With Dwindling Revenue, Nigeria Faces Uncertain Future

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  • N7.85tn shared in 2019, N8.14tn in 2018, N5.98tn 2017
  • Teriba, Yusuf recommend strategies to escape meltdown

Gboyega Akinsanmi

Statutory allocations to the federal government, 36 states of federation and 774 local government areas (LGAs) regressed by 24.43 percent between July 2019 and February 2020, indicating grave economic consequences in the months ahead, according to the Federation Account Allocation Committee (FAAC) reports analysed by THISDAY.

The reports, which cover the periods between 2015 and 2020, were independently obtained from the websites of the Federal Ministry of Finance, Budget and National Planning, National Bureau of Statistics (NBS) and Office of the Auditor-General of the Federation.

As shown in the FAAC 2019 series, the three tiers of government shared N769.53 billion in July 2019; N720.88 billion in August 2019; N740.87 billion in September 2019; 702.02 billion in October 2019; N650.83 billion in November 2019; N716.30 billion in December 2019; N647.35 billion in January 2020 and N581.57 billion in February 2020.

With the allocation of N7.85 trillion in 2019, federal transfers to the federal, state and local governments also nosedived by 3.35 percent between 2018 and 2019 compared with an upsurge of 36 percent they collectively recorded between 2017 and 2018 when a sum of N8.14 trillion was shared among the governments.

In 2015, for instance, the three governments shared N5.65 trillion; N4.62 trillion in 2016; N5.98 trillion in 2017; N8.14 in 2018 and N7.85 trillion in 2019, amounting to a whopping sum of N32.24 trillion, which were shared among the federating units in the space of five years.

Between 2015 and 2016 alone, ææthe federal transfers significantly crashed by 18.35 percent, which among other factors forced the domestic economy into recession with the growth contraction of about 1.62 percent in 2016, though the regression started from 2014 when the growth rate was 6.31 percent to 2015 when it slumped to 2.65 percent.

In 2019, as FAAC 2019 Series revealed, the revenue contraction also affected the 13% derivation fund due to the oil producing states in the federation, which suffered a regression of about 8.99 percent against the growth of 48.13 percent it recorded in 2018 and 20.90 percent in 2017, the year the country recovered from recession.

Specifically, as shown in the reports, the oil producing states in the federation alone shared N387.78 billion in 2015; N354.25 billion in 2016; N428.64 billion in 2017; N634.02 billion in 2018 and N577.15 billion in 2019, which did not include their statutory allocations.

With this steady revenue contraction with its attendant implication for economic growth, the Director General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf and Chief Executive Officer, Economic Associates (EA), Dr. Ayo Teriba lamented that the decision makers had learnt nothing from what the country went through between 2015 and 2017.
Although they acknowledged that the cause of the revenue contraction was temporary, the economists warned that oil price slump might weaken investors’ confidence and put undue pressure on the Naira exchange rate.

If the value of the Naira depreciates further, LCCI’s director-general argued that it might undermine the capacity of the governments – federal, states and local – to implement capital projects due to astronomical increase in project cost.
He, also, warned that the slump might put pressure on foreign reserves with profound macroeconomic repercussions; increase production and operating costs for businesses; trigger tumbling stock prices and heighten inflationary pressures on the back of currency weakening.

Besides, the director-general warned that the slump might weaken purchasing power with adverse implications for the welfare of the citizens; widen fiscal deficit; precipitate weak capacity to implement the budget; stoke heightened capital flow reversals and cause round-tripping in the forex market if the CBN forex management model remains unchanged.

With the unprecedented economic setback the country suffered between 2016 and 2017, the director-general lamented that nothing fundamentally “has been done to address the structural and policy problems impeding the diversification of the Nigerian economy.”

He, therefore, proposed that governments at all levels should work together “to conceive of a Nigerian economy without oil revenue and construct an economic management model based on this assumption.”

He, first, recommended that urgent steps should be taken through appropriate policy choices “to attract domestic and foreign non-debt private sector capital for infrastructure financing. For this to happen, however, the policy and regulatory environment must inspire the confidence of investors.”

He, equally, recommended that idle non-revenue yielding assets of the governments should be sold to generate liquidity while foreign exchange market should be liberalised [as much as possible] to attract forex inflows into the economy.
He, also, suggested that public private partnership should be bolstered “to attract private capital into the critical sectors of the economy. Aside, public private dialogue should be deepened to harness quality ideas on how to navigate through the current shocks in the economy.”

