Nigeria and 35 Other African Nations Face Budgetary Challenges, Report Reveals

A new report from McKinsey indicates that Nigeria, alongside 35 other African nations, is confronting tighter fiscal conditions that may hinder their capabilities to finance development projects and react to economic disruptions.

The report, titled ‘From borrowing to building: A new fiscal path for Africa,’ which was made public recently, emphasizes that while a limited number of African economies are enjoying better fiscal stability and diversified funding sources, large nations such as Nigeria remain exposed due to their weak revenue generation and restricted access to markets.

Matthews Mmopi, a partner at McKinsey's Johannesburg branch and co-author of the report, remarked, "Africa does not present a uniform financial narrative. The distribution of vulnerability and opportunity across the continent is uneven. Thirty-six countries—including Nigeria, Tanzania, Niger, and Angola—account for nearly three-quarters of Africa's population but produce less than half of its GDP. These nations experience constrained fiscal spaces, low domestic incomes, and limited market access."

Conversely, sixteen nations, such as Egypt, Morocco, and South Africa, which collectively generate over half of the continent's GDP while housing less than a third of the population, display greater fiscal resilience and a variety of financing routes.

"The flow of aid corresponds with this divide, where three-quarters of all Official Development Assistance (ODA) is directed towards the more vulnerable group of countries, highlighting their reliance on external support amid their incapacity to withstand shocks, " added Mmopi.

The report stresses that Africa is at a crucial juncture, already feeling the effects of a fiscal crisis, indicating that the continent stands to forfeit an additional $30 billion annually due to significant cuts in development aid.

Co-author Acha Leke, a senior partner at McKinsey in Johannesburg, pointed out that despite the long-recognized need for more robust financial systems in Africa, the recent reductions in ODA underscore the fragility of existing frameworks. He suggested that a proactive strategy, built on evidence-based consensus among stakeholders, could enable African nations to transition from aid dependence towards developing sustainable public finance systems that foster inclusive growth and enhance the quality of life across Africa.

The research revealed that 42 out of Africa's 54 countries depend on ODA for 10% of their governmental budgets. Additionally, it was found that 41% of the incoming ODA to the continent is allocated to health and emergency services, raising concerns about the viability of these essential services in the wake of declining aid.

Tania Holt, another co-author and senior partner in McKinsey’s London office, highlighted that the recent cuts exacerbate an already existing fiscal crunch. In 2023, African governments raised roughly $572 billion in revenue while incurring expenses of $785 billion, resulting in an approximate fiscal deficit of $200 billion. The continent’s external public debt has surged to around $746 billion—approximately 25% of Africa's gross national income—while interest payments are now consuming nearly one-sixth of government revenue, the steepest burden faced by developing regions.

The report asserts that rectifying the situation, while challenging, could lead to necessary reforms. African nations have an opportunity to not only address budgetary deficits left by decreasing ODA but also pursue reforms aimed at filling gaps and building long-term fiscal resilience.

The report identifies four strategic levers capable of generating over $200 billion in the next decade to stabilize public finances: domestic resource mobilization, cost optimization, strategic evolution, and economic growth.

Adam Sabow, a senior partner at McKinsey in Chicago, remarked that the average tax-to-GDP ratio in African countries remains below the World Bank's minimum threshold of 15%. An increase of just 1% in tax collection could raise $30 billion annually, enough to offset cuts in ODA and potentially total $150 billion by 2030.

Moreover, further efficiencies can be discovered, with Africa poised to tap into a $75 billion opportunity to address inefficiencies in financial management, over-expenditures on capital projects, and renegotiating debt obligations.

Sabow also noted, "Ideally, the continent should create more revenue through improved productivity. However, numerous countries face limitations due to narrow productive capacity and restricted access to capital."

To assist policymakers in enacting suitable reforms, the report introduces four archetypes—Stabilise, Build, Accelerate, and Anchor—that reflect each country's unique structure.

Matthews emphasized, “Despite the differing pathways, the underlying principle remains consistent: stability offers time, delivery fosters credibility, and depth ensures resilience. Skipping critical steps may erode fragile advancements and undermine trust from investors, so it is essential to apply these frameworks earnestly and collectively.”

The report underscores that achieving these objectives will require collaborative efforts. It highlighted five major stakeholders—national institutions, Development Finance Institutions (DFIs), the private sector, South-South partners, and regional organizations—that play pivotal roles in the journey toward fiscal stability.

Many of these entities are already engaged in these efforts, but there exists a chance to enhance their impact by leveraging current frameworks and shared objectives. By aligning fiscal reforms with investments in talent, job creation, and improved infrastructure, the continent can shift from an over- reliance on ODA towards establishing sustainable and inclusive financial ecosystems.