• Friday, March 29, 2024
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19 Experts on 2019: The fiscal challenge and the 2019 window of opportunity

Oil reserves

As the president read the budget speech a few days before the end of 2018, one thought ran through my mind: “This budget seems unimplementable. The revenue projections are unlikely to be met.”

As a recap, the budget assumes overall revenue of N6.97trn in 2019, with N3.73trn expected to come from oil revenues and N1.39trn from non-oil revenues. Oil revenues projections are unlikely to be met as the production target of 2.3m barrels per day has not been achieved in a long time and looks unlikely even if you include condensate and the new Egina platform. The oil price benchmark is also problematic.

The actual oil price had already fallen below the $60 per barrel budget benchmark while the president was reading the speech. It may go back up, but it may not. As for non-oil revenue, the projections continue with the trend of an over-optimist. If you throw in the near record deficit of the already over-optimistic budget and the fraction of actual revenues spent servicing already existing debt in the last budget cycle, then the phrase “fiscal distress” does not seem too far-fetched.

It is easy to get lost analyzing the details of this budget but a look at the trend in budget revenue and spending makes clear what the fiscal challenge is. First, a bit of history. In 1957 Nigeria started producing crude oil mostly for exports and revenue to the government from crude oil quickly outpaced every other revenue stream.

By 1974 crude oil accounted for 93 percent of all exports and 32 percent of the economy. By 1980 crude oil revenue accounted for an estimated 97 percent of all inflows into the federation account. By the end of our first oil boom in 1980, Nigeria had officially become an oil economy and the fiscal structure had shifted to how to effectively distribute and utilize these revenues. A key point is that by the end of the 1970s and through the 1980s, Nigeria was producing roughly 2 million barrels of crude oil per day.

Fast-forward through time and the crude oil industry has remained relatively constant. In the 1990s we produced roughly 2 million barrels per day on average. Same 2 million barrels per day in the 2000s. The average over the last five years? Just a little bit below our regular 2 million barrels per day. The country and the rest of the economy have, however, changed rapidly over the same period.

The population has grown from about 58 million in 1970 to over 190 million in 2019. Officially anyway. The economy has also ballooned in real terms from $12bn to $375bn between 1970 and 2018, mostly driven by the non-oil economy. If you think about it systematically, the fiscal challenge is clear: the government has survived based on its ability to collect and distribute oil revenue, but the oil industry has remained relatively stagnant while the population and rest of the economy have grown.

The government is therefore squeezed. The trend is towards a day when oil revenue will no longer be enough to perform even the most basic government functions.

We tend to focus on the challenges of the booms and busts with regards to the oil price but the real fiscal challenge is very clear. The government needs to transform from one that is structured based on collecting and distributing crude oil revenues to one that is structured on collecting and spending broader tax revenue. Simply put, the government needs to learn how to collect taxes from the economy in general. To get there, the government needs more fundamental tax reform redefining the structure away from sharing oil rents and redefining the rules determining which level of government collects what and keeps what.

Unfortunately, but also fortunately, we are in a democracy and such reforms will demand a constitutional process requiring all parties to participate. Such reform is also likely to create a lot of losers, in terms of governments that will get less money in the short term. For example, consider a case where a 15 percent derivation is paid to host states from corporate income tax collections to incentivize state governments to enforce compliance. In the short term, states with relatively more economic activity will gain but states with relatively lower economic activity will lose. If you crunch the numbers, the losers outnumber the winners. Why would losers then vote for tax reform that leaves them worse off? Indeed, any tax reform that tries to shift the tax structure from an oil sharing structure to a tax sharing structure is likely to result in these kinds of winner-loser dynamics, which in English can be translated as a political minefield. A minefield that will require the most adept political calculations.

Still, 2019 offers the opportunity for a serious government, either the current one or a new one if there is a change after elections, to start the inevitable discussion about tax reform. The challenge for that government is how to deliver tax reform in a political environment that is likely to create many losers from the reform. This is a challenge that we as a country must face regardless of who wins. We have a current strategy of ignoring the challenge and kicking the can down the road with debt. That window is unlikely to be open for much longer.

 

Nonso Obikili

Dr. Obikili is the chief economist at BusinessDay. His research primarily focuses on African economic history and political economy. He earned his PhD in economics from Binghamton University and is a director at the Turgot Centre for Economics and Policy Research (TCEPR). He writes from Abuja.

Next:
Dr. Abimbola Agboluaje writes on Friday. Agboluaje, managing director at WNT Capitas, a strategic communications and investment risk consultancy, completed a PhD dissertation on development aid conditionality and structural adjustment in Africa at the University of Cambridge in 2005.