Path to Higher, Inclusive Economic Growth

Obinna Chima writes on measures the federal government must adopt to achieve higher Gross Domestic Product growth rate

Data released by the National Bureau of Statistics (NBS) at the weekend showed that the country’s Gross Domestic Product (GDP) grew by 3.54 per cent (year-on-year) in real terms in the second quarter of 2022. The growth rate however indicated a decline when compared to the 5.01 per cent recorded in the second quarter of 2021.

According to the Q2 2022 report, posted on the NBS’ website, the rising prices of goods and falling oil production adversely impacted on the Q2 2022 performance. The growth rate in Q2 decreased by 1.47 per cent from 5.01 per cent growth rate recorded in Q2 2021 and increased by 0.44 per cent relative to 3.11 per cent in Q1 2022.

According to the NBS, in the period under review, aggregate GDP stood at N45 trillion in nominal terms, higher than the N39.12 trillion recorded in Q2 2021, indicating a year-on-year nominal growth of 15.03 per cent. The nominal GDP growth in Q2 2022 was higher relative to the 14.99 per cent recorded in Q2 2021 and higher compared to the 13.25 per cent growth recorded in the preceding quarter.

However, the economy was largely driven by the non-oil sector which contributed 93.67 per cent to growth while the oil sector accounted for 6.33 per cent.

In the review period, average daily oil production stood at 1.43 million barrels per day (mbpd), lower than the 1.61mbpd recorded in the same quarter of 2021 by 0.18 mbpd. This was also lower than the Q1 2022 production volume of 1.49 mbpd by 0.06mbpd.

However, real growth of the oil sector was –11.77 per cent (year-on-year) in Q2, indicating an increase of 0.89 per cent compared to the Q2 2021. On the other hand, the non-oil sector grew by 4.77 per cent in real terms during the reference quarter (Q2 2022), lower by 1.97 per cent compared to the rate recorded same quarter of 2021 and 1.31 per cent points lower than the first quarter of 2022.

The sector was driven by Information and Communication (Telecommunication) which contributed 18.44 per cent to growth in Q2. Others are trade 16.81 per cent, agriculture 23.24 per cent, Financial and Insurance 4.25 per cent, and transport 1.84 per cent.

Indeed, in the past few years, Nigeria’s economic growth has been unimpressive, constrained by a number of structural issues. Some of them include sustained rise in petrol subsidy payments, escalating debt service cost, insecurity, forex scarcity, high inflation, depletion in fiscal buffers, among others.

For instance, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed recently revealed that the country’s debt service cost presently outweighs its revenue, while the Nigerian National Petroleum Company (NNPC) Limited also disclosed that payment for petrol subsidy now exceeds total revenues from sales of crude oil and gas, which are both clear signs of economic dangers ahead.

According to Ahmed, the country’s debt service cost in the first quarter (Q1) 2022 was N1.94 trillion, N310 billion higher than the actual revenue received during the period. On the other hand, data from the NNPC’s monthly presentation at the last Federation Account Allocation Committee (FAAC) meeting showed that in the first half of 2022, petrol subsidy claims surpassed oil and gas revenue by a whopping N210 billion.

Beside these, the increasing level of insecurity across the country, forex scarcity due which manifests in scarcity on the parallel market are other sources of concerns to policy makers and pundits.

Due to Nigeria’s dwindling revenue, the continued payment of trillions of naira on fuel subsidy by the government and the attendant economic challenges, the World Bank recently raised the alarm that the country might be facing an existential threat.

The multilateral institution warned that if the country failed to optimise its tax system and focus on other areas to boost its revenue, the already low revenue would continue to drop.

It noted that despite the rise in the price of oil in the international market, Nigeria had not reaped the benefits because of the huge amount spent on fuel subsidy.

The federal government is estimating that N6.7 trillion would be spent on petrol subsidy next year.

To the World Bank Country Director for Nigeria, Shubham Chaudhuri, Nigeria would continue to face fiscal pressures because of its ballooning cost of fuel subsidy at a time production continues to decline.

The World Bank chief pointed out that Nigeria, for the first time since its return to democracy and as the only major oil exporter, hasn’t been able to benefit from the windfall opportunity created by higher global oil prices presently.

