For Nigeria, retaining fuel subsidies amid tight fiscal conditions is ‘a case of collective foolishness’, as it not only hurts the economy, but benefits mainly the rich, according to Ben Akabueze, director general, Budget Office of the Federation. In this exclusive interview with a BusinessDay team, comprising John Osadolor, Obinna Nwachukwu and Onyinye Nwachukwu, Akabueze insists that even though government is constantly looking at ways to cut costs, Nigeria’s problem is not huge spending, but low revenues.
Talk us through the budgeting process, beginning with the MTEF/FSP before the National Assembly.
The Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) is a requirement of the Fiscal Responsibility Act, 2007. That Act requires on an annual basis, to prepare MTEF/FSP on a three-year rolling basis. This year for instance, we did 2022 to 2024, next year we will do 2023 to 2025, which will still capture two of the years covered in this year, but it is on a three-year rolling basis. That Act also requires that the MTEF/FSP should get to the National Assembly by July, and they then review and pass it. The law requires the National Assembly to approve it by a resolution; it is not enacted like the budget. But then, the MTEF is supposed to form the basis for the budget, and essentially by definition, a top down estimation of the resources that are going to be available, and the broad category limits in terms of expenditure categories. The budget process itself then becomes a bottom-up approach, whereas MTEF is top-down, and sets a limit. The MTEF for 2022 for instance, sets an expenditure limit of about N14trillion. As we go forward in the process, that N14trillion will then be parcelled out in terms of limits; whether expenditure limits for certain categories that are cross cutting, and then ceilings for individual MDAs, in terms of how much is available to them to spend in 2022 for instance. While the law requires a three-year rolling MTEF, it requires only an annual budget as provided by our Constitution. Some countries prepare a multi-year budget, but, for Nigeria, our constitution requires an annual budget and that is why even though the MTEF is 2022 to 2024, we just do a budget for 2022.
We met the July submission of MTEF to the National Assembly as stipulated by the law. What has happened in the last two years is that even though we submit it to the National assembly by July, they do not get to pass it before their long recess in July. This means that by the time they return in September, the budget itself should be getting due for submission. So, if they don’t get to pass it before recess, we can’t also fold our hands waiting for their return in September before we begin the budget process. What we then do is that we anticipatorily proceed to prepare a budget aligned with the MTEF that we have already submitted. When they return from their recess, the first thing they would normally do is to review the MTEF and pass it. If the MTEF they pass entails any changes to what we had submitted, we then go back and adjust the draft budget to align with it before the budget gets submitted to them.
I explain this because last year, one of the CSOs made a big fuss about this being unconstitutional, that a budget should not have been submitted when the MTEF has not been passed or whatever. The law does not actually say so in terms of sequence, the law just says that the budget has to be based on the MTEF approved by the National Assembly. So there is nothing done outside of the law. But there are two parts to this, it actually says MTEF and FSP. While the MTEF is all about assumptions, projections, numbers; the fiscal strategy paper on the other hand speaks to the government’s strategy in terms of defining the fiscal condition of government, and then articulates its strategy for addressing whatever fiscal issues that emanate.
One thing that you will find relatively new in the FSP for 2022 to 2024, is what we call a tax expenditure statement. The fiscal Responsibility Act 2007 actually requires that an annual tax expenditure statement be prepared. But the first time we attempted compliance with that was last year. So, from 2007 till last year nobody did that. Last year we got as far as what we call ‘a statement about a statement’ in which we defined what a tax expenditure statement is, what it seeks to accomplish, but, we stopped short of actually presenting a statement, but in the 2022 to 2024 FSP, we have this. Tax expenditure is a term used to define all of the tax waivers, concessions and holidays that are granted, these actually translate to foregoing revenues. It is like spent money, an expenditure, almost like you collected it and spent it.
These waivers and concessions arise broadly from two sources: the policy-based and compliance-based, where maybe due to inadequate compliance, the net effect is that people are getting away with waivers or concessions that they ought not to. Therefore, in the FSP 2022 to 2024, we provided an estimate of what these concessions, waivers and all that, cost the federation. In 2020, the estimate was N5.8 trillion, which is huge because if you note that the federal government earned an aggregate of N3.94trillion approximately 4 trillion in 2020, but then the federation had 5.8trillion as tax expenditure. Approximately, half of that would have gone to the federal government at N2.9trillion, which as a percentage of the 4 trillion is almost 75percent. This is significant, and we need to draw attention to it.
