Nigeria's Wrongheaded Budget

21 October 2019
opinion

I just spent the weekend reading and doing some number crunching on the 2020 budget that was presented by President Muhammadu Buhari to the National Assembly on October 8. Of the five budgets he has presented since assuming office in 2015, this was the earliest to get to the legislature before the beginning of the next fiscal year. It is hoped that with the new record set by his administration and a pliant National Assembly, Nigeria will for the first time in decades revert to the January 1-December 31 budget cycle. This is expected to result in improved budgetary performance and planning not just for the federal government, but also the private sector that is reliant on the government's fiscal policy slant.

One of the highlights of the budget was the reaction that followed the proposed increase in the value added tax (VAT), also known as consumption tax, to be charged on goods and services from 5% to 7.5%. Whilst I can understand the concerns expressed by many that the 2.5% VAT hike will have a deleterious impact on disposal income, is inflationary, and will be disadvantageous for businesses that would have to contend with higher costs arising from their inability to recover input VAT that has already been remitted to the Federal Inland Revenue Service (FIRS), an increase in the VAT rate will, on the other hand, do very little to improve the finances of the federal government.

For one, the federal government by itself stands to benefit marginally from the hike because under the revenue sharing formula, it is the states and local governments that take up the lion share (85%) of VAT revenue that is collected by FIRS. Second, since 2016 to date, it's been apparent that the administration has set for its very ambitious revenue targets including VAT receipts that it has never met. Its best performance to date was in 2016 when it met 76.44% of total budgeted revenue of N3.855 trillion. However, its share of VAT generated during the period missed the target of N198.24 billion by 45.02%.

In 2017 and 2018, the government at the centre only met 52.27% (N2.426 trillion) and 54% (N3.299 trillion) respectively of total budgeted revenue, while VAT receipts missed the budgeted targets for both years by 46.24% and 29.39% respectively. In 2019, the federal government between January and June was able to generate N2.043 trillion, representing 58% of the budgeted revenue of N3.5 trillion for the first six months of the year, while VAT revenue missed the target during the same period by 29%. Of the entire N3.5 trillion revenue projections between January and June 2019, revenue from VAT was supposed to contribute N114.67 billion to total revenue, but actual receipts from VAT sources totalled N81.36 billion during the period.

If we are to follow this trend, the federal government will be lucky if it manages to attain 90% of its revenue projections from consumption tax receipts in 2020. In the 2020 budget, total revenue projections were put at N8.155 trillion, up by 7% from N7.594 trillion in 2019, while VAT is expected to increase by 28% from N229.34 billion in 2019 to N292.57 billion next year.

As it stands, the VAT Act already exempts pharmaceuticals, educational items and other basic commodities, which exemptions have been expanded in the 2019 Finance Bill to include white and brown bread; cereals including maize, rice, barley, wheat, millet and sorghum; fish of all kinds; flour and starch meals; fruits, nuts, pulses and vegetable of various kinds; roots such as yam, cocoyam, sweet and Irish potatoes; meat and poultry products including eggs; milk; salt and herbs of various kinds; and natural and table water.

Add to this the proposal submitted by Buhari to the National Assembly to raise the threshold for VAT registration by businesses to N25 million in turnover per annum, effectively exempting millions of micro, small and medium-scale businesses from remitting VAT to FIRS; plus the raft of other factors already impeding the FIRS from optimizing revenue that could be generated from VAT collection in Nigeria. What this implies is that the VAT hike, as a panacea for the government's revenue woes, will have a limited impact on its revenue stream or even help in closing the gap in the budget deficit.

A surer bet is for the FIRS to improve tax compliance, continue the task of broadening the tax base, as well as plugging leakages in government revenue. If it is serious about diversification, the government also has to start the process of capturing mining activities in Northern Nigeria and other parts of the country. For four consecutive years, revenue projections were made in the 2016-2019 budgets, yet earnings from solid minerals have been paltry. In 2016, N9.92 billion was generated from mining while in 2017-2019 not a farthing came into the treasury in the form of royalties or taxes from solid minerals.

The VAT hike aside, the aggregate budget size of N10.33 trillion for 2020 provided for a drop in capital expenditure by 22.65% from N3.184 trillion in 2019 to N2.462 trillion in 2020. The drop in capital spending was attributed to the increase in non-debt recurrent spending by 11.28% from N4.385 trillion in 2019 to N4.88 trillion in 2020, of which personnel cost and pensions alone stood at N3.6 trillion or 74% of non-debt recurrent expenditure; a hike in debt service by 14.39% from N2.144 trillion in 2019 to N2.452 trillion in 2020; an increase in statutory transfers by 10.88% from N502 billion in 2019 to N556 billion in 2020; and an increase in the sinking fund by 169% from N110 billion to N296 billion.

Effectively, next year, total capital expenditure will account for 24% of the total budget size, down from the 30% that the Buhari administration had pledged would differentiate it from its predecessor. But the biggest oddity about the 2020 budget is the non-debt recurrent expenditure of N4.88 trillion, of which N3.6 trillion (74%) alone has been allocated to the wage bill of the public sector. If we are to look at historical levels of actual revenue generation under the extant administration (2017-2019), which has averaged 50%-55% of budgeted revenue, that is approximately N3 trillion to N3.5 trillion, what this suggests is that the government is expected to expend its entire actual earnings servicing just the wage bill in 2020. This explains why it has had to borrow heavily from the domestic sector and resort to non-concessionary foreign loans to fund capital projects. In 2020, the finance minister, Mrs Zainab Ahmed has said the government will steer clear of commercial foreign loans and seek to raise concessionary loans.

