Again, the Debt-Subsidy-Revenue Trifecta

Postscript by Waziri Adio

On Thursday, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, provided some startling insights into the health of the Nigerian economy. Her presentation was part of the consultation for the 2023 to 2025 Medium Term Fiscal Framework/Fiscal Strategy Paper. Her disclosure on debt service, 2023 projected subsidy, and government’s revenue profile should give a serious reason for pause to everyone, especially those jostling to take over the running of the country from mid next year. The unflattering take-away: our public finance is in a bad place. 

That our public finance is health-challenged is not exactly news. That should be apparent not only to those who have been paying attention to official figures but also to everyone else taking a hit in their pockets due to the supersize impact of public finance on the larger economy and on citizens’ welfare. What is new is that despite the relief that the record-high oil prices of the past few months should offer to an oil-producing country such as ours, things are actually getting progressively worse. 

Ordinarily, the simultaneity of high oil prices and worsening fiscal indicators, especially government revenue, in one of the world’s leading oil-producing countries should be counterintuitive. But this present—and future—crisis is well foretold. Wrong policy choices have, inevitably, produced the enervating trifecta of mounting debts, spiralling petrol subsidy and dangerously low revenues. We need bold and swift actions on these linked challenges to grant our public finance, and by extension the larger economy, a breathing space. 

The headliner from the finance minister’s presentation is that debt service gulped more than the revenue realised by the Federal Government (FG) between 1st January and 30th April 2022. According to the minister, FG’s retained revenue for the period was N1.63 trillion and debt service stood at N1.94 trillion. This is very rich on many levels. First, it meant that debt service was 119% of revenue. The previous record, set as recently as last year, was 98%. 

The concern then was that almost all of FG’s revenue was going into debt service. It was feared then that one day all of government’s revenue might not be enough to cover just debt service. That day has come. And this leads to the second, and the more troubling, point: government has to borrow to service debt as well as to meet its other obligations like paying salaries, providing for overhead, and executing capital projects. 

Then a third point: it will get worse. Government will need to take on more debts to get just the basic of things done, and the more debts it takes, the greater the amount needed to service the debts. Talk of a perfect vicious cycle.  

A closer look at the official data will put the debt issue in grimmer relief. The total expenditure for four months was N4.72 trillion, out of which personnel and capital expenditure took N1.26 trillion and N773 billion respectively. This meant that debt service alone was 41% of the total expenditure. Put differently, it means that four-tenth of the total expenditure went into debt service and almost two thirds of the total expenditure itself came outside of revenue. (Interesting side note: the 65% budget deficit for the period will further increase future debt service bill.) 

The data also shows that debt service was 154% of personnel expenditure and 251% of capital expenditure. An interesting wrinkle: of the N3.96 trillion budgeted for debt service in 2022, a sum of N1.94 trillion was expended instead of the pro-rata sum of N1.32 trillion. Actual amount for debt service surpassed the budgeted sum by close to a half (47%). 

Whichever lens we choose to adopt, it is clear we have a serious debt problem. Government officials like de-emphasising the enormity of the problem by using a convenient metric: the debt-to-GDP ratio. The latest data from the Debt Management Office (DMO) puts Nigeria’s total public debt at N39.5 trillion. At 22.44% of the 2021 Gross Domestic Product (GDP) of N176 trillion, our public debt is still within the acceptable threshold. Besides, it compares favourably with the 59% for Ghana, the 107% for the USA and the 237% for Japan. 

But this metric is of limited utility because public debt is paid and serviced from government revenue, not from GDP. And the government revenue has fallen short of many points, including failure to cover even just debt service. That is the sobering and humbling reality. This should thus mark the end of any specious talk about debt-to-GDP ratio in a country with abysmally low revenue.

The second issue that came to the fore from the minister’s presentation is the continuing haemorrhage from fuel subsidy. She shared two scenarios for 2023: N3.36 trillion for half year and N6.72 trillion for full year. This shows that every month next year the government is projecting to spend N560 billion, or over half a trillion Naira, on only fuel subsidy. The amount allocated for fuel subsidy in the revised budget for 2022 is N4 trillion. Just last month, the International Monetary Fund (IMF) projected that Nigeria’s fuel subsidy expenditure may hit N6 trillion this year.

