/Nigeria Economy Outlook – Solutions Proffered On VOR

Nigeria Economy Outlook – Solutions Proffered On VOR

Copied.and Introduced by Ck

Some statements repeatedly find their way into public discourse. People hardly verify them, and no one questions them. In Nigeria, “70% of Nigeria’s government revenue comes from oil” is one of such statements. How true is that? 

To investigate, I looked at Nigeria’s revenue from the start of the current decade. Considering Nigeria’s loose federalism, it would be incorrect to only consider Federal Government (FG) revenue as Nigeria’s revenue. Many people make this mistake when comparing countries with Nigeria. So, I added the Internally Generated Revenue (IGR) of the states and local governments, using data from BudgIT and the Central Bank of Nigeria.

In nominal terms, Nigeria’s total revenue slipped from ₦11.34 trillion in 2011 to ₦8.15 trillion in 2017. Adjusting for exchange rates, revenue has shrunk from $72.75 billion in 2011 to $26.66 billion in 2017, a whopping 63% decline. Despite a naira devaluation in 2016 that should have boosted oil revenues (oil is sold in dollars), lower-for-longer oil prices have not helped. 

A Bloomberg op-ed suggested that oil prices are now controlled by three men—King Salman, Vladimir Putin, and Donald Trump, such is the fate of Nigeria. Oil prices may have found a short-term equilibrium of $60 per barrel, a level Putin stated satisfies him. Oil is no longer Nigeria’s saviour.

In my datasheet, it is clear that any increases in non-oil revenues up to 2017 have been weak, and primarily driven by rising Value Added Tax (VAT) receipts. Other non-oil revenue sources—company income taxes and customs levies—had remained at 2014 levels. One might casually accept that even the “non-oil revenue” classification might not tell the full story. As oil price and production swings have been critical to Nigeria’s economic growth, foreign reserves and currency stability, non-oil revenue growth has also been strongly influenced by oil.  

It is evident that when oil revenue declined in 2016 due to the oil price slump, the growth of non-oil revenue marginally reversed. We see this in the change in Company Income Tax revenue—₦1.2 trillion in 2014, ₦1.0 trillion in 2015, ₦0.9 trillion in 2016, and back to ₦1.2 trillion in 2017.

How about the states? While most states have grown their IGR, Lagos alone is responsible for 25% of growth in states’ cumulative IGR between 2011 and 2017, and only 7 of 36 states (Lagos, Ogun, Rivers, Delta, Kano, Kaduna, Enugu) account for 70% of nominal growth in subnational IGR in Nigeria. 

Enduring poverty, short-termism, absent single identity systems and poor incentives due to the central distribution of revenues have weakened states’ ability to collect taxes in the country.

In the near term, Nigeria is probably looking at ₦5 trillion in gross oil revenues. Once we account for joint venture deductions, 13% derivations, etc., net oil revenue available for sharing would be under ₦4 trillion, which means that the Federal Government (52.68% share) might not be scratching much more than ₦2 trillion in oil revenues. 

With a proposed increase in minimum wage, university lecturers also demanding more, and the rise in police personnel costs, ₦2 trillion would not be enough to cover FG personnel costs for a year.

The only reasonable option is to find new growth poles that can increase the non-oil tax take, but there must be effective wealth creation through productivity before it is taxable. Nigeria can also accept that its expenditure is currently too high for its budget. It must cut waste such as fuel subsidies that consumed ₦800 billion in the first half of 2018 and accept that VAT of 5% is too low (and corporation tax of 30% may be too high). Add rising debt servicing costs, service wide payments and statutory transfers, and the federal government’s recurrent bill cannot be less than ₦4.5 trillion. 

With total FG non-oil revenues (including independent revenues from government agencies) below ₦1.5 trillion (₦1.2 trillion in 2017), the FG would have a gap of at least ₦1 trillion for its everyday expenses. In essence, Nigeria would have to keep borrowing to fund capital projects and recurrent expenses. Many states are even worse off as the current Federation framework does not incentivise growth of internally generated revenues.