Yes, some of these are based on policies, but we need to then begin to review and interrogate the effectiveness of those policies; whether they justify such a high level. In our own case, however, out of this N.5.8trillion, N4.3trillion relates to VAT. Out of that N4.3trillion, only N900 billion is policy-based. The VAT Act stipulates exemptions; who is exempted, what goods are exempted, what kinds of institutions or services are exempted, those cost 900 billion. So, we have to begin to look at the list of exempt items, whether all of them are justifiable. For instance, while it is normal to exempt food from VAT, that should only relate to basic foodstuff. If you look through that list for instance, you will see some exotic foods that are not even grown here and are in the list of the things that are VAT exempt, should those be in there? But the biggest problem on the VAT side is compliance based, and that’s why the initiative FIRS is driving is important, based on powers derived from the Finance Act 2020; to be able to mandatorily deploy technology to many of these organisations that collect VAT, but are not faithfully remitting. The deployment of technology takes away that discretion about whether or not they remit and even when they even remit so as to scale down this level of tax expenditures. Import duty is another major component of that. That is one new thing in terms of MTEF/FSP 2022 to 2024.
What is the Tax Expenditure estimate in the 2022/2024 MTEF/FSP?
It is still in the ballpark, which is N6trillion plus or minus over the medium term if we do nothing, though we have not drawn attention to it, we will do something. I gave you an example of what FIRS is doing to reduce the compliance-based component of that with respect to VAT. The new PIB fiscal component, in terms of the CIT/PPT component of this tax expenditures, also has measures to tighten up some of these loopholes. The Finance Act (2020) has also tried to tighten some of those things. For instance, what used to be the case is that the government says interest earned on its securities is tax-exempt, what the banks have been doing all these years is: first of all, they take customer deposits, and with those customer deposits on which they pay interest, invest in government securities.
First they get full tax relief for the interest they pay on the depositor funds. And on all the income they earn, they don’t pay any tax, that’s double dipping. What we have done now is plug that loophole, you can’t double dip, so if you are getting full relief on the income, you can’t take relief on the expenditure. As we drive through these measures over the medium term, we hope to start seeing some positive impact. Hitherto, nobody even made an effort to size this dimension in such a meticulous and consistent manner. You may lose sight of the fact that you’re bleeding through this.
The World Bank has advised the government to rationalize these tax expenditures. Is it something that is being looked at?
We are reviewing it, we are trying to tighten up where we can, and cancel some of the sections where needful, for example the whole pioneer tax certificate has been reviewed. In this country, there used to be provisions for companies to remain in pioneer status forever, enjoying tax holidays. It was very loose before, for instance if I come as a pioneer and make an investment of N1billion, I enjoy tax holiday, if I make an expansion, it still entitles me all over again for exemptions. There is a loophole and companies were enjoying that for life. These are things we are trying to block. In every country, you have tax expenditures, just make sure that you keep the policy effectiveness under constant review, and continue to tighten up your compliance.
Have you looked at the projections in terms of numbers?
To get data to extract these projections is like extracting water from rock. We are being careful in terms of putting numbers out there, you raise tensions and then it does not pan out. Some of it requires change to legislation, until you achieve that amended legislation, you cannot start making any projection about what you will say. A legislative process is like a black box, you might even go in there to tighten things and what will emerge will even be to loosen it more.
The real sustainable solution for Nigeria is to shore up our public revenues and plug any leakages, including some of these subsidies.
What informed the assumptions in the new MTEF – are they appropriate or overambitious?
On crude oil output, we are at about 1.7 million barrels per day (mbpd) presently, why are we looking at 1.88 mbpd oil benchmark? Number one; the projections globally are that there will be stronger recovery post COVID next year, which means that global oil demand will be higher than it was this year. If global demand is projected to grow, it is then expected that OPEC will expand its output and quotas. Secondly, Nigeria through DPR is strategically trying to grow its condensate, and push it to 600,000 /700,000 barrels over the next few years. And condensates don’t count towards the OPEC quota.
The third key reason is that the domestic refineries that are projected to start coming back on stream are going to increase domestic crude consumption that is NNPC, Dangote and other local refineries. We may well get to a point where we become, may be a net exporter of refined oil, in which case we don’t even belong to OPEC again- though that’s not likely to happen over this medium term. OPEC is an organisation of Petroleum exporting countries, if all of your production becomes consumed domestically, what are you doing with OPEC again? It’s the market constraints that basically keep you, because even the quota is determined by market constraints as well. And as for the price, $57 per barrel is like 90percent of the average price projected by the different institutions internationally. But, if you look at the past several years, we’ve never been over on our benchmark price. We are intentionally conservative on price projection. We tend to be more bullish on the volume projection since price is outside of our control, but we can push volume and force people to do something. If instead of putting $57 you put $65, your people here can’t affect the price. If you were in Saudi, you can play games with price because you have the capacity to affect price, but we cannot. And that’s why year in year out, it looks like while we meet the price, we don’t meet the volumes, it’s intentional.
Are you worried that the excess revenue on the $40 oil benchmark for 2021 fiscal year is not reflecting on the economy due to fuel subsidies?
