Nigeria needs to boldly face its issues, and the post-election era in 2019 is another window for doing the right thing. We cannot keep expanding expenditure without a review of the other side of the equation – revenue… The federal government needs at least N2 trillion in new revenues to be able to meet its recurrent obligations (not capital) without blowing up the deficit.
Nigerians might have missed some important details when President Buhari presented the 2019 Budget. In the president’s words: “As at the end of the third quarter, the Federal Government’s actual aggregate revenue was N2.84 trillion, which is 40 per cent higher than 2017 revenue.” In the next paragraph, he mentioned that “N4.59 trillion had been spent by 30th September 2018 against the prorated expenditure target of N6.84 trillion.”
This is what it means. By September 2018, the federal government had spent N4.59 trillion and only received N2.84 trillion in revenues. This translates to the fact that in nine months, the federal government had accumulated a deficit of N1.75 trillion. In layman’s terms, the FG has either borrowed N1.75 trillion or the Central Bank of Nigeria (CBN) has supported it in plugging the holes. With the size of our revenues, this rise in the deficit is not sustainable.
During the same presentation, the president admitted that while FG should have made N5.38 trillion by September 2018, it was able to only earn N2.84 trillion. This means revenue performance stands at only 53 per cent. Nigeria budgeted N6.79 trillion as projected revenue for 2019. It seems like another guesswork from the federal government.
What FG has been doing in recent times is to seek support from the Central Bank without admitting it. In the 2017 budget performance, there was a deficit gap of N1.3 trillion that was not funded through borrowing and another N1.02 trillion in 2016. This postulates that the CBN has been providing an average of N1.2 trillion in the last budget cycles to bolster the FG’s finances. How far can this take Nigeria? This is just essentially the printing of money without an asset base and such behaviour raises concerns about inflation.
Nigeria’s biggest challenge in its fiscal matrix is the poor size of its revenues. With the exception of the 2018 numbers, which looked encouraging, the country’s non-oil revenue has remained at the same level it was in 2014. While the 2018 numbers look good, it is still mainly padded by fortunes in oil revenue. While company income tax (CIT) has grown by 23 per cent on a year-on-year basis as at September 2018, oil revenue has grown by 101 per cent within the same period. However, the world is not going to keep judging Nigeria on the basis of the oil revenue, with its current swings and uncertainty. It is time that Nigeria asked itself: How far can oil take us as a nation? Oil will not deliver beyond N2.5 trillion to the federal government in the current prism, and with non-oil revenues still hovering around N1 trillion, things do not look good. With debt servicing figures reaching N2 trillion, adding personnel costs of N2.2 trillion and other service-wide votes, statutory transfers and overheads costs of N800 billion, Nigeria cannot spend less than N5 trillion on recurrent costs in the near term, on an annual basis.
On the company income tax, I am of the opinion that to spur new capital growth, the current 30 per cent should be reduced to 20 per cent. Nigeria deserves to gain more by doubling its VAT and allowing companies to thrive with tax cuts, and creating more incentives for private investments. There is also the need to ask questions on the warped approach to distributing taxes.
So, what are the options for Nigeria’s revenue?
Nigeria’s chances to boost revenue will mainly come from four places: company income taxes (CIT), value added taxes (VAT), independent revenues and customs revenues.
But first, just like Nigerians, the FG also needs to pay attention to the small details.
Recently, the federal government read a riot act to its independent agencies, which it believes had delivered too little. The FG’s independent revenues from over 400 agencies stood at N295 trillion in 2017. Hence, it is a positive step that the federal government is asking the agencies to submit their budgets through the Budget Office of the Federation and that it would also start reviewing the government’s expenditure patterns on a quarterly basis. However, the biggest help to fix these agencies will come from revamped corporate governance. Most of these agencies are bloated with high levels of inefficiencies, in terms of personnel and overheads. This will require a surgical approach, fiscal discipline, with immense political backing. Maybe then, these agencies can easily provide N600 billion to the federal government.
