Nigeria’s and many other finance ministers in sub-Saharan Africa (SSA) have three immediate confronting challenges to overcome in an economy, which near-term growth prospects are somewhat more subdued, according to the International Monetary Fund (IMF).
The three challenges include: Firstly, to meet increased spending needs; secondly, to contain a pronounced increase in public debt, and finally, to mobilise more tax revenues.
“How policymakers navigate this trilemma will have a huge bearing on economic and social outcomes in the coming years,” noted Abebe Aemro Selassie, director of the IMF’s African Department, and Andrew Tiffin, senior economist in the Regional Studies Division of the IMF’s African Department, in a report titled, ‘The Policymaker’s Trilemma’.
Nigeria’s 2021 budget projects a total expenditure of N13.08 trillion, a revenue target of N7.87 trillion, which leads to a deficit of N5.21 trillion.
It is important to note that Nigeria’s proposed deficit was higher than its nominal budget, six years ago, said BudgIT, a Nigerian civic organisation that applies technology for citizen engagement with institutional improvement to facilitate societal change.
The Washington D.C-based fund said even before the coronavirus crisis, and in the context of rapid population growth, sub-Saharan Africa’s development needs were already daunting.
“I think the opinion of the IMF is true for Nigeria. Nigeria can however solve this by building an environment that will make Nigeria top of mind in attracting investments and investors both domestic and foreign,” Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said.
This can only be done if there is adequate security of lives and property in the country, and adequate infrastructure that can lower cost of doing businesses, he said.
While there is variation across countries, public debt in sub-Saharan Africa increased to almost 58 percent of GDP in 2020—the highest level in almost 20 years and a jump of more than 6 percentage points in just one year, the Fund noted.
Responding to the development, Jimi Ogbobine, head of consulting at Agusto Consulting, a pan-African credit rating agency, said some of these challenges were Covid-induced. Many of these challenges have always been but Covid brought them to the surface.
In terms of meeting spending needs, Ogbobine said sub-Saharan Africa especially is largely under invested in healthcare over the years.
“Where have we directed our prioritised spending needs? A lot of our spending needs, especially in countries like Nigeria, have gone to recurrent expenditure, government overhead and things like that while things like education and healthcare have suffered. How do we reprioritise spending to the core issues that affect societal wellbeing, especially education and healthcare?”
On the issue of containing increase in public debt, which he tied to mobilise more tax revenues, he said increase in public debt was as a result of government deficit, “which means when your revenue is lower than your spending. You can reduce that deficit by increasing tax revenues, but at the same time, how do you increase tax revenues on overburdened populace?”
One of the things that sub-Saharan Africa can do is to bring in new businesses, new investment that can grow income and then pay taxes, he said. Sub-Saharan Africa must be investment friendly, the kind of reform that will make SSA an attractive drive for capital that will make SSA competitive like South East Asia.
“We must look at the kind of reform that helped South East Asia become a more competitive economy globally. How do we educate our people? How do we improve infrastructure,” Ogbobine asked.
To engender a robust post-COVID recovery, IMF said policymakers need to look for opportunities to expand what was possible under the trilemma. On the spending side, for example, greater transparency and governance reforms can lift the efficiency of public spending and ensure that the authorities’ scarce resources are helping people who need it most.
On the revenue side, such transparency and targeting are also more likely to entice greater tax compliance. Efforts to improve tax administration, including through the use of new digital technologies, can broaden the tax base. And more generally, authorities should seek ways to raise more revenue in a manner that protects the vulnerable and growth.
On debt sustainability, the Fund said medium-term fiscal frameworks were needed to strike a balance between the required short-term, supportive fiscal stance with medium-term consolidation that would be vital in containing borrowing costs and sustaining confidence, especially where debt was high and financing tight.
Complementing these efforts, authorities should accelerate reforms to promote private sector activity and economic diversification, which will help lift potential growth and resilience, and create jobs.
