Africa’s biggest oil producing country is heading into a more perilous fiscal position if the new minimum wage of N30,000 is implemented except strict reforms are swiftly undertaken.
“With the implementation of the new wage, the Federal Government would be taking into its cost obligation an additional N1 trillion,” senior sources close to government disclosed to BusinessDay.
This excludes the extra recurrent expenses that would be borne by the 36 states in the federation some of which have failed to meet payment of salaries at current levels, according to sources familiar with the matter.
BusinessDay gathered that a large chunk of the N1 trillion in costs would stem from additional expenses in catering for the segment of the population employed in the civil service sector (N256 billion), security agencies (N250 billion), as well as over 400,000 of its youthful population embarking on the compulsory yearly National Youth Service Corps (N68 billion).
The additional expenses would mean blowing up the Federal Government recurrent expenditure by 21.2 percent from the N4.7 trillion estimated in the 2019 budget to as much as N5.71 trillion.
Senior government sources tell BusinessDay that the Federal Government set up another committee this week to examine modalities for meeting the new obligations, bearing in mind the stark fiscal realities the government faces.
This follows the submission of the report from the earlier minimum wage committee inaugurated almost one month after Buhari signed the bill into law, to negotiate the consequential adjustment in salaries arising from the new National Minimum Wage, with the
Head of the Civil Service of the Federation, Winifred Oyo-Ita, as chairman.
Nigeria has never met its revenue estimated in the budget since the 2014 collapse in global oil prices.
“The Federal Government might consider taking some revenue actions like reducing petroleum subsidy or could probably increase VAT rate to spur some improvement in the fiscal account and to fund the minimum wage,” said Abimbola Omotola, a macro and fixed income analyst at Chapel Hill Denham.
Suggested ways of funding the new minimum wage
Sources confirmed to BusinessDay that the FG may be considering three possible ways of bearing the minimum wage burden. These range from moving FX rates from official rate of N305/$1 to market-determined rate at N360/$1, reducing or totally eliminating fuel subsidies, and increasing the Value Added Tax (VAT) from 5 percent to 7.5 percent.
The sale of government assets, a perennial budget revenue line item, is also seriously on the table now, sources say.
Data gathered from the 2018 budget implementation report of the Budget Office shows that the FG earned N1.433 trillion in oil revenues as at the third quarter of 2018, using the official exchange rate of N305 and average oil price of $64.90.
BusinessDay estimates that moving the official FX rates to N360 could have unlocked an extra N252 billion in federally collected oil revenue in the three quarters.
Eliminating the government subsidy on fuel or reducing subsidy levels could also help fill the fiscal hole.
According to NNPC’s under-recovery cost report in 2018, amount spent on petrol subsidy by the Federal Government totalled N730.9 billion with fuel price fixed at N145 per litre.
Totally eliminating fuel subsidy may, however, push petrol prices to N250 per litre, at par with international petrol prices. However, if the Federal Government considers a 38 percent increase in fuel price to N200, it will save the Nigerian treasury about N277.23 billion in expenditure directed into fuel subsidy.
A consideration of VAT increase by 2.5 percentage points may add an additional N54 billion to the FG revenue, according to BusinessDay calculations.
Calculations by Taiwo Oyedele, senior tax partner at PwC, put the average VAT collection in the past six years at about N900 billion. The revenue is shared 15 percent to the Federal Government, 50 percent to states and 35 percent to local governments net of 4 percent cost of collection to Federal Inland Revenue Service (FIRS).
“If the rate is increased by 50 percent (all things being equal) we will generate on average an additional N450 billion annually. Less 4 percent cost of collection to FIRS, all 36 states will get N18 billion per month translating to an average of N500 million per state,” Oyedele said.
Finally, in solving the minimum wage dilemma, opportunities abound in selling moribund FG assets, like the Federal Secretariat in Ikoyi or National Theatre, both in Lagos, or some stake in DisCos’ assets, power assets, or state-owned Nigerian National Petroleum Corporation (NNPC) like Saudi Arabia plans to do by selling 5 percent of Saudi Aramco.
Tough times warning
With elections season over, expectations rest on Nigeria’s President Muhammadu Buhari who secured a second term after defeating his main challenger, Atiku Abubakar, by a margin many had predicted to be slim but turned out quite significant.
While Buhari’s supporters say his intentions are good, his critics contend that his statist economic policies are stumbling blocks and are doing the economy, and the same poor he is desperate to protect, more harm than good.
Buhari himself and other senior government officials have given warning signals lately of what to expect in the next four years threatening it will be “tough”.
Also, chairman of Nigeria Governors Forum (NGF) and governor of Zamfara State, Abdulaziz Yari, in April advised both the returning and newly-elected state chief executive officers to prepare for tough times in governing their domains, warning that there may be another cycle of recession from mid-2020 to the third quarter of 2021.
While appearing before Senate’s Committee on Banking, Insurance and other Financial Institutions for screening for his second term, CBN Governor Godwin Emefiele told Nigerians to prepare for a challenging time, saying the road ahead would be tough.
“I thank you for praying for me because we need it. I say this because the road ahead is still rough and very tough,” Emefiele said.
Warning signals on fiscal position
Budget approved by the National Assembly showed that the FG plans a N1.91 trillion fiscal deficit which would be financed largely by tapping debt offshore.
Nigeria’s debt service to revenue ratio since President Buhari came into office has surged from 22 percent in 2014 to as high as 60 percent in 2018, with total debt standing at N24.4 trillion as at 31 December, 2018.
Last year, Nigeria’s Foreign Direct Investments plunged to its lowest level of $2.2 billion since at least 2005. Also, since Nigeria exited recession in the second quarter of 2017, GDP growth has barely struggled to hit 2 percent per annum which is below 6 percent recorded in 2014.
Data from last apex’s bank annual report showed the CBN is battling to stabilise the foreign exchange markets and lower inflation which is becoming increasingly costly as interest expense (interest payable on any borrowings – bonds, loans, convertible debt or lines of credit) jumped significantly by 192.8 percent to N1.3 trillion in the financial year ended December 2017 compared to N459.3 billion recorded in the corresponding year of 2016.
The rise in the interest expense was as a result of increased Open Market Operation (OMO) auctions carried out by the CBN in the review period.
“The bank adopted far-reaching strategies to stabilise the exchange rate and eliminate pressures from speculators, bettors, round trippers and rent-seekers. During the year, special foreign exchange windows for small and medium enterprises and for investors-exporters were established to increase market transparency, stabilise the rates, improve investment sentiments in Nigeria and bolster foreign exchange supply,” Emefiele said in the report.
The draft annual report released by the apex bank showed that OMO issuances, a liquidity tool for CBN to control the amount of money in circulation, rose by 44.7 percent to N11.3 trillion in 2017 from N7.8 trillion in 2016.
The average monthly OMO issuance stood at N945.5 trillion in 2017 from N654.9 trillion in 2016 and the average yield also increased to 19.43 percent in 2017 as against 14.60 percent, feeding directly into the higher interest expenses.
MICHAEL ANI, DIPO OLADEHINDE & DAVID IBIDAPO
