Revisiting Nigeria’s Fiscal Dilemmas

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Seun Onigbinde

 Seun Onigbinde

In recent months, the World Bank and the International Monetary Fund (IMF) haved issued reports on Nigeria’s current realities. Most of their concerns–our oil-dependent economy, weak tax system and relatively shallow private sector–are not really new.

We must first acknowledge that Nigeria is not an oil-rich nation, it is an oil-dependent entity. While Saudi Arabia, with 32m people, pumps 11m barrels of oil per day; Nigeria, with an estimated 190 million people, still produces less than 2m barrels per day. Is it not interesting to note that Texas, a state within the United States but with an economy greater than that of Sub-Saharan Africa also pumps over 3m barrels of oil per day? I did a casual research into the revenue to GDP (comparing revenues to the size of the economy) of countries and Nigeria’s numbers are abysmally awful. While Nigeria’s revenue to GDP is around 8%, Ghana, South Africa and Kenya are 21.6%, 29% and 19.8% respectively. This is not a symptom of non-oil producing countries as revenue to GDP for Angola (20%) and Saudi Arabia (30%) show relative strong numbers.

According to research by IMF’s Director of Fiscal Affairs, Nigeria needs a minimum 12.75% of “tax-to-GDP ratio for accelerated growth and development outcomes.” We currently do less than 5%. Where will the money come from? With the sluggish growth, the Nigerian government is reluctant to apply structural reforms to tax rates, neglecting a much needed stem-to-root reform. How does Nigeria fund infrastructure, deliver social projects without higher revenues? Everyone talks about expanding the tax net but in a country with a large informal system, how easy is that? What exactly is the size of taxable wealth at the bottom of the pyramid that can be taxed? FIRS claimsthat over 15 million Nigerians have been added to the tax net but that has not lifted tax revenues in a gargantuan way. How do you tax a system that is grossly informal, while not also hurting growth by constraining consumer spending?

Nigeria’s public debt (excluding outstanding liabilities such as AMCON and fuel subsidy notes) is around N22.4tn. This has been notably driven by the recent lure for Eurobond, which has seen Nigeria raise over $10bn in 3 years. However, how big is Nigeria’s debt in relative terms? While Egypt has a debt to GDP (comparing debt to the size of the economy) of 103%, South Africa (52.6%), Ghana (71.8%), Kenya (55%), Nigeria posts a debt to GDP of 24%. This means that the country has sufficientroom to borrow considering the size of its economy. Most analysts have put the right ceiling for debt to GDP not to be more than 50%. This means that Nigeria can double its current debt and will still be in a sustainable threshold. I always make this loose analogy that Nigeria is like a graduate of Harvard who everyone expects to earn seven figures in USD but ends up with a clerical work in Oshodi. When rent is due, he beats his chest to his landlord and keeps saying “Do you know I am a Harvard graduate?”

However, debt to GDP does not tell the full story. Nigeria’s debt servicing to GDP, at 61%, is insanely high compared to acceptable levels of not more than 22.5%. Peer countries figures are: Ghana (44%), Egypt (54%), South Africa (13.7%), Kenya (35%). Nigeria is spending 60 Naira out of every N100 earned to service debts. Nigeria has the width to borrow based on its low debt to GDP numbers but can’t borrow aggressively because it will also be judged by its capacity to pay back, continuously raising its risk rating and cost of debt.

One would say is it not better to forget government and look to the private sector? A 2017 IMF research showed that oil-driven economies tend to lend copiously to energy entities, quietly crowding out opportunities for others. Most of the Nigerian banks are also in the difficult territory after making large bets on a continuous rise in oil prices which have fallen since late 2014. According to the 2019 IMF Article IV Report on Nigeria , “Banks’ vulnerability to oil price and production shocks is high given their large exposure to the sector (about one-third of their loan book). In response to shocks, NPLs in the sector would increase further, worsening banks’ risk aversion and shrinking private sector credit, thus constraining non-oil growth.” According to IMF 2018 analysis, Nigeria’s credit to the private sector in 2018 declined approximately by 6.7% on an annual basis. So why is the private sector not lending to entrepreneurs who are meant to create jobs and excite an economy struggling to grow? You can easily connect the dots that the same government has been crowding the debt field anddistorting incentives for the private sector. How does Nigeria grow its private sector without lending to entrepreneurs?

On a nominal level, Nigeria’s debts are low but its revenue is also very low. It does not want to raise taxes in order to raise public revenues as this might hamper consumer spending and hurt a very weak growth. The government also wants to fix infrastructure and cannot continue on a borrowing binge as cost of debt servicing is hitting the roof and also distorting private sector lending. How does it exit this dilemma because doing nothing or just dancing around this circle keeps the country locked in a circle?

Nigeria is flirting with a lost decade as its unemployment numbers continues to soar; since 2014, it is yet to find clear-cut structural agenda and aggressive action to push the country ahead. Even as the existential question continues to torment the country like a ghost: what will it sell to the world apart from oil? In Nigeria’s response, lies the solution to its multiple challenges of public revenues, employment, infrastructure growth and security. Until then, Nigeria keeps dealing with big issues with kid gloves.

– Seun Onigbinde is the Co-Founder of BudgIT, a civic tech organisation focused on making public finances accessible.