There is also the path through increased VAT. Nigeria has one of the lowest VATs in the world. A flat VAT of 5 per cent does not work and in the non-oil revenue matrix, VAT has seen the highest growth in recent times. It is time that the FG faces the issue and doubles the VAT to 10 per cent, while putting consideration on this for fuel and agriculture-related expenditures. There is a huge political economy to this but Nigeria has to accept that current fiscal practices can help its cause. If the FG increases VAT to 10 per cent, this has the potential of bringing an additional N800 billion into the federation’s coffers. In my view, the 5 per cent VAT should be solely distributed to the federal government. State governments are in more devastating conditions but the challenge is not about giving them more taxes from the current base. It is about encouraging them to be competitive and create incentives for private investments in their states for increased personal income tax (PIT).
On the company income tax, I am of the opinion that to spur new capital growth, the current 30 per cent should be reduced to 20 per cent. Nigeria deserves to gain more by doubling its VAT and allowing companies to thrive with tax cuts, and creating more incentives for private investments. There is also the need to ask questions on the warped approach to distributing taxes. Currently, CIT distribution is governed by rules that favour states with large populations. Despite a large financial district in Lagos and increasing investments in the Ogun State corridor, they do not benefit more than other states for such efforts. For example, the company income taxes that Nigerian Breweries pays have no direct linkage to it plants in Lagos or Ibadan, while Kano State (despite its recurrent destruction of beer bottles) benefits more from the distribution of this tax due to its population. How will states benefit from the ease of doing business index without incentivising the corporate income tax? It is appropriate that the FG provides an incentive for states with newly established companies who pay the CIT, as it done with the distribution of VAT.
Nigeria can’t run away from the concession of certain institutions to free up government expenditure and end cycles of waste. However, the sustainable way to deepen public sector revenues is to seek the expansion of Nigeria’s private sector, which is too hollow for the size of our GDP. It takes growth in jobs and taxable income to provide opportunity for government…
Finding resources for the FG is not easy in a country without a single database of its citizens, weak tax compliance and high level of informal trade. However, with the rise in personnel costs and debt servicing, to reach N5 trillion in the near term, it is only important to ask deep questions. Where are the holes leaking funds that can be plugged? What about maximising funding from existing sources?
It will also take long-term approaches backed by an informed leadership. Any sale of asset in joint venture (JV) operations or stolen funds recovered in 2019, should not be considered as a revenue line due to its non-repeatable annual nature. It is a mere short fix to plug the yawning deficit gap. The federal government needs to consider that the revenue angle requires restructuring. There is also need for the consideration of the removal of fuel subsidy. Whatever the FG might be selling to the public, the Nigerian National Petroleum Corporation (NNPC) reports show that as at July 2018, it has charged N427 billion from domestic crude payments in the name of under-recovery or subsidy. Nigeria can’t run away from the concession of certain institutions to free up government expenditure and end cycles of waste. However, the sustainable way to deepen public sector revenues is to seek the expansion of Nigeria’s private sector, which is too hollow for the size of our GDP. It takes growth in jobs and taxable income to provide opportunity for government to receive taxes.
Nigeria needs to boldly face its issues, and the post-election era in 2019 is another window for doing the right thing. We cannot keep expanding expenditure without a review of the other side of the equation – revenue. The federal government might not be able to apply a combination of the removal of subsidy, an increase in VAT, reduction of company income tax or driving efficiencies into its revenue agencies at the same time, due to inflationary concerns or the political economy of these decisions. The federal government needs at least N2 trillion in new revenues to be able to meet its recurrent obligations (not capital) without blowing up the deficit. Whatever path the FG chooses in shoring up its revenue, it won’t be painless but would be a courageous way of fixing an emerging dangerous imbalance.
Oluseun Onigbinde is the Lead Partner of BudgIT, a civic organisation that holds government to public accountability.