The direction of Nigeria’s fiscal policy over the medium-term still hangs on a balance as ministers are yet to resume. While delay is costly, a more pressing concern would be seeing the FG sustaining the policies of the past four years. In this report, we present the task ahead for the finance minister between 2019 and 2023 by analysing the dire state of FG’s finances.
Since the collapse in the prices of crude oil in mid-2014, the FG’s revenue has fallen sharply to 3.1% of GDP in 2018 compared with the record high of 5.0% to GDP in 2013. With expenditure outpacing revenues at 5.4% of GDP, the FG has accumulated N3.9tn in debt from the domestic and external debt markets to partly plug its fiscal deficit of N8.2tn between 2016 and 2018. In addition, the FG received N5.6tn in monetary financing from the CBN, which is more than half the FG’s total deficits. This support has breached the constitutional threshold of 5.0% of the prior year’s revenues by N5.2tn. With the cost of servicing debt and recurrent expenditure at 60.8% and 146.9% of revenues respectively, this strategy is unsustainable. The FG needs a strong revenue boost and cost containment strategies to improve its finances and enhance its contribution to economic growth.
The strategies to boost revenues in the first term of President Buhari fell short of expectations. This includes a whistle-blower policy which helped in recovering looted funds and the Voluntary Asset and Income Declaration Scheme (VAIDs) that supported a broader tax net and N30.0bn in receipts despite a target of N305.0bn. Accordingly, FG’s revenue to GDP only improved to 3.1% in 2018 from a low of 2.3% in 2017. To achieve revenue targets, we believe there is a need for comprehensive fiscal reform. This would include action plans to improve the tax system and administration in a bid to drive efficiency by reducing costs and boosting collection. In addition, more transparency and accountability would be required by the citizens to encourage tax payments. The VAT increase being mulled given Nigeria’s lower VAT rate of 5.0% when compared to peers represents a quick fix.
However, this would not be a silver bullet as total VAT receipts for the entire country is weak at 0.8% of GDP in 2018. Similarly, as two cities – Lagos and Abuja – account for 75% of the VAT receipts, the FG should work on bringing more businesses into the VAT net rather than imposing more taxes on current taxpayers. In Lagos, for instance, consumers already pay twice the national rate of 5.0% as consumption taxes. Increasing VAT collection would require lower taxes and costs in the formal economy as well as providing conditions that enable faster business growth. In our view, this would take time, hence revenues are likely to remain weak for an extended time.
Reining in spending will also not come easy as the FG’s wage bill is likely to increase significantly over the next two years due to the implementation of the new minimum wage which is 67.0% higher at N30,000.00/month. The bigger challenge is that public sector wages often rise almost evenly across the board once a new minimum wage takes effect. For context, the wage bill more than doubled between 2010 and 2012 after the last revision to minimum wage. Although we expect the increase in wages to be less aggressive upon implementation, it would still put considerable pressure on FG’s fragile finances. The FG is negotiating a moderate increase of 5.0% and 9.5% for grade levels 7-14 and 15-17 respectively while the Trade Union Congress (TUC) is angling for 25.0% and 30.0%. We believe the FG needs to rein in overhead costs, which are more discretionary, to partly offset the new wage increase.
From our analysis, improving the FG’s fiscal position would be tougher than expected. But our outlook is not entirely gloomy as we see quick wins. Government spending on energy subsidies continue to be steep, denying the FG and States of much needed resources. We estimate a 22.9% expansion in FG’s revenues over 2018 levels with the removal of petrol subsidies and the adoption of a market reflective exchange rate alone. Ultimately, the passing of the PIB and the review of petrol and electricity prices are necessary to drive improvements in the energy sectors as well as to support an improved fiscal position for governments.