Nigeria records largest average revenue forecast errors – IMF

•Tinubu and IMF logo

The International Monetary Fund (IMF) has stated that Nige­ria’s budgeting process will con­tinue to suffer from a deep-seated optimism bias — an entrenched tendency to overestimate revenue potential despite chronic under­performance in actual collections.

The Fund, in its selected pa­pers titled, ‘Fiscal Forecasting Er­rors In Nigeria’, said that recent analyses comparing 16 econo­mies across Eastern and South­ern Africa reveal that Nigeria records the largest average rev­enue forecast errors, underscor­ing a long-standing challenge that has far-reaching implications for fiscal credibility, public spending efficiency, and economic stability.

At its core, the issue reflects a mismatch between revenue am­bition and fiscal reality, reports Daily Independent.

Year after year, budget projections assume that the federal government will generate more income than it actually can.

Yet, instead of translating into ballooning deficits, as one might expect, these inflated forecasts of­ten trigger what economists call “expenditure compression” — a mid-year belt-tightening that forc­es ministries, departments, and agencies (MDAs) to slash spend­ing, delay projects, or abandon critical operations altogether.

Revenue Optimism Meets Fiscal Constraints

In theory, when governments overestimate revenues, the fis­cal deficit should widen unless borrowing compensates for the shortfall.

However, in Nigeria’s case, borrowing constraints and limit­ed access to affordable credit mar­kets have forced the government to respond differently.

Each time projected oil and non-oil revenues fall short, the Ministry of Finance curtails spending —particularly on overheads, payroll, and capital expenditure — to prevent an un­controlled rise in deficits.

This approach keeps the books balanced on paper but exerts a heavy toll on economic performance.

As official budget implementation reports repeat­edly show, capital projects are ei­ther stalled, abandoned midway, or executed at substandard levels.

“Such outcomes not only distort fiscal priorities but also deepen public disillusionment with the government’s promises”, IMF analysts said.

“The problem isn’t just miss­ing targets; it’s the repeated un­derfunding of essential services because the budget begins with unrealistic assumptions,” notes a Lagos-based fiscal policy analyst.

“When you compress expendi­ture mid-year, you starve agencies of funds, paralyze service deliv­ery, and set the stage for another round of failures.”

Underfunding And Institutional Weaknesses

The effects of forecast errors cascade across all layers of gov­ernment.

When expected reve­nues fail to materialise, MDAs struggle to finance operational and personnel costs, leaving many unable to execute even modest capital allocations.

This cycle erodes their cred­ibility and effectiveness, com­pounding Nigeria’s longstanding problem of poor budget execu­tion.

The Fund also said inadequate funding also undermines multi-year development planning.

“As capital projects are rolled over or abandoned, contractors withdraw, costs escalate, and public infrastructure deterio­rates further. The persistence of concurrent, overlapping budgets highlights institutional weak­nesses—particularly in expendi­ture management and cash-flow planning.

“The result is a vicious circle: optimistic revenue projections trigger spending commitments that cannot be sustained, which then lead to mid-year cuts, un­finished projects, and ultimately, public distrust in the budgeting process”.

Lessons From Across Africa

Nigeria’s predicament is not unique, but the scale of its fore­cast errors is. Cross-country ex­periences from Kenya, Malawi, and other African economies show that fiscal forecasting can be improved through systematic self-assessment and transparency.

Kenya’s Macro-Fiscal Depart­ment, for instance, conducts ex post reviews of past budget fore­casts and publishes its findings as an annex to the annual Budget Policy Statement.

These analyses include tables showing divergences between forecasts and actual outcomes, along with explanations for the discrepancies.

Malawi’s Ministry of Finance has gone a step further, quantify­ing forecast errors in GDP and revenue projections and present­ing confidence intervals around its macro-fiscal forecasts—a prac­tice that enhances accountabili­ty and provides a more realistic framework for fiscal planning.

“Such institutionalised re­views help identify the root caus­es of forecasting errors—whether political pressure, data inadequa­cy, or flawed models—and create feedback loops that improve future accuracy. They also build public and market confidence in the credibility of fiscal policy”, IMF said.

Pathways To Better Fiscal Forecasting

Experts argue that Nigeria can strengthen its budgeting pro­cess by adopting several proven strategies:

Institutional Empower­ment: The government must el­evate its macro-fiscal forecasting unit to the same level of authority as other departments within the Ministry of Finance. This would ensure its independence, credi­bility, and capacity to produce ac­curate and unbiased projections.

Interagency Coordina­tion: Fiscal departments must collaborate more closely, en­suring timely data sharing and synchronisation of economic assumptions. Memoranda of Understanding (MoUs) between agencies can formalise this coop­eration.

Capacity Building: Staff in forecasting units should re­ceive targeted training and access to modern tools compatible with their skill levels, improving both precision and accountability.

Transparency and Per­formance Reviews: Regular publication of forecast perfor­mance reviews can increase public scrutiny and create inter­nal incentives to minimize errors. Transparency also helps markets better understand government decisions.

Political Commitment and Oversight: Nigeria’s Fiscal Responsibility Council should play a more active role in review­ing and publishing independent analyses of forecast accuracy, providing parliament and the public with objective evaluations. External reviews by consultants or stakeholders could further re­duce political interference in the forecasting process.

Why Credible Budgets Matter

Improving forecast accuracy is not merely a technical exer­cise — it is a cornerstone of fiscal discipline and national develop­ment. A credible budget enables the government to allocate re­sources efficiently, manage debt prudently, and inspire investor confidence.

Enhancing Expenditure Management: Realistic budgets ensure that spending plans align with macroeconomic realities and long-term priorities. This leads to more efficient resource allocation and better service de­livery.

Strengthening Debt Sus­tainability: Overestimating rev­enues and underperforming on execution can lead to unplanned borrowing and rising debt. Trans­parent forecasting mitigates this risk by setting clear fiscal expec­tations.

Boosting Investor Con­fidence: Private sector actors watch government budgets closely. Consistent forecasting, transparent implementation, and credible policy direction can encourage greater public-private partnerships and foreign invest­ment inflows.

Restoring Public Trust: Perhaps most importantly, credi­ble budgeting restores faith in gov­ernment institutions. When citi­zens see realistic plans matched by tangible outcomes, it becomes easier to rally support for reforms and collective sacrifice.