I am terribly worried, and it is extremely painful because when oil prices decline, we take the heat. You would expect that when oil prices increase, we should take the benefit, but this is a case of ‘heads we lose, tails they win’, so we never win! Because crude price is the biggest single determinant in terms of the price of refined product. When we export crude at $70, and turn around and import all of our refined products, it’s tantamount to buying back the same crude you sold at $70 at $90 per barrel, that’s what the refiners cost our margin, so it totally erodes the benefit of it.
If we had domestic refineries working, we would at least claw back something. But, not only are our domestic refineries not working, we are also subsidising things that we are importing. If domestic refineries were working, and we are subsidising, it would lower the costs that we incur. But now, the heat is on multiple fronts. The foreign exchange requirement to import those products is 30 to 40percent of our foreign exchange. If we did not have to import those refined products, there will be less pressure on our local currency.
Even if you sustain that amount of demand for dollars, it will go to fund more productive sectors of the economy than to fund consumption. I don’t know how else to explain this subsidy thing to Nigerians, but this is some case of collective foolishness, this thing hurts and it’s a farce that it would hurt the common man, it’s not true. The rich are the biggest beneficiaries of this subsidy regime. First of all, remember that its only PMS (petrol) that has subsidy, the common man who uses kerosene to cook doesn’t get any subsidy. Industries, which still depend on diesel-powered generators because of our power shortage, doesn’t get any subsidy. Some people say a lot of SMEs use ‘I better pass my neighbour’ generator which uses petrol, but, how much of that do they use? And then, the common man who doesn’t even have any business premises to use generators and only spends on public transport, how much of the benefit of the subsidy does he get? You see, people who are driving around in fuel guzzling SUVs do not need this fuel subsidy.
As I said, we have a situation where we have this massive draw down on our foreign exchange to import this product, it contributes to higher costs of the dollars, because of our significant import-dependence, the cost of average goods and services are higher. There is imported inflation, it’s hard on the common man. If you do a proper analysis you will see that fuel subsidy doesn’t do the common man any good. But we pretend that it does, and for me, this is a case of elite conspiracy, it’s a very myopic view. And then, the worst area in which it has hit us is that it is the single reason why our midstream sector in the oil and gas industry hasn’t developed. No bank will finance a refinery with this subsidy still there, on a project finance basis you will not be able to. But Dangote is able to do this because his balance sheet can support financing for any project he fancies. I see people collect licenses for refineries and they go away because nobody will lend them money when the product is subsidized, this costs us jobs.
Does the government even have political will to remove fuel subsidy and get the refineries working. Is the government not communicating enough to let people understand the impact?
Let me take us back a bit, you remember 2011/2012, the government then mounted this massive national campaign to convince Nigerians that subsidy was no good. You remember Ngozi Okonio-Iweala, Sanusi’s push then, but at the end of the day when they moved, it spurred the ‘occupy Nigeria movement’ in strong opposition against the policy – even the elites took to the streets.
What’s even mind-boggling is the fact that, we are resisting removal of subsidy on petrol, but didn’t resist removal of subsidy on diesel and kerosene. I do not know any other country in the world where diesel costs more than petrol, even from a logical point of view, it costs more to produce petrol than to produce diesel. Before we brought this subsidy regime, diesel used to be cheaper than fuel. The government of that day abandoned that process, the price was N97 per litre at the time. In the run-up to 2015 election, in desperation, the government even dropped the price further by N10.
Inexplicably, the government that was campaigning to remove fuel subsidies and increase the price, dropped the price. So, this administration inherited that and in the early days, had massive political capital to address this problem. You saw the price go from N87 to N145. Unfortunately, what has happened was that we were coming from a background of massive corruption that bedevilled the subsidy regime. So, when this administration decided to get rid of the subsidy, there were people who advocated and insisted that it couldn’t be without a ceiling. Remember that the oil marketers at that time were seen to be highly suspect because in one year the subsidy rose up to N2.1 trillion, more than even the revenues of the government for that year. If we did not put that N145 ceiling, things would have been bad.
Some marketers were even selling below the N145, unfortunately, two things happened. Number one, the prices of crude rose much faster than anybody anticipated. You know one way to destroy your career as an economist, is to take a bet on what crude price would be. It can be anything, all kinds of imponderables.
How do you factor it in your modelling whether one crazy person will throw a bomb into one Saudi oil facility and the price will jump up? So prices rose faster, and then as the economy lapsed into recession with the crude oil price collapsing, the exchange rate also devalued faster, and these two things messed things up. That room that 145 allowed for interplay of market forces evaporated quickly and we were back to a situation where 145 could no longer do it, and so we were back into subsidy regime. Early last year, with the onset of COVID-19 and the collapse in oil prices, it was a good opportunity to get rid of this. In March, 2020 PPPRA said pricing of PMS is deregulated.
