Between January and May 2020, total government revenue generated was below total government expenditure by 59.1 percent, a stark reminder of Nigeria’s ailing finances.
The Federal government’s retained revenue has continued to perform poorly against total expenditure, with deficits of over 50 percent for three years straight.
Revenue generated in the first five months of 2020 was N1.6 trillion and expenditure incurred was N3.9 trillion, according to data from the 2021-2023 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP).
What’s worse is the sheer amount of money going to debt servicing from already lean government earnings.
The same data from the MTEF/FSP show that between the five-month period under review, debt servicing swallowed up to 96 percent of the total generated revenue.
Since 2015, national expenditure has doubled but the nation has continuously failed to meet revenue targets, necessitating the need to incur debt to meet the government’s obligations.
The reasons for Nigeria’s declining revenue are not farfetched. The country derives the bulk of its government revenue and foreign exchange earnings from oil exports.
However, the inflow of petrodollars has steadily declined in recent years owing to a fall in the price of crude oil from a peak of $113 per barrel in 2012 to around $60 in 2019, a situation which has resulted in the inability of the government to meet revenue targets.
Nigeria has largely attacked its revenue challenge by going on a borrowing spree, but that has not impacted the economy which has been stuck in a low growth path despite higher debt levels.
As at June 2020, Nigeria’s public debt stood at N31 trillion with external debt accounting for 36.7 percent at N11.36 trillion and domestic debt accounting for the remaining 63.3 percent at N19.65 trillion. That’s more than double the debt stock in 2015.
As if Nigeria’s fiscal woes weren’t bad enough, the COVID-19 pandemic and volatile oil prices this year have made matters worse, with the government growing increasingly broke.
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The poor performance of Nigeria’s revenue profile and the huge debts before the government has led to the introduction of several policies aimed at boosting revenues especially from taxes.
Nigeria has one of the lowest tax revenue to Gross Domestic Product (GDP) ratio in Sub-Saharan Africa of 6.1 percent and is less than half of the government’s target of 15 percent stated in the 2019 public finance bill.
The government launched the Voluntary Asset and Income Declaration Scheme (VAIDS) and raised Value Added Tax (VAT) by 50 percent but the result has been underwhelming, as they have proved insufficient in materially boosting government revenues.
It was always going to be difficult to boost tax revenues in an economy still grappling with the aftereffects of the recession it suffered in 2016, as well as spiralling unemployment and a low growth rate.
The VAIDS scheme for instance, which was to give defaulting tax payers the opportunity to make up their outstanding tax obligations from 2011 to 2016 in return for waiver of penalty and interest and criminal prosecution, was supposed to fetch $1 billion (N360 billion) had only added N70 billion to government coffers as at January 2020, according to Zainab Ahmed, the minister of finance and budget and national planning.
That’s less than 20 percent of what was targeted.
The renewed pressure on earnings this year from COVID-19 and lower oil prices means the government’s desperation is growing.
The federal government said Wednesday that it was taking over the revenue management of 10 Government Owned Enterprises (GOEs).
“Government is increasingly concerned with the dwindling profile of revenue and this trend has to be quickly arrested particularly with key revenue generating agencies of the government,” said Finance minister Ahmed.
On the same Wednesday, the federal government put up a jet in the Presidential fleet for sale. Some findings indicate that the same jet sold for $22.91 million in 2012. The aircraft which the government said had a range of 3,190-nautical mile and had flown for 1,768 hours will surely be worth much less today as it is no longer brand new.
While the proceeds of the aircraft sale will not significantly boost government revenue, the move is perhaps a signal of the government’s desperation.
Some of the ways to know the troubles facing Nigeria’s government revenue are the comparison of total expenditure and total revenue, comparison of target tax revenue and actual tax revenue, trend analysis of debt service to revenue ratio, and the comparison of the proportion of total expenditure used to service debts and apportioned to capital expenditure.
Total expenditure versus total revenue
Source: CBN, Budget Office of the Federation, Business Day
Nigeria’s 2020 revised budget showed a budgeted expenditure of N9.9 trillion and expected revenue of N5.4 trillion. That leaves a budget deficit of N4.5 trillion. In any economy, when the total expenditure exceeds the total revenue generated, the government resorts to external or domestic borrowing and makes use of future revenue to service the debts.
Nigeria has always been faced with fiscal deficits over the years, but the gap between total expenditure and total revenue started to worsen from 2013 when deficits started jumping to trillions of naira.
With recurrent expenditure superseding capital expenditure by about 305 percent, the end of 2019 saw total expenses incurred by the government amount to N8.3 trillion while total revenue generated was about N4.5 trillion, showing a deficit of N3.8 trillion.
Targeted tax revenue and actual collected tax revenue
Source: FIRS, Business Day
Nigeria generates revenue from both oil and non-oil sources, but the bulk of revenue has been gotten from oil over the years.
In a bid to reduce the dependence on oil for revenue in Nigeria, tax revenue became the go-to option to boost non-oil revenue, with tax revenue contributing over 89 percent of total non-oil revenue generated in Nigeria.