However, Nigeria seems to be favouring other unreasonable options. One of which is gorging on Eurobonds—the FG has borrowed nearly $10 billion in two years—to pile up its external reserves and defend the naira. It can also sell assets such as part of its stake on oil Joint Ventures, but these would be one-off. Or it can continue to bank on the CBN to cover deficit (there is an unaccounted ₦1 trillion deficit from 2017 spending). Or it could keep milking oil by ramping up production from about 2 million barrels a day to 2.5 million barrels a day and even leverage a currency devaluation to bloat oil receipts. In the long-run, these would all be missteps that fail to solve the real issue.  

Nigeria must face the reality that its spending plans have outstripped what oil revenues can support, given our domestic production capacity and the international oil market outlook. The only way to reform is to look away from oil and explore how to raise productivity, improve ease doing of business, and build a business case to attract foreign capital. Even Moody’s, an internationally recognised credit ratings agency, explained that Nigeria would be appraised on how expands its non-oil revenue base. This will take time, a luxury that the four-year thinking of current democratic systems may not allow, and will require a wholesale restructuring of the country, which the administration pays scant attention to and the opposition has not defined in detail.

Currently, Nigerian leaders are trying to appease every class with spending on social welfare, increases in wages, and higher capital spending, but we need to ask: where will the money come from? This might not be pleasing to tell during an election but whoever wins, it is essential for them to know: Nigeria is going broke as oil contribution to Nigeria’s revenue has effectively declined to 50%.

Nigeria’s revenue-to-GDP is down to 7%, and its tax-to-GDP is less than 5%. It is clear that the rent-seeking framework of oil would no longer work; Nigeria has to sweat its resources—human and physical and carve another narrative beyond oil to face the future that beckons. However, every day with the current government still rehashing old tales of how they were unfortunate not to be around when oil prices were high, it seems Nigeria is waiting for another miracle rather than rolling up their sleeves and doing the hard work required.

Ck

Good analysis. – Response by TM

The problem of Nigeria is an elite especially the political elite that cannot see that the ‘oil’ party is over. The future for us and our children has been consumed by our bloated, unproductive civil service; unbridled and reckless  consumption by public officers through overhead and security votes; irresponsibly self-awarded undisclosed  remuneration for our legislators, on top of a predilection by civil servants, politicians and their business accomplices to turn every expenditure of Government (recurrent and capital) into a means of looting the Treasury. The vast majority of the rest of the elite is complicit by either being participants or those protesting, in spite of their ocassional, feeble protestations are actually seeking attention to be invited to join the bazaar. In the interim, the society is kept drugged by the Government on unsustainable and ruinous subsidies for fuel, for electricity and a suboptimal taxation regime in a political structure that is creaking under the weight of inequity and a political economy that rewards unproductive units.

We are in trouble but we know not. This place may not be habitable for the sane a few decades  from now.

TM

Response by BO

Thanks for sharing this, Ck. Clear understanding of what is cooking beneath all the glitz and glamour of an essentially unviable and dysfunctional Nigerian economy.

Bold surgery required. Cost of running govt MUST COME DOWN by 60% aggregated across all public cost centres.

We need 2-3 `Lead Sectors` and at least 6 SPATIAL GROWTH POLES – fed by in-zone AND inter-zone PRODUCT CORRIDORS; we need to STOP pretending (or persisting in the strategic error) that individual Ministers can INDIVIDUALLY (with 95% own-sector alone focus) transform or developmentally govern their sector for sustainable or enduring TRANSITION IMPACTS. 

They cant, especially in a country where Ministers are NOT appointed based on deep technocratic knowledge and experience in the sector they are sent to administer! Your average (perhaps over 80%)  Nigerian Minister gets appointed BECAUSE of their cash and kind CONTRIBUTION to the last election; and which states or votes they helped bring in – or `buy in` for the winning parties!

