I had earlier vowed not to bother analyzing Nigeria’s budget proposal as it has since become an exercise in futility.
However, about 30 minutes ago, I received a call from a very senior professional colleague. He expressed surprise that he had not seen my analysis of the 2020 proposed budget, and when I told him my position, asked that I should not relent.
We eventually reached a compromise that I should draft 10 bullet points of monetary and fiscal policy issues underpinning budget performance that I will like government to address.
He also promised to try and get it across to the people with the capacity to implement. I agreed and also decided to share my comments / concerns here.
Honestly, none of what I am about to say is new, but here goes my 10 points / concerns.
1. A lack of fiscal restraint and policy volatility may be popular to the masses but it will always undermine investor confidence. Example, the recent notice by NERC to cancel licences issued to DISCOs under the power sector reforms will rattle investors and create a crisis of confidence.
If acted upon, this will further trigger events of default on the underlying risk assets on the balance sheets of Nigeria’s money deposit banks. The ensuing Loan Loss Provisions can, in turn, trigger a crisis in the banking industry and the economy by extension.
2. The cost of government is too high. As painful as it will be, Nigeria has to reduce the FGN’s Wages, Salaries and Pensions bill.
One way to do this is through public sector reforms. Explore merging of government ministries, departments agencies. It is unconscionable that while we claim to be curbing corruption and plugging leakages, the Federal Government of Nigeria’s Non Debt Recurrent Expenditure (salaries, pensions and wages of the Federal civil service) has ballooned by almost N1.5 Trillion in 5 years, from N1.96 Trillion in 2014 to N2.75 Trillion in 2017, N3.5 Trillion in 2018 and now projected at N4.4 Trillion in 2019 and N4.9 Trillion in 2020.
To put this anomaly in perspective, FGN’s total revenue in the 2018 fiscal year was N3.9 Trillion. In that year, oil price averaged US$71.4 per barrel. Yet, in a year that oil price will likely be below last fiscal year’s average, the FGN is budgeting a recurrent expenditure that is N1 Trillion more than its 2018 fiscal year’s revenue!
3. Government must find creative ways to increase revenue. The proposed changes in VAT policies are good however we must note that FGN’s share of VAT for 2018 was N146.52 Billion. If we assume the same base and collections and adjust for the change from 5% to 7.5%, that will be just N219.78 Billion. This is not much of an increase given the deficit.
Consequently, improved tax compliance is paramount (including unlocking new taxes) as well as plugging leakages in government revenue mobilization and administration, enhanced property tax mobilization and widening of the tax base.
4. Fiscal decentralization which will improve sub-national government’s capacity to identify, value and create database of properties, and develop a collection strategy for property taxes to ensure that there are no leakages.
5. Nigeria cannot afford subsides! The fuel subsidy has to go! FX subsidy has to go as well. Power subsidy has to go!
Fuel subsidy in 2017 was N1.5 Trillion, which was more than 50% of the Federal Government’s 2017 total revenue of N2.65 Trillion, and circa N500 Billion more than what the previous administration paid despite higher oil prices and lower local pump price of PMS.
2018 fuel subsidy figures remains opaque and shrouded in secrecy, however it is estimated to be anywhere between N843 Billion and N1.5 Trillion.
6. Nigeria has to reduce fiscal deficits which has ballooned progressively from N1.143 Trillion in 2014 to N3.815 Trillion in 2017 and N3.63 Trillion in 2018.
2018 budget projected revenue was N7.16 Trillion, actual achieved was N3.91 Trillion (54.61% achieved).
Thus, though projected deficit for 2019 is N1.92 Trillion while that of 2020 is projected at N2.175 Trillion, because our revenue projections are largely unrealisable, we expect the deficits to remain at 2017/2018 levels or grow even higher with our historical circa 55% revenue achievement.
7. If debt is necessary, then the focus has to be on concessional debt, simply because concessional lenders are more open to debt restructure and less interested in penal interest rates and late payment penalties from a commercial perspective.
The cost of Nigeria’s non-concessional debt is currently exacerbating our Debt Service problems.
2019 Debt Service is now chasing N2.4 Trillion (N1.2 Trillion by half year 2019) from N941.67 Billion in 2014. Nigeria’s foreign currency commercial (non concessional) debt has increased from US$1.5 Billion in June 2015 to US$11.8 Billion as at November 2018, a 787% increase, and we have since borrowed more!
If Nigeria’s revenue for 2019 is held constant with that of 2018 at N3.9 Trillion, against a N2.4 Trillion Debt Service, we will be applying 62% of our revenue to servicing debt, which means that for every N100 earned, we spend N62 in servicing debt.
To put this anomaly in perspective, what the World Bank recommends as debt service to revenue ratio is 22.5%. Nigeria’s historical debt service to government revenue ratio is as follows;
2011 – 20.54%
2012 – 21.69%
2013 – 23.66%
2014 – 29.04%
2015 – 32.73%
2016 – 44.56%
2017 – 61.59%
2018 – 67%**
8. Though usually more difficult to access (as it requires fiscal policy credibility), this is the time for Nigerian to mobilize private, non-debt, investment capital with which to build infrastructure and industrialize the economy.
9. This is not a time to borrow from the central bank. Regardless of the Rube Golberg system of controls used to mop up the ensuing excess liquidity, the market will find a way to adjust your exchange rate to reflect the increase in volume of currency.
Besides, The Central Bank of Nigeria (CBN) Act of 2007 caps the CBN’s financing of the FG’s budget deficit at 5% of the last fiscal year’s revenue. FG’s 2018 fiscal year’s revenue was N3.91 Trillion, which means that the CBN can only finance the FG to the tune of N195 Billion to be retired within the same fiscal year.
However, from data in the public domain, the CBN has financed the FG to the tune of N4.45 Trillion in 2019. I doubt that any multilateral agency will lend us money with such an anomaly.
On mopping up excess liquidity in the system, The CBN spent N2.114 Trillion and N1.489 Trillion in 2018 and 2017 respectively just to mop up excess liquidity. Shouldn’t that tell us that maintaining this appearance of growth in Foreign Reserves and stable exchange rate is hemorrhaging the economy?
10. And finally, it is trite knowledge that when you find yourself in a hole, stop digging and start thinking.
Dr. Jekwu Ozoemene
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