Whatever the amount spent on fuel subsidy this year or next, it is clear that it has become a major and unsustainable strain on our public finance. The N4 trillion budget for this year alone is 23% of the revised 2022 budget of N17.32 trillion and 2.4% of 2021’s GDP. If the current revenue pattern continues, the extrapolated FG revenue for 2022 will be N4.89 trillion, which puts the amount budgeted for subsidy at 82% of FG’s retained revenue for the year. That is just one item. 

We are thus swiftly moving to a point where the fuel subsidy payment may outstrip total revenue. Prior fears centred on two areas: fuel subsidy crowding out important social expenditure in health and education and the amount for fuel subsidy surpassing oil revenue. But we have since gone beyond such puny fears and are set for other sad milestones. Before long, we may need to be borrowing to cover fuel subsidy, in addition to borrowing to service debt, pay salaries and meet other obligations.  

The third point that can be gleaned from the minister’s presentation is Nigeria’s lingering revenue problem. Based on the amended appropriation act, FG’s pro-rata revenue for January to April 2022 was N3.32 trillion but the actual was N1.63 trillion, a shortfall of 51%. If current revenue pattern holds and the budget is implemented fully, this deficit may sttetch from budgeted N7.35 trillion or 42.4% to an actual of N12.43 trillion or 71.8%. This revenue shortfall is despite the fact that the average oil price per barrel for the period was at least $30 above the $73 per barrel adopted as the price benchmark in the revised budget. 

The document adduced reasons for government’s shrinking revenue at a time of high oil prices: growing oil theft and higher subsidy payments. This is largely true. Our average oil production figure for the four months was 1.32 million barrels per day. This is far below our OPEC allocated quota of about 1.8 million barrels per day or our peak of 2.5 million barrels per day of a few years ago. High level of oil theft and ageing infrastructure have been cited as reasons for the embarrassing decline in our oil production. 

But it is much deeper than that. The unvarnished truth is that our oil sector has been in precipitous decline over time. Underinvestment, peaking oil fields and the shift in production arrangements have created a perfect storm leading not only to diminished production overall but to government’s take of less than 30% of total output. But the most critical factor here is that even government’s current paltry take is devoted almost exclusively to domestic consumption, bartered sort of with petrol refined abroad. 

This quaint prioritisation has negative implications. NNPC pays for domestic allocation in Naira after deducting subsidy and other costs. Payment in Naira means that the country cannot benefit correspondingly from higher oil prices in terms of forex inflow. This puts pressure on the Naira. And high oil prices push up subsidy on imported fuel, resulting in little or zero remittance by NNPC. This underscores the link between fuel subsidy and low revenue. But there is also a link between fuel subsidy and the relationship between debt service and revenue. If there were no fuel subsidy, debt service would not have surpassed revenue. The three ailments are thus linked. 

It is tempting to see fuel subsidy removal as the magic wand. It will go some distance but it won’t be the cure-all. Removing fuel subsidy will not solve our revenue challenge, as adding back the subsidy deductions into revenue makes clear. Clearly, we do not generate enough revenue for our need. Total revenue from all tiers of government is just about 8% of GDP (tax-to-GDP is even much lower). The average revenue-to-GDP in Africa is 18%. We are definitely not leveraging the size of our economy for revenue purposes. 

Also, our budget is too slight for our size in both absolute and per capita terms. Our 2022 federal budget of N17.32 trillion is about $41 billion which even in absolute numbers lags behind the $111 billion for Egypt and the $128 billion for South Africa for the same year. And for context, the estimated population of South Africa is 59 million, Egypt’s is 102 million and Nigeria’s is 206 million. Our federal budget per capita ($199) is thus about a fifth of Egypt’s ($1,088) and less than a tenth of South Africa’s ($2,169).

From all indications, we are bedevilled by a suffocating trifecta which cannot be addressed by denial or by kicking the can down the road. We cannot borrow our way out of it either. We need to halt the freefall, and quickly make some painful and pragmatic adjustments. We shouldn’t wait until the adjustments are forced on us. 

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