Even for countries that ALREADY HAVE relatively viable institutions – and appoint a decent percentage of Ministers who are experienced technocrats, DEEPLY knowledgeable about the Critical Issues in their Ministry BEFORE being appointed there – even for such political societies, MINISTERING is a tough job to successfully drive – IF, as we do here – each Minister works 95% in their own Sectoral Silo – with little Inter-Ministerial understanding of HOW ONE ACTION HERE ENHANCES OR UNDERMINES ANOTHER OPERATION OVER THERE!! Which is what happens in Legoland.

A typical Nigerian Minister spends months coming to grips with the technical, financial, institutional and governance minutiae of the sector they have just taken charge of!! Those months are the period when they are MOST VULNERABLE to manipulation by their topmost technical officers (Perm Secs, Top Directors, Deputy Directors, Federal Commissioners, etc) under them. Who want to `programme` to fit in with all the wuruwuru on ground before their new bosses arrival! A decent measure of PRIOR experience and familiarity with HOW that sector works, WHAT are its Critical Issues, etc – make a qualitative difference in the `taking charge` process and months. I guess CK found some of that useful upon getting to Zaria. 

WHO becomes Minister WHERE must be revisited and done at least 85 – 90% differently! 

Find SOMETHING ELSE, SOMEHOW for those politicians in your party who `delivered`. 

Plus, Nigeria NEEDS a high-experience, high `evolving-sectoral knowledge` and ECONOMIC NATIONALIST-LOADED body – that forms a back-room KITCHEN OR ENGINE ROOM in which the OVERARCHING DIRECTIONS FOR ECONOMIC, SOCIAL, INFRASTRUCTURAL  DEVELOPMENT are set for all Ministries, their Depts and Agencies; and delivery quality monitored and appraised CONSTANTLY. 

This approach – over the last 70 years, has been used and has been a (perhaps even THE) KEY FACTOR in ensuring success in virtually all the nations that have MADE THE TRANSITION from pre-industrial (our current status) to industrial and tech-driven economy – where we NEED to be.

The devil of a successful Transition is in the DETAIL AND MASTERING the HOW?. WHY? BY WHO, WITH WHAT, along with the right dynamics, nuances, POLITICS, institutional capacity and – perhaps as crucial as any other imperative – the right quality, quantity and attitude (commitment) of the human asset needed to implement all the above, PLUS putting adequate Implementation Assurance mechanism in place.

One last area of strong concern for me (in the national monetary policy interest) – Nigeria MUST STOP the GLOBALLY abberant and insane practice of moving all these dodgy, Smart Alecs who have spent decades in the commercial banking sector specialising in the art and science of wrong-footing CBN`s crucial role in regulating and disciplining the private/commercial operators in our financial intermediation governance system – moving them straight from their unpatriotic games into position as Governor of CBN!!!

We didnt do this travesty before. We started only from the early 80`s. It MUST stop – if we want to have a sensible and EFFECTIVE Monetary/Macro–policy  Governance, driven ONLY by economic-nationalism urges!! Employ FOREIGNERS COMPETITIVELY, if we must. What we do now amounts to putting a hungry lion in charge of protecting fresh/raw meat!!

BO 

Response by KR

A good diagnosis of the current state of the economy and a prognosis of the economic outlook. Thanks also for directing the attention of discourse from government daily bashing to what to be done in our individual enclaves and collectively towards getting the nation out of self-induced economic doldrums.

As elites, we all have the responsibility not only to hold the government accountable but also to provide alternative ways to achieving developmental objectives. The elites also occupy pivotal role  (since the top policy moulders are from their circle and more than anything else, they have access to them).

The earlier the elites play this role in a critical and constructive way and not in a cynical manner,  the faster a given nation develops.

The time is now ripe for the elites to come together (regardless of political, ethnic and religious orientations) towards fostering a better economic pathway for this nation, to follow. 

The masses are looking up to the elites for direction but the current conduct of the elites is nothing to write home about hence the social, economic and political difficulties we now experience.

KR

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