The initial impact at that point was for prices to fall below 145, and Nigerians were happy. But again, crude prices recovered faster than we projected and before you knew it, we were back to 145 and beyond. The same people who were hailing the government when the price dropped to 123, started serving notice of strike the moment it crossed 145. At a time it got to 162, they threatened again to bring down the whole system. Government started engaging with them and those engagements continued. But strategically, part of what the government is trying to do is to provide an alternative which is that you don’t have to use PMS for your car, you use gas. If you use CNG or LPG, it will actually be lower than the N162 that you pay now for a litre of fuel. That is supporting the development of the facilities across the country, for people to be able to convert their vehicles from petrol to gas and access fuel for their vehicles at a price that they can pay. These are some of the strategies, but ultimately it is clear that fuel subsidy is not sustainable.
But the gas thing is not popular….
Yes, it is not. But if you see that your neighbour has done it and is getting an advantage, it’s your choice.
What do you think should be the appropriate pricing for PMS today without subsidy?
There is nothing like an appropriate price, the PMS is a commodity, so the interplay of market forces should determine the price. The last number I saw suggested N234 or so, at some meeting, the price of N380 also came up. Beyond this import parity, there are other subsidies, right now, there is no VAT being charged on some commodities, and there is no formal reason for that exemption. In other countries, not only do they charge VAT on PMS, they charge carbon tax as well.
If you go to the UK for instance, when you buy PMS, it’s about 37percent percent of the cost per meter you pay at the pump, its tax. And that’s what funds their road maintenance programme. We have VAT here and we need to put that back on, this N234 doesn’t factor that in. Right now, because it is NNPC alone importing, they have preferential access to foreign exchange. NNPC is still using foreign exchange that is priced below market rate to import. If you look at then, the comparative cheapest price for this product in our neighbouring countries is about N382 or N392 naira per litre. In a country like the Central African Republic, it’s over N800 per litre and that’s why there’s such massive smuggling across the borders. If you look at the margin, at N162, the ex-depot price is at N130, that’s why people are taking that advantage and are running across the borders. The per capita income in our neighbouring countries is not higher than ours, if they can sustain those higher prices, why not us?
Are we literally depending on Dangote refinery?
You see, Dangote refinery will help, earlier I said if we had functional refineries, it will make the situation even better. But make no mistake about it, Dangote is going to buy his crude at international prices, so, if the price of crude goes to $100 per barrel, that’s what he will pay. He’s not going to fund the government subsidy programme.
The only thing now is that CBN is coming out to say domestic refineries can pay naira for their crude, otherwise, they will come to the same CBN to ask for dollars to pay the country, but that naira will be at international parity price. However, it will eliminate higher refining costs, which are higher internationally because in those countries labour is more expensive, including tax on hydrocarbons, fossil fuels. And when you factor in the freight to bring it back here, plus the financing cost for all the time that it takes you to open LC and all that, there will be cost savings, but that’s not going to eliminate the fuel subsidy.
There are still inefficiencies in government. For example, we have refineries that are not working, yet people are being paid salaries for doing nothing. Are you worried considering our low revenues and that a chunk of it is spent on recurrent?
I am worried. Is it the fault of the people that they were being paid for doing nothing? They did not employ themselves. It is not their decision. On the other hand, if you try to fire them, labour will bring down fire. The powerful oil industry unions, NUPENG and the rest will go on strike, and say that they are not moving petroleum products again, and people would turn around again and put pressure on the government. So year in year out, it has always been a case of “oh the refineries will be fixed, so, the staff are staying on”.
Look at Ajaokuta, there are people who have been there for years, Ajaokuta has pensioners of over 4,000. It’s almost like some people have started and ended a career without any output. These are real issues that give those of us on the fiscal side a headache. I’ve been in the private sector for more of my career than I’ve been in the public sector, I can tell you, decisions in the public sector are not that cut and dry. In the private sector, you run the numbers, if it doesn’t add up, you cut and chop out and move on.
In the public sector, there are all kinds of dimensions. For example, someone elected representatives of the people because we are in a democracy, therefore, you cannot afford not to listen to the people. In the private sector, you listen to your shareholders, and at any point in time they want you to maximise their profit, any action you take in furtherance of that objective is fine. You can wake up one day and say, we have too many staff, we need to cut salaries, you sack two third of your staff, nobody queries you and if they resist, you get some policeman to flog them and chase them away from your gate, and life goes on. It does not work that way with the government. It is a lot more difficult to make these decisions, not that people don’t know what to do, and there is this proverbial ‘political will.’
Political will is not like flicking on a light switch, you can’t get a politician away from thinking about the next election cycle, they are conscious of how any policy resonates with the people. I just gave an example of an administration that was campaigning for the removal of subsidy, but in the end it failed. But then at the run up to the elections, they inexplicably reduced the price of fuel more, thereby expanding the subsidy. It was all a political gambit, to try and claw back some of the political loss suffered during the campaign to remove the subsidy. It is not just labour we have to contend with in this policy, we are going to contend with political actors in removing their subsidy.