Data from the FIRS show that actual tax revenue obtained has been performing poorly against the targeted tax revenue since 2013.
In the first half of 2020, taxes raked in N2.5 trillion as revenue, but this was a shortfall of 27 percent when compared with the target tax revenue for the period of N3.4 trillion.
Revenue from oil has dwindled due to the crash in global oil price as well as Nigeria’s increased compliance with the production cut of the Organisation of Petroleum Exporting Countries (OPEC) +.
This, therefore, means that if oil revenue and non-oil revenue are performing below their targets, the expenditure financing ability of the FGN becomes incapacitated and debts will continue to expand, with a large chunk of revenue being used for debt servicing.
Debt service to revenue ratio
Source: CBN, Budget Office of the Federation, Business Day
Nigeria has a public debt to GDP ratio of 21 percent which is still within the 25 percent threshold stipulated in the Fiscal Responsibility Act and within the 56 percent advised by the World Bank and International Monetary Fund (IMF).
Nonetheless, if the debt service to revenue ratio is higher than the accepted 20 percent threshold, serious interventions are highly required.
Having a growing debt service to revenue ratio indicates lower revenue figures and higher debt service figures.
In the first quarter of 2020, it was reported by the Debt Management Office (DMO) that debt service to revenue ratio in Nigeria stood at 99 percent as total revenue of N951.6 billion generated was used to service debts of N946 billion.
Debt service to revenue ratio in the second quarter was reported by DMO to have dropped to 72 percent, but it still remained far beyond the acceptable threshold limit of 20 percent.
Capital expenditure versus debt servicing costs
Source: CBN, Budget Office of the Federation, Business Day
Countries borrow when there is a shortfall in revenue, so borrowing is not a big problem in itself.
A problem arises when debt is not being channelled efficiently like on capital projects that ensure the money borrowed can be paid for without hassle in the future.
Capital expenditure is an important component of the total government expenditure as it is used for the creation of assets like schools, improved health care, roads, railway lines, airports and other national infrastructural needs.
In Nigeria’s case, the government has been inefficient in utilising debt. That’s because capital expenditure has often taken the back seat in government spending with recurrent expenditure and debt servicing accounting for the bulk of expenditure.
Since 2014, the proportion of total government expenditure allocated to debt servicing has gradually climbed above capital expenditure.
January to May 2020 statistics from the Budget Office of the Federation puts debt service to total expenditure in Nigeria at 39.6 percent while capital expenditure to total expenditure was at a low of 9.76 percent.
This means that resources which should be expended on stimulating the productivity of the country are being spent by the FGN on servicing debts. It also means that the government has not spent borrowed money on bankable projects that can pay for themselves and save the government the need to dip hands into its already thin revenues to service debt.
The future is dim for Nigeria, if things to change soon and fast. As long as Nigeria’s revenue outlook does not improve, the government will be left with no choice but to keep borrowing and using revenue generated to service debts.
A private sector approach to fixing government’s revenue challenges
The two things a well-run private company facing revenue challenges will consider to address the problem are to cut costs or find ways to improve revenues. Nigeria should target both.
Nigeria can reduce the cost of governance and find ways to increase revenues.
Nigeria practices one of the most expensive presidential systems in the world. For a country that is broke, this is not sustainable.
Nigeria runs 37 separate governments, consisting of the federal and state governments, one of the largest in the world. At the federal level, the president is constitutionally obliged to appoint a minister from each of the 36 states, plus Abuja.
In effect, he has to appoint 37 ministers while each of the 37 governors is constitutionally obliged to appoint not fewer than 12 commissioners.
But in actual fact, at both levels, the president and governors find a way of circumventing even these large constitutional limits using special advisers and numerous aides.
In addition, the country has to run over 700 local governments with the same overstaffing as the federal and state governments.
The United States, the most powerful and richest country in the world, has a comparatively slimmer and more cost effective bureaucracy than Nigeria. It has less than 20 federal ministries and secretaries of state (equivalent to ministers in Nigeria). The British cabinet is also smaller than that of Nigeria, an indictment on a country with far less resources than Britain.
On Monday, Italy announced it was cutting the size of its parliament by a third to cut government costs. Italians have voted in a referendum to cut the size of the country’s parliament by more than a third.
Almost 70 percent of Italians voted in favour of the change, which will reduce the number of MPs in the lower house from 634 to 400. The senate will also be downsized as the Italian government eyes savings of €1bn (£918m) over 10 years.
If countries with larger resources than Nigeria are reducing the size of their governments, it casts an uncomfortable spotlight on the country.
The answer to boosting government’s revenue may lie outside of the government in a sense.
This means the government may be better served by addressing structural deficiencies in the macro economy, as well as improving the ease of doing business in order to help private businesses thrive. When private businesses thrive and are more profitable, it translates to higher tax revenues for the government as it seeks to reduce its over reliance on oil exports.
