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. As of September 2018, the Federal Government had spent N4.59tn and only received N2.84tn in revenues. This translates that in 9 months, FG has accumulated a deficit of N1.75tn. In layman’s terms, FG has either borrowed N1.75tn or CBN has supported it 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 N5.38tn as at September 2018, it was able to only earn N2.84tn. This means revenue performance stands at only 53%. Nigeria budgeted N6.79tn 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 Central Bank without admitting it. In the 2017 Budget performance, there was a deficit gap of N1.3tn that was not funded by borrowing and another N1.02tn in 2016. This postulates that CBN has been providing an average of N1.2tn in the last budget cycles to bolster FG finances. How long can this take Nigeria? This is just essentially printing of money without an asset base and such behaviour raises concerns about inflation.
Nigeria’s biggest challenge in its fiscal matrix is its poor size of revenues. With the exception of 2018 numbers which looked encouraging, its non-oil revenue has remained at the same level it was in 2014. While 2018 numbers looks good, it is still mainly padded by fortunes in the oil revenues. While CIT has grown by 23% on a year-on-year basis as at September 2018, oil revenue has grown by 101% within the same period. However, the world is not going to keep judging Nigeria based on oil revenues 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 N2.5tn to FG in the current prism and with non-oil revenues still hovering around N1tn, things do not look good. With debt servicing figures reaching N2tn, adding personnel costs of N2.2tn and other service wides votes, statutory transfers and overheads costs of N800bn, Nigeria cannot spend less than N5tn on recurrent costs in the near term, on an annual basis.
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, FG read a riot act to its independent agencies, which it believed had delivered too little. FG’s independent revenues from over 400 agencies stood at N295tn in 2017. It is a positive step that FG is asking the agencies to submit their budgets through the Budget Office of the Federation and also will review 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 N600bn to the Federal Government.
There is also the path through increased VAT. Nigeria has one of the lowest VAT in the world. A flat VAT of 5% does not work and in the non-oil revenue matrix, VAT has seen the highest growth in recent times. It is time that FG faced the issue and double the VAT to 10%, putting consideration on fuel and agriculture. There is a huge political economy to this but Nigeria has to accept that current fiscal practices can help its cause. If FG increases VAT to 10%, it has the potential of bringing an additional N800bn to the federation coffers. In my own view, the 5% VAT should be solely distributed to the Federal Government. State governments are in a more devastating state 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.
On the Company Income Tax, I am of the opinion that to spur new capital growth, the current 30% should be reduced to 20%. Nigeria deserves to gain more by doubling its VAT and allowing companies to thrive with tax cuts, creating more incentives for private investments. There is also need to ask questions on the warped approach of distributing taxes. Currently, CIT distribution is governed by rules that favour states with a large population. 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 would pay has no direct linkages to it plants in Lagos or Ibadan and Kano (despite destroying beer bottles) benefits more 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 FG provide an incentive for states with newly established companies who pay CIT as it done with VAT distribution.
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, reaching N5tn 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 assets either in Joint Ventures or recovery of stolen funds in 2019 is not a revenue line with non-repeating annual nature. It is a mere short fix to plug the yawning deficit gap. FG to consider that the revenue angle needs restructuring. There is also need for consideration for the removal of fuel subsidy. Whatever FG might be selling to the public, NNPC reports show that as at July 2018, it has charged N427bn from domestic crude payments in the name of under-recovery or subsidy. Nigeria can’t run away from 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; post-election 2019 is another window to do the right thing. We cannot keep expanding expenditure without a review of the other side of the equation- revenue. FG might not be able to apply a combination of removal of subsidy, an increase in VAT, reduction of Company Income Taxes or driving efficiencies into its revenue agencies at the same time, due to inflationary concerns or the political economy of these decisions. FG needs at least N2tn in new revenues to be able to meet its recurrent obligations (not capital) without blowing up the deficit. Whatever path FG chooses in shoring up its revenue, it won’t be painless but it is a courageous way to fix an emerging dangerous imbalance.
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