Does it mean there is no way out of the high cost of governance?
When it comes to retrenching, at this point in time, it’s not even just about the reaction of labour. With unemployment at about 33percent, if the government adds to that by retrenching, the government might save money, but what about the other consequences? When it comes to governance, it is not all just down to naira and kobo, remember the constitution says the security and welfare of the people is a cardinal purpose of government.
So if you retrench, you increase the army of the unemployed, you can expect crime to increase and other deviant social behaviours. You can expect more people to then become a burden on the public health system, and at the end of the day, the government still needs to come back and deal with those consequences. You will still turn around and buy more ammunition or recruit more policemen. When you weigh all of this, you will see that for the time being, this is a lesser evil. Keep the staff numbers that you don’t necessarily need and just find a way of improving their productivity.
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Aside retrenching, is there any other thing being done to cut down governance costs?
There are things that are being done. We have an efficiency unit in the ministry of finance that is constantly looking at how we can save costs. What are the major costs? Our single highest cost item is personnel, you cannot cut this. Take this year for instance, the federal government budgeted N13. 8 trillion. Personnel and pensions is about N3.6 trillion of that, debt service is about N3.4 trillion, we are already at N7trillion. Then we need to be spending at least 30percent of our annual budget on capital expenditure to be able to create the basis for growth. So N4 trillion for capital expenditure, you are already at N11trillion. Then you have the statutory transfers to the other arms of government, that’s another half a trillion naira. In the service wide votes, you have other government programmes like the social investment programme, N400billion in there. There is an amnesty programme, armed forces operations – N100 billion, then you have overhead for all the agencies N400 billion, between the agencies and the government owned enterprise, it’s about 700 billion. We keep saying cost cutting is critical, but we can’t cut costs out of our fiscal challenges. We have a 5.6 trillion naira deficit, what do you want to cut? I made a statement recently in one interview and I got a few abuses on social media. We often hear, cut the salaries of legislators. And at that interview, I said fine, let me concede that the legislators are taking so much. But the total budget of the National Assembly this year is N134 billion. This includes the pay of the civil servants that work there and everything to run the legislature. Assuming I make the budget of Assembly zero and I have a deficit of N5.6 trillion, I am down to N5.5 trillion naira. How does it solve my problem?
So we’re constantly looking at ways to cut costs, but our problem is not that our expenditures are too high, our problem is that our revenues are too low. As a matter of fact, we’re not spending as much as we ought to. Public expenditure to GDP ratio for Nigeria is about 12percent, in Africa, the average is about 22percent. There are countries in Africa with over 40percent. So the government is not spending enough money. It’s not that the government is spending too much money, we are not spending enough on education, health defence and security, just to illustrate. The flip side to that is that our public revenue to GDP ratio for Nigeria is about 8percent, the African average is 16percent. So you see a correlation there. Our GDP is too low, our expenditure is too low. The real sustainable solution for Nigeria is to shore up our public revenues and plug any leakages in our public revenues. Some of these subsidies represent leakages in our revenues, because NNPC simply nets the cost of that out of the revenues that they generate before remitting to the treasury.
But, we have to really come to terms with the fact that we need to pay more taxes. Our VAT rate is 7.5percent, which is less than 50percent of the average VAT rate in Africa. VAT rate in Ghana is over 20percent, of all the countries around us, I don’t know of anyone with a VAT rate of less than 20percent. Even at this 7.5percent, we only managed, some people are still fighting and agitating that we need to go back to 5percent.
Our excise tax to GDP ratio in Nigeria is less than 20percent of the African average. If you check the number of tax-paying Nigerians as a percentage of our population, it will be about the lowest also. There are only 42 million people in the tax base of the Joint Tax Board (JTB), that’s about 20percent of our population. If you take our demographics in terms of our taxable, active population, you would get just over 100 million people, at least 70 million people that are in gainful employment that should be paying some form of tax or the other. There are about 30 million people out there not paying anything and all of them are expecting public goods and services. And some of these people earn far higher income than you and I. And the point is that with the huge informal sector in our economy, it’s not easy to track these people, people can afford to be anonymous.
That’s why strategically for Nigeria, the preferred approach is indirect taxes rather than direct taxes. In 2010 the government lowered the personal income tax rates and thresholds. It was supposed to be a twin policy of lower direct taxes and increase indirect taxes. VAT was simultaneously supposed to go up to 10percent, government did one part of it and chickened out on the second part. And it took us many more years before we could even now achieve only 50percent of that. There is still massive resistance to property taxes. In some of the countries that we want to be like, the municipalities derive up to 65percent of their funding from property taxes. But here, you have people who have successfully hidden their income away from the taxman, but the thing is, while you can hide your income, you can’t hide your expenditure. If you’ve escaped on income, you should be caught at the point of spending, whether buying goods or properties.