According to World Bank’s estimates, the present economic challenges the country is facing are likely to push an additional one million Nigerians into poverty by the end of 2022, in addition to the six million Nigerians that were already predicted to fall into poverty this year because of rising prices, particularly food prices.

To the Senior Public Sector Specialist, Domestic Resource Mobilisation, at the World Bank, Mr. Rajul Awasthi, Nigeria must have to eliminate petrol subsidy to stimulate economic growth.

Awasthi stated, “Nigeria has the largest economy in Africa and the largest country in Africa by population, so it is critical to Africa’s progress. There is no doubt about that. But the government of Nigeria, from the public finance perspective, is really facing an existential threat. Let’s not downplay the situation. That is the actual reality.

“Nigeria is 115th out of 115 countries in terms of the average revenue to Gross Domestic Product ratio. Despite the oil prices rising the way they have been, net oil and gas revenues have been coming down because of the tremendous impact of the subsidy.

“So, what is going to happen in 2022? The federation’s revenues are going to be significantly lower. They are already very low, and Nigeria is already the lowest in the world out of 115 large countries and this year, it’s really going to be lower than what it was in 2020 because of the debilitating impact of fuel subsidy.”

Commenting on how to boost economic growth, Awasthi stressed the need for technology deployment in tax administration and data sharing between the Federal Inland Revenue Service and the states’ Internal revenue services to boost the revenue from personal income tax. He also called for an increase in the tax levied on certain goods, like wine, cigarettes and beer.

“Also, I think there is a huge opportunity to raise excise on goods like beer, wine, spirit and cigarettes. There is a very tiny tax that has been introduced on them and this could be higher.

“These are the kinds of things that across the world there is a consensus that these rates should be higher because they are supposed to attack and address negative externalities of these products.

“There is also a need to reform the fuel subsidy regime, moving towards its full elimination at least by 2024. Nigeria needs to roll back the PMC subsidies and adopt the free market price. This is critical for this country. There is also the need to improve revenue from cross-border transactions and other international tax measures.

“Going forward, the approach to revenue mobilisation has to be more strategic. We need to be more strategic and it’s not just about taxing more, Nigeria needs to tax better. We need to review the collection system and not just about what to collect and from who. There have been discussions about how the tax system has to be progressive and efficient in terms of compliance and making sure we are targeting the right tax bases.”

On his part, Anambra State Governor, Prof. Chukwuma Soludo recently stressed the need for the government to phase out petrol subsidy immediately.

“We have had this analysis over and over and so the diagnosis is clear. We know this problem, we know that Nigeria is grappling with several unsustainables, be it in the area of security or in the area of macroeconomic framework and subsidies that nobody gets. We subsidise those who own cars but have no money to build the roads for them to drive on,” he added.

Soludo lamented that sub-nationals were bearing the cost of subsidies.

“If we continue with subsidy, the central bank would continue to print money, the deficit will continue to rise, and how does the federal government pay its bills? It has got to resort to ways and means and the ways and means continue to fuel inflation and the depreciation of the exchange rate,” he warned.

The International Monetary Fund (IMF) urged the country to take proactive measures to enable it escape debt default.

A recent presentation by the Chief Executive Officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane had shown that, “Nigeria is approaching the fiscal cliff with a fiscal deficit of N3.09 trillion and the actual debt service was more than revenue between January and April 2022. In addition, the excess crude oil account was depleted to $375,000 in July 2022 from $35.7 million in June 2022.”

But the Chief Economist and Director, Research Department, IMF, Mr. Pierre-Olivier Gourinchas noted that, “If you don’t have a reduction in the claims of debt restructuring, then the country is still saddled with unsustainable liabilities that it has to service and is unable to.”

Commenting on how to address the challenge in the forex market, Ayodele Akinwunmi of FSDH Merchant Bank, noted that the best way to resolve the issue was through increased supply.

This, he said could be achieved through increased export of goods and services.

“It is also about how do we move away from exporting only crude oil to refined oil and how do we do that? There are lots of modular refineries that are idle today. We need to ensure those things are in place.

