We all know the Nigeria government revenue story. Back in the days regional governments had a diverse revenue mix with the governments mostly dependent on customs and trade taxes and broader taxes on agriculture. In the 1970s crude oil income grew rapidly to dominate all other sources of government revenue. In 1989 crude oil revenues accounted for almost 85 percent of all federally collected revenues.
However, it wasn’t just that crude oil revenues rose rapidly, but the crude oil industry dominated all other economic activity. Between 1973 and 1979 the oil rents from the crude oil industry rose from 1.6 percent of GDP to 38.55 percent of GDP, the highest it has been in Nigerian history.
And of course, the oil industry is peculiar because the government directly captures a large part of the value compared to say agriculture or services. In that historical scenario the political question was not how to collect taxes but how to share this newfound wealth. Just like that the Nigerian Petro-state was born. In 1989 federally collected revenues amounted to 25.3 percent of GDP, most of it from crude oil income; a strong Petro-state, at least as far as finances were concerned.
Unfortunately, or maybe fortunately, things have changed since then. And the changes should not have been too surprising. On the one hand crude oil production has remained mostly fixed at around two million barrels per day. There have been price swings that have had impacts on actual revenue but in general Nigerians were sharing roughly two million barrels per day in 1980 and are still sharing roughly two million barrels per day today.
On the other hand, the country hasn’t stopped growing. Population has grown leaps and bounds since the 1970s. In 1980 we had an estimated population of 73 million people. The estimated population in 2018 was about 195 million. So, we have more than doubled, but are still sharing two million barrels of oil.
The economy has grown as well. In 1980 we had a GDP of about $64bn while in 2018 we had a GDP of $397bn, with the growth driven mostly by other activity besides crude oil. The implication has been that the share of crude oil rents to overall economic activity has been getting smaller and smaller. In 2017 it was only just over six percent of GDP. So, what has happened to the political Petro-state whose previous concern was to share oil rents?
Sarah Burns and Olly Owen, both at the Oxford Department of International Development, try to get at that question in a new working paper published recently. From a public finance perspective, the question is how well the government has done in transitioning from crude oil revenues to other revenues. This question is complicated since beyond the federal government, there is sparse information on what the other levels of government collect in taxes. State government revenues are now more readily available but local government internally generated revenues are still largely a black box.
Still, they find that the transition is well underway. In 2015, for the first time since the 1970s, the federal government actually raised more revenue from non-oil sources, and as at 2016 oil income only accounted for 47 percent of its revenue; you probably have to consider the impact of the negative oil price shocks and the disruptions to oil production which happened during that period. Regardless, in terms of government revenue, crude oil is becoming less and less relevant.
Unfortunately, as crude oil has become less relevant, the Nigerian government has become less relevant as well. At least if we define relevance as the amount of taxes it collects relative to the size of the economy. Since the start of the new millennium, the federal government’s tax-to-GDP ratio has been slowly declining albeit with a few blips along the way.
In 2016 it was just over six percent of GDP. That would make it one of the weakest central governments in the world. If you include state revenues the tax to GDP number rises by about two percentage points but it is still very low. The trend is also still declining with the governments getting weaker and weaker relative to the size of the economy.
The trajectory is clear. The Nigerian economy is less and less of an oil economy in terms of its structure, but the government is lagging behind, the political economy of oil rent sharing behind even further. How will we transition to a new non-oil tax driven political economy? That question is yet to be answered. You can read the full paper titled “Nigeria: No longer and oil state” online. It is free to read.
Nonso Obikili
Dr Nonso Obikili is Chief Economist at BusinessDay
