We look forward to the New Year in the literal sense while remaining sceptical about the prosperity it will bring. The World Bank’s new Global Economic Prospects has growth of just 1.1% for Nigeria this year, rising to 1.8% in 2022. These forecasts reportedly assume that we have oil price stability (of +/- US$50/b) and that a second national lockdown can be avoided because of vaccine development. The IMF’s latest World Economic Outlook dates from October, and so before both the rapid progress on vaccines and the emergence of new strains of Covid-19, and projects 1.7% growth.
If we take one official estimate in circulation of annual population growth of 3.1 per cent, the economy has not grown in per head terms since Q1 2015. As the FGN looks to make up for six lost years, it has limited policy options available to it. It cannot spend its way out of trouble as the developed economies have attempted.
Furlough schemes are unrealistic in Nigeria’s fiscal context. The same is true of the US move to send cheques to every household in the country, regardless of income levels. The FGN has opted for direct cash transfers to some of the poorest families while the CBN has launched a new set of interventions in response to the virus, notably its targeted credit facility for households and the MSMEs. Some G7 governments have provided a combined monetary and fiscal stimulus approaching 15 per cent of GDP. They may open the taps further in the light of the new strains of the virus. The comparable figure for Nigeria would be about 4 per cent.
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The FGN also cannot transform revenue collection in a hurry. First, the economy is back in recession due to the virus, the related weakness of the oil price and official restrictions. Incomes and spending therefore remain under pressure. Gross non-oil revenue has been rising, from N2.92trn in 2016 to N4.07trn in 2019 yet is pitiful in any context, at just 2.8 per cent of GDP.
Collection suffers in a weak economy of course but the greater challenge in our view is poor coverage, which is the result of poor compliance. It does not help that a large part of the economy is informal and outside the tax net. Some Nigerians within the net, such as those paid after automatic deduction of tax on a PAYE basis, have no choice. Many more, however, can take a “won’t pay” stance.
If the FGN is to quicken its exit from the shadow of the virus and lay the foundations for a transformation and diversification of the economy, the only course of action open to it is to step up its borrowing
We could explain this way of thinking many ways, some more charitable than others. Our choice is that people are generally more willing to part with their money if they can identify some benefits in return. If your refuse is cleared and if street lighting in your area is working, you are better disposed towards your local municipality when you receive a tax demand. Compliance is generally better in advanced than in developing countries because deduction of tax at source is widespread, because the spending of tax receipts tends to be more visible and because the collection agencies have teeth. These are generalities that apply broadly to developing economies. There is an additional reason specific to Nigeria: for three decades or more, the authorities felt that taxes raised from the hydrocarbons industry were sufficient for their needs.
Its spending muscle is modest and its revenue collection is inadequate. If the FGN is to quicken its exit from the shadow of the virus and lay the foundations for a transformation and diversification of the economy, the only course of action open to it is to step up its borrowing. This is the only way to build the hard infrastructure without which most direct investors will not commit themselves to Nigeria.
The issuance of debt by governments and corporates has taken off since the emergence of the virus in Q1 2020 yet the appetite of investors has not evaporated. Nigeria’s Debt Management Office was given a record funding target of N1.6trn last year and met it with little difficulty (and with declining costs too). The domestic institutions have few competing investment outlets. Further, the CBN is adroit at managing liquidity in the market so that the banks have the funds at the right time to bid for FGN paper. On the external side, Eurobond investors are chasing yield from decent credits in the B/B+ range in the EM universe.
We hear the objection that the FGN’s record in maximizing the positive impact of its borrowings is suboptimal and agree with it. For reasons we have today outlined, however, there is no other road to achieving the diversification that Nigerian governments, civilian and military, have sought for four decades. There are now issues of timing: the process has to be completed before the near-exhaustion of oil and gas reserves or the world’s consumers no longer want to burn fossil fuels (whichever comes first.)
Kronsten is head, Macroeconomic and fixed income research at FBNQuest Capital
