(Bloomberg) -- Nigeria must cut gasoline subsidies and boost revenue collection to avoid a sharp deterioration in government finances next year, the nation’s budget office said.

The budget deficit may rise to 12.4 trillion naira ($29 billion) next year -- almost three times total revenue, or 5.5% of gross domestic product -- if the government continues paying fuel subsidies, according to a medium-term expenditure framework published on the office’s website. The subsidies will cost 6.72 trillion naira, it said. 

The budget shortfall would balloon from a projected 7.35 trillion naira in 2022 despite plans not to fund capital expenditure in 2023 if the subsidy remains, the budget office said. The country’s Fiscal Responsibility Act sets a budget-deficit threshold of 3% of GDP. 

Only 5.9% of projected government revenue of 6.34 trillion naira will come from oil in 2023 “as it will be eroded by the fuel subsidy,” while the balance of funding will come from non-oil sources. Even in a situation in which the government does away with the subsidy by June, the budget deficit would still exceed 5% of gross domestic product, the office said.

The country spent 982 billion naira in the first quarter subsidizing gasoline, providing Nigerian drivers with among the cheapest pump prices in the world. The World Bank and International Monetary Fund have repeatedly urged the government to remove the subsidy, which is forecast to cost the country at least $9.6 billion this year. 

With limited headroom for external borrowing, the government plans to fund the deficit mainly from local capital markets. Domestic borrowing currently accounts for 60% of public debt, estimated at 41.6 trillion naira in March.

Nigeria’s debt-service obligations are rising faster than revenue, pushing the country toward “high debt distress,” according to Bismarck Rewane, chief executive officer of Financial Derivatives Co. in Lagos. The country’s long-term debt is ranked B2 by Moody’s Investors Service and B- by S&P Global Ratings -- both sub-investment grade.

The government generated 1.63 trillion naira of revenue in the first four months of the year, which was 49% below its target and less than the 1.94 trillion naira needed to cover debt-service payments.

Africa’s biggest crude producer is missing oil-earnings forecasts because of widespread theft and pipeline vandalism, which are also keeping it from meeting its OPEC+ quota, according to the government. 

The excess crude account -- where the government saves surplus earnings from crude sales -- had only $376,655 left in June because the government has been unable to earn enough from oil sales to deposit into the fund.

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