“There is need to look at other government refineries, rather than doing turnaround maintenance, sell them to private investors, let them do the maintenance, increase production and export. It will help increase local demand and reduce demand for forex,” he said.

“In terms of non-oil export, he said there was need to further incentivise manufacturers in the non-oil sector. We have competitive advantage in agriculture but insecurity has not allowed us to extract maximum value in that area. These are the things we need to do to earn more dollars,” he added.

However, the Director-General of the West African Institute for Financial and Economic Management (WAIFEM), Dr. Baba Musa, pointed out that Nigeria’s biggest challenge has always been the debt service cost for its domestic debts, compared to that of the external debts.

He noted that the interest rate the federal government pays on its domestic debts was twice as much as what it pays on external debt and that they were short-dated instruments.

Musa said, “When you look at the redemption profile of our debts, that of domestic debts are much higher. And the bonds, the government keeps rolling them over and when they roll them over, they do so at higher cost.

“So, the issue is that there is some money kept aside in sinking fund; if I am to advise the Minister of Finance, I think this is the right time to use the sinking fund to pay off all the domestic debts rather than rolling them over. That will reduce our debt burden.

“Another thing is to do what is called debt re-profiling, so that for those that have two to three years maturity duration, we can elongate the tenor, so that it can mature in five to 10 years or beyond. This will enable government to have breathing space, otherwise, our debt service cost would continue to dwarf our revenue, which is a mis-match.”

He added, “The second thing is that we need to bring in innovative way of increasing our revenue. For that, if I were the federal government, I would cancel any tax relief that I had given to people. For now, you don’t need to give any tax relief because the government is in dire need of revenue.

“Our biggest problem has been expenditure; we need to re-prioritise our expenditure and only spend on essential items until our revenue profile improves. Unfortunately, we are going into an election year and naturally, in an election year in every government in Africa, you spend more than what you had budgeted.

“But I pray that we would have that fiscal discipline. Eventually, I see us going back to the International Monetary Fund (IMF) for support. We have to do that because that is the only way we can get support, at least in the medium term.”

According to the Chief Executive Officer, Centre for the Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf, Nigeria’s economic challenges can be placed in four categories.

The macroeconomic challenge, which he said has to do with inflation, debt crisis and exchange rate; and the structural challenge, which has to do with ensuring productivity and competitiveness in the economy, driven largely by the quality of our infrastructure. The third challenge he said was one of security which has become a major problem now because it’s affecting productivity in the economy especially in agriculture and affecting the ability to attract investment from countries also affecting domestic investors from investing.

On the global factor, Yusuf said Nigerians were yet to recover fully from the COVID-19 pandemic when the Ukraine -Russia war that is threatening global food supply chain broke out thus causing disruptions in the energy sector.

He argued that in order to tackle the macro-economic issue, the government needs to tackle inflation by dealing with the problem of productivity.

In this regard, Yusuf stated that government needs to revive infrastructure, so that the level of competitive output can be improved and increased.

“We need to fix infrastructure to be able to support output production and employment that is critical in bringing down inflation. Another thing we need to do is to reduce inflation and moderate the rate at which the Central Bank of Nigeria finances government deficit which is extremely high at the moment. The cumulative figure now is about N15 to N19 trillion. A major component of inflation is food inflation and insecurity is the biggest problem contributing to food inflation.

“If we have not had the kind of disruption to our agric sector, the situation would not have been as bad as this,” he added.

On naira depreciation, he said “If we can address the issue of insecurity and forex, then we can address the issue of inflation. We also have the revenue collapse. The level of fiscal deficit is high. The level of debt servicing is increasing. The way to deal with that is to ensure we restore investors’ confidence. If there is more investment, there will be more revenue. If there is more revenue, there will be less need for deficit financing and therefore less need for debt.

“There is a need to review government’s expenditure. We are still spending the way we used to spend. There is no deliberate effort to cut down on the cost of governance. The issue of oil theft needs to be addressed. We are having a major financing deficit because of oil theft, especially our forex.

“It is in our control to ensure security within our own space. If we are able to fix the oil theft issue, we will be able to restore sanity in our oil producing areas.”