I have a theory about this, every government seeks legitimacy, and it’s worse if you start out with questions about their legitimacy. In the colonial era, pre independence, up to the first public, Nigerian government was funded mainly by taxation. And then the military came and threw that away, the military sought to legitimise itself with Nigerians by downplaying taxation. Also, the advent of the military also coincided with the oil boom and oil becoming a major source of revenue, so they downplayed collection of taxes. For the number of decades that we had military rule, nobody was troubling anybody about paying taxes. By 1999, the dawn of the return to civilian rule, do you know how many people were paying tax in Lagos state, 250,000 people. Then Tinubu began building blocks to get that done. At the time he was leaving, that number had gone up to 500,000. Fashola picked it up from there, by the time he was leaving that number had gone to 4.5 million and even at that, by our estimate then, there were still about 3 million who ought to be paying but were not paying. I don’t know what the number is right now, but this tells you my point. Meanwhile, modern governance is based on a social contract which empowers the sovereign to collect taxes and then obligates it to provide goods and services to the people. Under the military, this social contract, which is the basis of modern governance, was vitiated. In societies where people pay taxes to the point that it hurts, there’s accountability, everybody’s eyes are red, you don’t mess around with it. If we really want to create a strong culture of accountability in government, people need to pay taxes. It’s a very unpopular philosophy, but if you don’t pay, you are not really in a strong position to hold government to account. But as I said earlier, it’s not that our spending is too high, it is down to the fact that our revenues are too low. If we fix our revenue problems, our deficit will reduce, we won’t need to borrow as much. Debt service to revenue ratio will decline because the denominator which is revenues will grow. Simply put, the current situation is not sustainable.
You’ve talked about revenue not being enough, besides tightening up loose ends of the tax system, what are other strategies?
We have to stabilise the polity and that’s why recently, despite all of these challenges, we came up with a supplementary budget. Not because we had supplementary sources of revenues, not because our revenues were doing that great. But we looked at that budget of N895 billion, out of which N770billion was for security. Without security, you can’t have investment, without investment, growth would be affected. If the economy is not growing, you can’t grow revenues, what are you going to tax? Are you going to tax unemployed people, are you going to tax loss-making companies? That’s why we came up with the supplementary budget even though it will entail yet more borrowing in the face of an already difficult situation.
Why are we borrowing so much when we are also generating money?
When revenue generating agencies throw out those numbers of what they are generating, one of the things that is lost on people is that those are federation numbers and not federal government numbers. Customs, NNPC, FIRS collect revenues on behalf of the federation not the federal government. When customs tell you they’ve collected one point something trillion naira of revenues, they don’t tell you that they keep 7percent of that as their cost of collection. They don’t tell you that the balance is split among the different tiers of government. So at the end of the day what comes to the federal government is the sort of numbers that I gave you. But, beyond those agencies that collect revenues on behalf of the federation, there are revenue generating agencies for the federal government like NPA, FAAN, NIMASA and all of those. Until four years ago, the budgets of those agencies did not form part of the federal government’s budget. So it’s like those people were in their own world, they were not subjected to the same fiscal discipline that the MDAs were. Three years ago, we changed that, we now bring them into the budget. We first started with just 10 of them and then 63 of them last year. Their budgets are now integrated into the federal government’s budget, which means that increasingly, they are being subjected to the same standards of fiscal discipline, and the thoroughness of the review of their budget and being required to account. The Fiscal Responsibility Act requires these agencies to remit 80percent of their operating surplus to the Federal Government’s Treasury. Five years ago when we started, even with the kicking and whatever, the most that they remitted was N200billion and something billion. This year as of May, we’ve already collected over N400 billion from them, and the finance Act 2020 limited how much of their revenues they can spend. There is now a cost to income ratio of 50percent imposed on them. So it’s not like the government is not looking at itself, and its agencies, but up until recently, the government didn’t look at what those agencies paid themselves. Many of them pay salaries that would make private sector organizations grin with envy, which is fine, as long as it can be related to productivity and nobody was demanding those productivity measures as a basis for justifying what to pay. We are now bringing them within the federal government’s budget and subjecting them to those kinds of rigour.
Are we deriving any substantial benefits from the tax credit programme?
Absolutely. Tax credit essentially is one strategy for bringing private capital into the public infrastructure space. The way it works is that you express an interest as a private company in developing a vital piece of infrastructure. And then you submit your costing for that infrastructure. If it’s a road for instance, the Ministry of Works will evaluate your bill of quantities to ensure that the cost is right. You then ask the government to give you the right to develop that piece of infrastructure. You are allowed to recoup the money that you spend on it, plus a reasonable amount of interest, to offset against your future tax obligations to the government. It’s a great programme because one, if you’re delivering infrastructure today against taxes that you will have paid in the next several years, the country is getting that infrastructure faster than it would have done if it waited to collect that tax in future. Two, the cost of collection is reduced. But for me, one of the biggest benefits of that is that it provides us a reference for pricing government projects which is a rigorous process. So tomorrow, if any government wants to procure a similar infrastructure, there’s already a reference cost.
