Preliminary negative numbers from the second quarter Gross Domestic Product (GDP) computations could be strong signals of Nigeria sliding into a second recession in four years and the worst in several decades, as being widely projected.
The National Bureau of Statistics (NBS) is due to release the second-quarter GDP numbers in two weeks, but according to a top source monitoring the computations, “The second-quarter numbers are obviously negative, but how negative, I still do not know at this moment.”
Minister of State for Budget and National Planning, Clem Ikanade Agba, somehow corroborated with the development when he said late last week that “Nigeria’s Q2 GDP growth is in all likelihood negative, and unless we achieve a very strong Q3 2020 economic performance, the Nigerian economy is likely to lapse into the second recession in four years, with significant adverse consequences.”
Making a presentation to the House of Representatives Committee on Finance at an interactive session on the 2021-2023 Medium-Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), Agba said Nigerian economy faced serious challenges in the first half of 2020, with the macroeconomic environment significantly disrupted by the COVID-19 pandemic.
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He decried the level of significant medium-term fiscal challenges, especially with respect to revenues, which if not addressed could snowball into a debt sustainability crisis.
The Minister stated that the medium-term outlook for Nigeria suggests that fiscal risks were somewhat elevated, largely due to COVID-19 related disruptions which had exacerbated structural weaknesses in the economy.
Apart from the Covid-19 pressures, global Crude oil prices declined sharply, with Bonny Light crude oil price dropping from a peak of US$72.2 PB on January 7, 2020, to below US$20 PB in April 2020.
“In effect, the US$57 crude oil price benchmark on which the 2020 budget was based became unsustainable,” the minister said.
Another key development in the international crude oil market was the massive output cut by OPEC and its allies (OPEC+) to stabilize the world oil market, with Nigeria contributing about 300,000 barrels per day (BPD) of production cuts.
According to the minister, “the impact of these developments is about a 65 percent decline in projected net 2020 government revenues from the oil and gas sector, with adverse consequences for foreign exchange inflows into the economy.”
He said that Nigeria was exposed to spikes in risk aversion in the global capital markets, which would put further pressure on the foreign exchange market as foreign portfolio investors exited the Nigerian market.
Agba who represented the Minister of Finance, Budget and National Planning, Zainab Ahmed, at the 5-day interactive session, said in response to the developments affecting the supply of foreign exchange to the economy, the Central Bank of Nigeria (CBN) adjusted the official exchange rate to N360/US$1, and more recently to N379/US$.
He explained that the disruptions in global trade and logistics would negatively affect custom duty collections in 2020 and that the COVID-19 containment measures, though necessary, had inhibited domestic economic activities, with a consequential negative impact on taxation and other government revenues.
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As a result, the projections for Customs duty, Stamp Duty, Value Added Tax, and Company Income Tax revenues were recently reviewed downwards in the revised 2020 budget.
Speaking more specifically on the revenue performance from January to June 2020, the minister said that FGN’s retained revenue was N1.81 trillion, 68% of prorating target as at end of June 2020.
FGN’s share of oil revenues was N859.1 billion, representing 169.48% performance, over and above the prorated sum in the revised 2020 budget, while non-oil tax revenues totaled N581.23 billion, about 72% of revised target.
According to him, “Companies Income Tax (CIT) and Value Added Tax (VAT) collections were N301.06 billion and N85.4 billion, representing 73 percent and 60% respectively of the pro-rata revised targets for the period.
“Customs collections was N184.36 billion (82 percent of revised target) (while) other revenues amounted to N372.04 billion, a lowly 28 percent of the target.”
He said that the NLNG dividends, recoveries, and stamp duty collected during the period had, however, yet to be booked in the fiscal accounts.
In an effort to check the looming fiscal crisis, the Federal Government has instituted fiscal measures aimed at improving revenue and entrenching a regime of prudence with emphasis on achieving value for money.
The goal of the fiscal interventions, Agba said would be to keep the economy active through carefully calibrated regulatory or policy measures designed to, among others, boost domestic value-addition, de-risk the enterprise environment, attract external investment and sources of funding.
Agba said that the Federal Government is also improving the tax administration framework to optimize government revenue, which had been a major thrust of the Administration’s Strategic Revenue Growth Initiative (SRGI).
According to him, “We have included in the 2021 – 23 MTEF/FSP, a Tax Expenditure Statement (TES) overview which seeks to dimension the cost of tax waivers/concessions, and evaluate their policy effectiveness.”
He said that in order to enhance independent revenue generation and collection, the government would aim to optimize the potential, operational and collection efficiency of Government-Owned Enterprises (GOEs) with a view to generating significantly higher revenues required to fund the Federal Government of Nigeria (FGN) budget.
“Current sub-optimal revenue performance of GOEs will be addressed through the effective implementation of the enhanced Performance Management Framework.
“The key elements of the reform initiative include Performance Contracts for Chief Executive Officers (CEOs) and key management staff members, which will set financial indicators and targets for each GOE.
“The cost-to-revenue ratio of GOEs has, by a Presidential directive, been limited to a maximum of 60%-70%, while regular monitoring and reporting of revenue and expenditure performance of GOEs will be undertaken by both the Budget Office of the Federation and the Office of the Accountant General of the Federation,” he stated.
The minister disclosed that the Finance Bill 2020, which would accompany the 2021 budget proposal, would contain measures to advance the SRGI, revealing government plans to work closely with the National Assembly to amend relevant laws needed to drive the SRGI.
According to him, “Weaker-than-expected economic performance threatens our ambitious revenue growth targets, as seen in the 2020 revised budget and the updated medium-term projections.”
But fiscal sustainability and macro-fiscal objectives of government would require bold, decisive, and urgent action, and as the minister assured “government is determined to act as may be required.
“Thus, key reforms will be implemented with increased vigour to improve revenue collection and expenditure management.”
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