Weakness in Tax Revenue Dampens Enthusiasm on Budget 2021 Projections

Festus Akanbi

All things being equal, the N13.08trillion proposed federal budget will be transmitted to the National Assembly next week but analysts argued that the projected revenue of N8.60 trillion was largely exaggerated given the perceived structural weakness of the nation’s tax revenue.

With projected revenue of N8.60 trillion, the Federal Executive Council put the total deficit for the 2021 fiscal year at N4.48 trillion, translating to 3.6% of the projected GDP.

However, analysts from Cordros Securities, in their Weekly Economic and Market Update released yesterday, believe the assumptions were too optimistic and may not represent the true realities on ground especially in the face of sustained failure of the tax agency, the Federal Inland Revenue Service to meet its targets.

“In our view, the FGNs revenue expectations are rather optimistic, given that (1) aggregate revenue has averaged NGN3.94 trillion between 2017 and 2019 and (2) revenue performance from Jan-July 2020 revenue performance was only 68.0% despite the exchange rate devaluation. Given the structural weakness in tax revenue, we expect the projected revenue to underperform, implying a larger than projected deficit,” the report said.

Key assumptions of the proposed budget include an oil price benchmark of $40.00/barrel, oil production of 1.86mb/d, an exchange rate of N379/USD, and an inflation target of 11.95%. “Although the proposed revenue is greater than the NGN6.15 trillion stated in the MTEF, we suspect that the variance stems from the upward adjustment in the exchange rate assumption (MTEF: NGN360/USD) which translates to higher estimates naira receipts from oil sales,” the report said.

In 2018, a total revenue of N6.7 trillion was set, while the Federal Inland Revenue Service (FIRS) was able to collect N5.32 trillion. In 2019, N8.8trillion was the target in a year when N5trillion was collected.

The agency’s chairman, Mohammed Nami, in a recent audience with the National Assembly, explained that Nigeria loses a lot of revenue through tax waivers granted to big companies which otherwise would have been taxed to buoy up government revenue. He also blamed illicit financial flow for the revenue loss.

The problem of low collection however predated Nami’s appointment as the trend became a national embarrassment in 2015, 2016, 2017, 2018. For instance, in 2015, it set N4.7 trillion target but was only able to make N3.7 trillion in the actual collection. In 2016, 2017 and 2018, the target collections were N4.2 trillion, N4.8 trillion and N6.7 trillion but the actual collections were N3.3 trillion, N4 trillion and N5.3 trillion, respectively.

The National Assembly passed a revised 2020 budget of N10,805,544,664,642 on the 11th of June after the Federal Executive Council (FEC) approved a revised budget of N10.523trillion in May, which was signed by President Muhammadu Buhari.

The Oil benchmark in the revised budget was reduced from $57 per barrel to $25 and crude production was reduced from 2.18 million to 1.94 million barrels per day in the new revised budget which was disclosed by Zainab Ahmed, the Minister of Finance.