If tax credit is working efficiently, why do we still have a huge infrastructure deficit and CAPEX in the budget, and more borrowing?
We have a massive infrastructure deficit. What is captured in the budget is constrained by the resources available, it’s only a tiny portion. Our national infrastructure master plan, which was developed around 2012, dimensioned our annual required investment in infrastructure at 100 billion dollars. Out of this, it is projected that the government will need to do a third of it, 33 billion dollars, and the private sector will do $67 billion. The $33 billion that we projected the government would make, the total budget of the federal government is not even up to 33 billion dollars. The total size of the budget is 34 billion dollars and out of this, we are struggling to find up to 30percent of it to invest in capital expenditure and not all of your capital expenditure is infrastructure. At the end of the day, we are only scratching the surface. This tax credit just helps you begin to chip away, a little faster at the deficit. So it’s not a replacement, it’s not a substitute, it’s simply complementary to what you’re able to put on the budget, and can’t be a source to reduce your deficit.
The 1.2 trillion that these agencies are yet to remit to the federal government account, how much of that has been remitted or is it still outstanding?
Well I don’t know where you got the N1.2 trillion. But the treasury has now obtained its own Presidential authorization, and remember, these agencies are now mostly under the TSA system, with CBN and now visible. The only one still outside of TSA is NNPC because of their argument about the way they operate, their Ventures and all of that, but the rest are there. So on a monthly basis, the treasury is no longer waiting for them. As they generate, revenues automatically go into the TSA.
How about recoveries and proceeds from sale of government assets?
They are part of the budget. First of all, recoveries are only taken into the budget when they are not subject to litigation, with a final forfeiture order by the Supreme Court. All of those numbers we hear from some agencies as recoveries do not translate to being available for spending. Note that proceeds from sale of government assets is a financing item not a revenue.
You must be uncomfortable with the system where governors rely on monthly disbursements from FAAC to operate?
How can I possibly be comfortable with any of that given where I sit? If you point to Lagos to these governors, they would say the case of Lagos is different. Without a doubt, Lagos had greater potential, but without deliberate actions to change things, Lagos may as well still be in this position. When Tinubu began this journey, one of the fundamental decisions he made was to say we cannot do this with our manual systems, and he committed the state to a massive investment in technology.
Today, Lagos state is the largest single Oracle user in the whole of Africa. At the time when the total budget of the state was about 20 billion naira, to commit the government to a N4 billion expenditure programme would seem like hell, but today see the outcomes. How many of these other state governments can be audacious in trying to fix their Internally Generated Revenue (IGR). There are some states that are dependent on FAAC allocations from Abuja for well over 90percent of their revenues. They are not collecting taxes, they lack the interest to do something, they want to be popular in their states, and do not want to tax anybody.
With the opportunities that exist in property taxes, how many states have property tax laws? In many of the states, even when they tend to collect IGR, they appoint their friends as consultants who don’t even account for what they collect. I don’t believe that there’s any single state in Nigeria that can’t do better than they are currently doing, even Lagos continues to challenge itself to do better, and they continue to raise the bar. Last year, they generated over 400 billion naira in IGR, God knows how many states you will have to combine all their revenue sources to get to that. Instead of challenging themselves, when you cite Lagos as an example, they just dismiss it, as if it takes no thinking, no effort, no initiative and no determination to do this.
I was in Fashola’s cabinet for eight years, every single last Friday of the month of those eight years, we held what was called a revenue stakeholders’ meeting chaired by the governor himself. On the rare occasion that he was not available, as a commissioner of economic planning and budget, I would preside over the meeting without fail, and all the revenue-generating agencies will come and account for their performance in the previous month, vis-a-vis their target.
If they have real issues that require additional resources, additional policy measures, additional legislation those are discussed there. That’s how serious it was taken. How many governors have ever convened a meeting to sit down with their revenue generating agencies to figure out how revenues are performing? You can’t build something on nothing. If there is no economic activity in your state, there’s nothing to tax, IGR is not a question of wishful thinking, you have to be deliberate, you have to be intentional to create economic activity in your state, for you to be able to generate IGR. Sometime ago, I was invited to speak on IGR for one of the states which I will not name, and they said they don’t really have anything. And I reminded them about a certain state called Nevada in the United States, a desert land. They sat down and decided to create an economy based on sinning. So, Las Vegas is called Sin City, I’m not advocating that, but I’m just explaining the extent people can think. They urged people to come and gamble, wine, with cheap hotels, airlines, food, and once you get into Las Vegas, they have you. If you’re walking on the streets of Las Vegas, everywhere you turn are gambling machines and points. This is how far determined people can go to get things fixed.
