Explainer: How Nigeria can boost growth through spending

Infrastructure deficit is one of the major problems plaguing Nigeria, making it difficult to create jobs and grow the economy.

To change this narrative, the World Bank has recommended ways the government can increase spending to build a resilient economy. The country has suffered two recessions in the last six years and is contending with the fastest price growth in 17 years, among other economic headwinds.

In a report, titled ‘Nigeria’s need to spend more and better’, the Washington-based multilateral lender advised Nigeria to increase its spending from its current very low levels, which is one of the lowest worldwide, at $220 per Nigerian yearly.

“The country is among the eight economies with the lowest human capital in the world, ranked 167th out of 174 countries on the World Bank’s Human Capital Index. As a result, a child born in Nigeria today will only be 36 percent as productive when he grows up as he could be if he had access to effective education and health services,” it said.

The key to raising public spending lies in urgently raising more revenue, according to the World Bank.

However, over the years, Nigeria, Africa’s largest economy, has been grappling with revenue problems, which have led to a debt problem and consequently, according to the World Bank, led to a spending problem.

Official data collated by BusinessDay showed that the country could see its revenue shortfall hit the highest level in 12 years in 2022.

The government missed its revenue target by 36 percent in eight months (January-August) but still achieved 83 percent of its spending plan, the latest data from the 2022 budget implementation showed.

As of August, the federal government’s retained revenue was N4.23 trillion, a 64 percent decline from the pro-rata target of N6.65 trillion for the eight-month period.

BusinessDay findings showed the government’s actual independent revenue was down by around 50 percent to N866 billion, compared to a target of N1.7 trillion in the period under review.

When government revenues fall short of its expenditure, governments borrow to fund public spending, particularly when it is difficult to raise taxes and reduce public expenditure.

Data from the Debt Management Office (DMO) showed the country’s public debt increased to N44.06 trillion in September 2022 from N42.84 trillion in June.

“The increase in the debt stock was largely due to new borrowings by the Federal Government to part-finance the deficit in the 2022 Appropriation Act as well as new borrowings by sub-nationals,” the DMO said.

BusinessDay’s finding showed the country prioritised debt servicing over capital expenditure in the coming year.

The government has budgeted to spend N6.56 trillion on debt servicing in 2023, compared to the N4.93 trillion budgeted for capital expenditure, data sourced from the Budget Office of the Federation showed.

debt servicing and capex

How Nigeria can raise more revenue

At 7 percent of GDP in 2021, Nigeria’s revenue to GDP ratio is among the lowest in the world.

To boost revenues, the government has initiated important revenue-enhancing reforms over the last two years. A few of these measures include increasing the Value Added Tax (VAT) rate (from 5 to 7.5 percent in 2020), starting the process of limiting tax expenditures in certain sectors (2021), operationalising the electronic money transfer levy, and introducing excise taxes on certain “sin” goods (2022).

“Despite these reforms, actual revenues collected are still far below their potential. In fact, Nigeria’s non-oil revenue potential is estimated to be twice the current collection rate,” the World Bank said. “The key challenges that continue to undermine Nigeria’s ability to raise more revenues are low tax rates, tax administration inefficiencies, high tax expenditures, low tax morale, and opaque and complex governance of the oil sector.”

To this effect, the World Bank said there is an urgent need for Nigeria to significantly increase the level of fiscal revenues to fund the public spending needed to deliver critical public services.

It suggests Nigeria increase non-oil revenues by increasing VAT and pro-health tax rates, closing tax loopholes, and strengthening tax administration.

“Safeguard oil and gas revenues by protecting the Federations oil and gas assets and ensuring the Federation receives what is due,” it added.

Read also: 2022 Review: Seven things that have increased Nigerians’ cost of living

How Nigeria can spend better

The World Bank said: “Nigeria continues to finance regressive and inefficient petrol, electricity, and exchange rate subsidies. The government’s net oil revenues could be 52 percent higher if it did not subsidize petrol, a product that is largely consumed by wealthier households: the poorest 40 percent of the population only consume 3 percent.

“Similarly, while electricity subsidies have been reduced thanks to the Government’s recent reform efforts, they still represented almost 9 percent of the Federal Government’s non-oil revenues in 2021, and implicit exchange rate subsidies are a consequence of the multiple exchange rate windows managed by the Central Bank of Nigeria, with the Federal Government subsidizing the Central Bank through the differences between the official and IEFX windows rates. Overall, all these untargeted and distortive subsidies incur large costs and take away resources from spending on social services and infrastructure.”

The World Bank, therefore, suggests that Nigeria allocate spending more efficiently, including by phasing out the fuel, electricity, and exchange rate subsidies, to make room for human and physical capital investments.

To this, it said the country needs to establish a ‘compact’ with the Nigerian people that phases out the petrol subsidy while protecting the poor and the vulnerable, achieve and sustain progressive cost recovery electricity tariffs, adopt single and market reflective exchange rates and improve the credibility of the budget.

It said Nigeria should strengthen fiscal management institutions to improve the efficiency of spending.

According to the World Bank, by strengthening fiscal rules, debt management, and transparency, and improving data foundations for fiscal management, Nigeria can improve its efficiency of spending.

In addition, Nigeria needs to spend more on infrastructure and social work (education, health, and social protection). “To provide all the infrastructure the economy needs to maximise its potential, the country would need to invest $ 3 trillion by 2050.” World Bank added.

Skip to toolbar