Apparently, in a bid to keep inflation under, the director-general proposed that pragmatic steps should be taken to reduce the production costs for oil producing companies to make the sector more competitive.

Aside, Yusuf canvassed the need “to urgently review the spending structure of government and the cost of governance. The ballooning recurrent expenditure, in the face of declining revenue, is a cause for concern.”

He highlighted the imperatives of pursuing structural reforms, which according to him, was fundamental to promoting economic inclusion and self-reliance.

With the implementation of structural reforms, the director-general suggested that fiscal federalism “is imperative to ensure the fiscal viability of the states. Current structure of federalism can only perpetuate the dependence of the federating units on the federal government.”

Consistent with the proposal of LCCI’s director-general, EA’s chief executive, Teriba criticised policy agencies for failing to prevent a situation in which temporary decline in oil price would once again create permanent economic problems.

With the economic turbulence that shook Nigeria to its foundation between 2016 and 2017, EA’s chief executive regretted that policy makers had done nothing “to insulate our economy from the weak oil price. Between 2016 and now, we have just shown the world that we learnt nothing.”

Teriba, however, said the country now “has fresh opportunities to do some of the things we had missed the opportunities to do between 2016 and now,” though required to prepare a strategy to access trillions of dollars the developed countries “are currently injecting into the global financial system.”

EA’s chief executive observed that borrowing from either sovereign lenders or international financial institutions “is not an option for Nigeria currently. But with the way the developed countries are injecting more money into a global financial system, there will be liquidity glut after the lockdown.

“The developed countries are giving people money at a time that the people cannot even spend it, at least until the lockdown ends. When the lockdown ends, there will be surplus liquidity in the international financial system. Much of the liquidity will end up in developing countries that know how to adopt investment friendly policies,” he explained.

With this context, Teriba urged the federal government “to open the sectors where the country has historically shut out foreign investors, especially where the government has 100 percent equity, especially such sectors as power transmission, rail, and pipelines. These are sectors that are likely to attract very large inflows of foreign investment.”

EA’s chief executive, specifically, cited the example of Saudi Arabia, the world’s oil largest producer, which he claimed, had been offering investors equity ownership opportunities across its infrastructure sectors.

Teriba, equally, cited the case of India, South Asia’s biggest economy, which according to him, had been getting over 60 billion per year from foreign direct investments by allowing investments into sectors from which foreign investors were historically prohibited.

For Nigeria, he explained that attracting large inflows of FDIs “is as simple as the government accepting to reduce its ownership. If the government is prepared to dilute its ownership in all infrastructure entities from 100 percent to 49 percent, we will find foreign investors like we found for the Nigeria Liquefied Natural Gas (NLNG) and GSM telephony.”

Apart from the FDIs, he advised the federal government to devise a strategy “to attract more remittances from the Diaspora. We need to prepare ourselves and get as much inflows as we can through all these channels.

“I am not talking of portfolio inflows or donor funds or foreign aids that tend to be either too erratic, as in the case of portfolio inflows, or too little to be of much use, as in the case of donor money”, he added.

He, therefore, said combined inflows available to developing counties through foreign direct investments and remittances were already in excess of one trillion US dollars by 2018. Covid-19 induced liquidity injections might push that figure to $1.5 trillion or $2 trillion by the end of 2020.

“We just need to work out plans for Nigeria to get a good share of these inflows, even while exports are likely to remain weak. The federal government can issue foreign currency bonds that appeal to Nigerians in the diasporas. Now, the key problem to solve is the weak external reserves position.

“The only way to address the weak external reserves position is to look for alternative types of foreign exchange inflows apart from exports. Instead of issuing bond in Naira, we can issue in foreign currency. Egypt issued foreign currency bonds and they got between $7 billion and $9 billion.

“Nigeria may get as much as $20 billion or $30 billion if we choose to issue foreign currency bonds, especially by appealing to our people in the diaspora. We can use the proceeds to shore up foreign reserves like Egypt did.

“Nigeria’s capacity to issue such foreign currency bonds, I believe, is better than that of Egypt, particularly given our equity stakes in numerous dollars-denominated wholly owned entities like the petroleum pipeline company and numerous dollars-denominated joint ventures,” he said.

 

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