The changing power dynamics in the search for non-oil revenue

As you no doubt have heard, the Nigerian government is desperately looking for ways to increase its revenues. At a presentation last week, the DG of the budget office laid bare the government’s expectations on revenue inflows thanks to the chaos caused by the coronavirus pandemic. As oil prices have crashed from around 50 dollars to the current 30 dollars it is now, the revenue projections of government have crashed with it. As a result, we are yet again regaled with tales of how the government needs to diversify its revenue base and grow non-oil revenues.

However, the pandemic has really only exposed what was already a significant trend. Based on last year’s actual revenue and expenditure numbers when oil was about $64 a barrel on average, total revenue accruing to the federal government from crude oil was not even enough to meet its personnel costs. Total revenue from oil in 2019 was about N2.2 trillion while personnel costs alone were N2.6 trillion. In short, if anyone is expecting that a post-COVID recovery in oil prices would make the government’s financial challenges disappear then perhaps they better think again. The government already had no clothes although the pandemic seems to have blown the underwear off too. It is clear that the Nigerian government really has no option but to transition from an oil funded government to a tax funded government.

The thing is, most commentators seem to be forgetting that government revenue from oil works in a completely different way to revenue from regular taxes. In the oil industry the government collects the lion share of any value created. If a barrel of crude oil is extracted and sold, the government collects the lion share of the sales value after deducting production costs. Accurate data is hard to find but by my estimates, the government collects up to 70 percent of the profits from the sale of crude oil in taxes. The percentage fluctuates with oil prices. It can do this because crude oil is a natural resource and technically belongs to the country which is administered by the government.

The situation is very different once you start to think about other productive economic activity. If a farmer does the hard work of tilling the soil and growing crops for export, is that farmer going to hand over 70 percent of the profits from farming to the government? Obviously not. The farmer will pay whatever the applicable tax rate is, which is anywhere from zero for poor low-income farmers to 30 percent for corporate farmers. Although the true maximum is complicated by the plethora of taxes paid. The same is true for virtually every economic activity that involves something other than finding something of value in the ground. Manufacturers are not going to hand over the lion share of their profits. Private sector medical personnel are not going to handover the lion share of their profits. No one will hand-over the lion share of their profits. Even the most socially leaning countries do not have tax rates high enough to replicate the dynamics in the crude oil industry.

The implication is that, if the government wants to earn as much as it did from other non-oil activities to replace lost crude oil income, people are going to need to produce four or five times the value that was lost in the value crude oil sales. If the government collected $700 million from $1 billion worth of crude oil sales then cocoa corporate farmers are going to need to make $2.33 billion in profits to pay that same $700 million in taxes to the government.

This distinction between taxes from crude oil versus other productive economic activity means that, as a country, we probably cannot saddle the government with the same responsibilities that we did when crude oil was the major earner. It is probably not wise to expect a government who now has to depend on tax revenue to be responsible for the same things it was responsible for when it was flush with oil cash. That sword is double-edged though. The government also needs to realise that its power to “control” the economy has probably also evaporated. It may have had some power when it was armed with the lion share of resources from crude oil but with tax revenue the story is different. That power now lies with the farmers producing the $2.33 billion worth of exports. If you don’t have power again then perhaps it’s time to think about acting accordingly. Cut your coat according to your cloth.