The Federal Government has struggled to earn its budgeted revenues, over the past 3 years to effectively carry on with its fiscal obligations.
But despite admitting that the country is in a precarious state, the reality is yet to dawn on the government that its age-long socially inclined policies in which it spends frivolously on projects are never sustainable.
Over time, Nigeria has taken up huge public sector spending that is adding to an already ballooning cost of governance. The government has also embarked on various social interventions programs in a bid to cater for the large number of people at the bottom of the pyramid.
Notwithstanding, poverty is still on the increase. Statistics from the World Poverty Clock shows that more than half of Nigeria’s population is poor, with six people becoming poor in Nigeria every minute.
Nigeria’s challenge of a revenue shortfall became obvious in 2016 when oil revenue which accounts for more than half of totally collected revenue declined significantly owing to collapse in global oil prices and a plummet in domestic oil production volume attributed to activities of militants in the oil-rich Niger Delta. This singular act further widened the gap between government projected revenue and actual revenue.
Not even key sectors of its economy, such as education and health, needed for human development, gain much traction from the lean government finances.
Analysts, who spoke to BusinessDay, identified four activities that are eating deep into government’s already lean revenue and if discontinued, would free up more cash for government to spend on critical infrastructure that would stimulate inclusive, robust and sustainable growth.
Fuel Subsidy
Africa’s largest oil producer over time has held on to the policy of capping the prices at which it sells refined fuel in the domestic market. This is irrespective of whether the Brent crude—the benchmark of oil prices at the international market—increases or not.
State-owned Nigerian National Petroleum Corporation (NNPC), has consistently borne the burden of the difference between the prices at which crude oil is traded in the international market to that in which the refined petroleum product is sold in the domestic market, as under-recovery cost. This makes the corporation remits a small amount of money into the federation account.
Figures from the Budget Office of the Federation and NNPC show that fuel subsidies, otherwise known as under-recovery cost, swallowed about N648 billion ($1.8b), so far this year as the country kept prices pegged at N145 ($0.40) a liter. That’s four times the amount it spent building new schools, health centres and equipping new science labs during the period.
In 2018, fuel subsidies gulped approximately N730.9 billion, about 19 per cent of the total generated government revenue (oil and non-oil) in the period.
In the 2020 budget, the government is planning to spend N420 billion on fuel subsidies, according to statements made by Zainab Ahmed, Minister of Finance.
That’s a whole lot for an economy that is cash-strapped and has over the years resorted to huge domestic and foreign borrowings. As at half-year 2019, Nigeria’s total debt stood at N25.7 trillion according to data from Debt Management Office (DMO).
With domestic fuel prices pegged at N145, Nigeria has effectively put itself out as one of the countries with the cheapest fuels in the world according to data from GlobalPetrolPrices.com. This cheap fuel has led to large-scale smuggling of the product to neighbouring countries like Benin and Niger where it is twice more expensive. This act necessitated the government’s order for an outright closure of the land borders.
“For me, I think Nigeria needs a market driven approach that encompasses removal of subsidies to attract private sector investment, and structural reforms to stimulate productivity, enhance job creation and lay the foundation for a more inclusive, broad based and sustainable growth,” Gbolahan Ologunro, an Equity research analyst at Lagos-based CSL Stockbrokers said.
“I think fiscal adjustments are inevitable, however the use of contractionary fiscal policies in the form of higher tax rates will further exert pressure on already fragile consumer spending. The impact would mean that short to medium term growth trends would remain underwhelming.”
FX Subsidy
Nigeria operates a multiple foreign exchange window where the US dollar can be sourced at a rate of N305/$ and another where it can be gotten at a weaker rate of N360/$.
This has caused distortions in the way in which receipt from oil—which accounts for 70 per cent of governmet revenue and about 84 per cent of its foreign earnings—are shared.
“The Federal Government is taking in too much upon itself all in the name of reducing burden on final consumers, even though such actions are exerting pressure on its finances,” said Philip Anegbe, Head of Research at Cardinal Stone.
“We have seen them subsidizing the FX rate for electricity per kilowatt hour at N310/$ which is not the true market reflective rate and this is indirectly rubbing on the balance sheet of the government,” Anegbe added.
When the receipt from the sales of crude oil is calculated in naira terms, they are done at N325/$, rather than the market reflective rates of N360/$. Using the weaker rate (N360) would mean more revenue to the government, industry experts tell BusinessDay.
For example, as of June 2019, at an exchange rate of N325/$, the Federal Government generated N1.54 trillion from crude oil sale.
Converting this amount back to dollars would mean dividing the N1.54 trillion generated by N325, which would give $4.7 billion.
However, using an exchange rate of N360 would mean an extra N165.5 billion for the Federal Government to spend. This was derived by simply multiplying $4.7 billion by N360 minus the N1.54 trillion generated when the N325 rates were used.
High Cost of Governance
It is expected that an economy confronted with acute revenue challenge, would play down on the amount government spends in maintaining itself.
However, despite being faced with dwindling revenues, Nigeria still operates a high cost of governance with payments of salaries and overheads consuming a larger chunk of its budget.
Non-debt recurrent expenditure at N4.88 trillion is about half the N10.33 trillion aggregate expenditure. These expenses are more than double the total revenue generated so far in 2019, official figures from the Budget office show.
That’s huge for a country holding the mantle as being the world poverty capital of the world. And even though it has one of the poorest people in the world, it is named as having one of the highest costs in maintaining its leaders.
Debt Servicing
Since the government is cash-strapped, Nigeria has resorted to huge borrowings to fund ballooning budgets thus; this has made its debt servicing obligations to widen.
In the 2020 budget, debt service is estimated at N2.45 trillion, while some N296 billion was earmarked as provision for retiring of maturing bonds issued to local contractors. Nigeria’s debt to revenue ratio stands high at 60 percent, meaning that for every N100 the government makes, about N60 goes into servicing debt.
MICHAEL ANI & DAVID IBIDAPO