Do you think that rising crude oil prices can reflect in our budget deficit?
You see, the oil sector still accounts for over 90percent of our export earnings. In terms of revenues, it’s now at 40percent and under. As of May, oil revenues were only 38percent of our actual revenues. But, we still have a heavily-import dependent economy, and that’s why when the price of oil, which is our major source of foreign exchange declines, the rest of the economy hurts because access to foreign exchange is constrained. However, high prices – even though it doesn’t do a lot of good for us in our deficit because what we are making is leaking out more also – help in terms of foreign exchange, and to that extent therefore, help to stabilise the naira. If you have more supply of the foreign currency, the price will fall. If you then get a breather, it also slows down inflation and reduces the rate of increase in your cost, which helps you with containing your deficit. As inflation starts sliding down, interest rates start sliding down also, even the interest that you have today on your borrowings also reduces. So to that extent, yes, it does help, but, I wish we didn’t have to deal with the leakages that payment of subsidy creates, that’s when we would have seen the full benefits of this. If we didn’t have to be importing refined petroleum products, that’s when we would have seen the benefits, but, unfortunately our mates, other countries in the OPEC are seeing a boom as a result of the higher oil prices and we are not. We are the only OPEC country that is importing refined crude products.
In budgeting, how do you carry states and local governments along to avoid duplication of capital projects?
There is no duplication between the states and local governments. First of all, when did you last see a local government embark on a project, have you ever seen a local government budget? This country has roughly 200,000 kilometres of road network. Of these, 35,000 are federal roads, about 95,000 are state roads; the balance, which is about 70,000 are local government roads. That the federal government is doing some roads in a local government and the local government is trying to do roads doesn’t mean the same road. Of this 35,000 kilometres of federal government roads, there are contracts for about 13,000 kilometres, which are at various stages. Some of those contracts have been out for 10 years. So there is no question of duplication of the same roads, it doesn’t happen. Assuming there are say 5,000 youths in a local government targeted to be given Keke; if in the budget of the federal government, the legislator from the constituency puts 300 keke, and in the budget of state government they have 500 and local government 100, this is only 900 keke for the 5,000 people that need it, where is the duplication here?
There are situations pointing out where there have been cases of this duplication.
There’s a problem, but the label is not duplication. The issue there is more fundamental. We operate a federation, which assigns responsibilities to the different tiers of government. Each tier of government has a constitutionally guaranteed share of federation revenues, at the same time, they also have constitutionally guaranteed taxing authorities.
What we now have in the federal government’s budget is a situation where the federal legislators have basically hijacked the government’s budget and are appropriating funds to deal with matters that don’t belong to the federal government. They shouldn’t be the ones buying Keke for people in local government or building markets, that’s the constitutional remit of the local governments. You hear comments like, in the United States they have what they call the pork barrel system. First of all, pork barrel is not something the American legislator is proud about, many people who do it are even ashamed of that system. But, even then, the pork barrel system is about you fighting to get federal funding, federal projects for your constituency. You are not likely to see construction of a community hall in the budget of the federal government of the US. Those are local government and county level sort of things.
We have nearly 20,000 projects in our budget because rather than concentrating our scarce resources on trying to complete these roads, what will happen is that may be another 10,000 roads, not 10,000 kilometres, which cumulatively might measure about 50,000 kilometres of roads will be brought into the budget and the amounts allocated to do these ones will be cut down.
For many years, we couldn’t make progress on building the Lagos/Ibadan expressway, you know why? The ministry of works could put N4o billion in a year for that road, when the budget gets to the National Assembly, they will cut it down to 10 billion, and take the other N30 billion and distribute it across the country. What ends up happening is that you don’t get Lagos/Ibadan expressway fixed, you don’t get any of those roads finished. So, the whole country is simply an endless construction site, and the stock of abandoned projects keeps growing from year to year. This is one of the things that is at the crux of annual budget fights between the Legislature and Executive.
The legislature insists that under the Constitution, they have the power to appropriate, and it includes to make the final decisions on the budget. The power to appropriate does not include power to originate projects. There’s a rigorous process for projects to get into the Executive budget. But, during the legislative process that same level of rigour doesn’t happen. There is no process for costing those roads or whatever that is put in there and there are no designs. Before you put a project in a budget, you put the design, the cost, and so on. During Obasanjo’s time, if he refused to do it, they would threaten him with impeachment. When Yaradua came, after his first year, he said he was going to approach the Supreme Court to interpret the constitution; the limits of the powers of the executive and legislative arms in the budget process. His party prevailed on him to take the matter out of court, and that’s where we are today. For four years in the 8th assembly, we couldn’t get a budget passed before May or June.