The budget for fiscal year 2020 further shows that the projected revenue framework comprises oil revenue of N2.64 trillion, accounting for 32% of aggregate revenue, and non-oil revenue of N5.5 trillion (68%) which indicates that more pressure will be exerted on non-oil revenue generating sources. Yet, despite the VAT increase, among other levies, total revenue projection of N8.155 trillion is unlikely to be met, given the shortfalls in crude oil production and the high likelihood of oil selling at below the budget benchmark of $57 per barrel.

Consequently, if revenue projections for 2020 are held constant at 2017-2019 figures, the knock on effect is that actual capital spending is unlikely to exceed 50% (N1.2 trillion) of the budget for capital projects that are critical to creating employment opportunities and making Nigeria competitive. The bigger danger of unrealisable revenue projections is that the actual budget deficit will continue to balloon, while debt service as a percentage of revenue will rise ominously to 70%. A recent study showed that Nigeria's budget deficit had risen progressively from N1.143 trillion in 2014 to N3.815 trillion in 2017 and N3.63 trillion in 2018, while debt service to revenue ratio spiked from 20.54% in 2011 to 67% in 2018 as against the World Bank recommended rate of 22.5%.

Rather than continue to dig itself into a deeper hole, the federal government needs to stop trying to win what it unwisely thinks is a popularity contest, but in reality has a reverse effect on the economy. As this column has repeatedly maintained without shifting ground, the government must eliminate fuel subsidies. Let no one, not even the corrupt Nigerian Customs Service (NCS), deceive the government into thinking that smuggling of petrol to neighbouring countries has witnessed a decline due to its ill-advised land border closure. The arbitrage created by the Nigerian government-imposed subsidy regime will always provide a lucrative incentive for oil marketers to smuggle petrol across the land borders.

Whether they are closed or not, racketeering marketers will most certainly find a way to smuggle the product to Benin, Togo, Niger, Chad or Cameroun. Besides, the subsidy on petrol will always provide an incentive for the Nigerian National Petroleum Corporation (NNPC) to make spurious claims of high domestic demand for the commodity and consequently inflate the opaque deductions that it makes from oil revenue receipts. The attended impact, naturally, is that the federation will never get full value for the crude oil that it exports. By unlocking the revenue that it currently loses to NNPC in the name of "deductible under-recoveries", the three tiers of government will have an additional N1.5 trillion that could be deployed in capital projects and other social amenities.

Equally debilitating are the subsidies on electricity tariffs, which serve as a disincentive to investment in the power sector, as well as foreign exchange subsidies. On the latter, the official exchange rate at which the government conducts business is N305 to the dollar, however, the effective wholesale rate at which the CBN intervenes in the interbank market is at N345 while at the import and export (I&E) window the dollar exchanges for N358. What this means is that when revenue earnings from the sale of crude oil (which is dollar denominated) is shared between the three tiers of government monthly (which is converted to naira at the point of revenue sharing or during the monthly FAAC meetings), the multi-tier FX market operated by the Central Bank of Nigeria deprives the federal, states and local governments of the naira differential between the official rate and either the wholesale or I&E rate.

I can understand concerns that merging the official exchange rate with the I&E rate might lead to a further depreciation of the naira on the parallel market, with the attendant impact on inflation. However, merging the official rate with the wholesale rate will achieve two things: unlock several billions of naira to the benefit of the three tiers of government and largely eliminate the arbitrage that is currently being exploited by corrupt persons in the system.

Just as important is the need for the federal government to cut costs aggressively. That its personnel and overhead costs are so huge is reflective of the size of government, leaving very little to expend on capital projects. As suggested in the past, I remain of the view that certain ministries need not be retained. The Ministry of Information and Culture, for instance, is a relic of the colonial past. No modern country runs a department of information any longer. The presidency is already equipped with a media team and department that can speak on behalf of the executive branch, so is every ministry, department and agency of government. Accordingly, we do not need another ministry or department to disseminate information that can be better handled by the respective MDAs.

Similarly, I have often wondered why the petroleum and power ministries cannot be merged, given the synergies between both departments of government. Former President Olusegun Obasanjo sensibly merged them just before his departure from office in 2007. Unfortunately, his successor the late President Umaru Yar'Adua unbundled them. But it is not just some ministries that should be consolidated or scrapped all together. The recommendations on public sector reforms and rationalisation of MDAs made by the panel led by a former Head of Civil Service of the Federation, Mr. Steve Oronsaye continue to gather dust. The reforms were meant to streamline the public sector and consolidate scores of MDAs that duplicate one another's functions and often compete for relevance.

Serious cost cutting is something the federal government can no longer ignore. With non-debt recurrent expenditure and debt servicing accounting for almost 70% of the 2020 budget, coupled with the unending dependence on the central bank to finance the budget deficit and concomitant interest payments expected to take up more than 60% of revenue, there is very little hope that next year's budget will accelerate growth in the economy and lift millions out of poverty. At best, Nigeria will continue to plod along at President Buhari's slow pace, while the world leaves us behind.

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