On Nigeria’s Dire Revenue Challenge (3)

Postscript by Waziri Adio

In case anyone needs a reminder, Nigeria’s revenue challenge was dragged into focus again on Monday. Mrs. Zainab Ahmed, the Minister of Finance, Budget and National Planning, told the House of Representatives that the deficit in the projected N19.76 trillion budget for 2023 will range between N11.30 trillion and N12.41 trillion, the range a function of whether petrol subsidy will be for six or 12 months and whether  capital expenditure will be funded from government revenue or only outside of it. 

Beyond budget deficits and fiscal responsibility requirement, a more important way to look at the minister’s presentation is through the revenue lens. From the expenditure and revenue figures, it can be extrapolated that the projected aggregate revenue for the Federal Government (FG) in 2023 is between N7.35 trillion and N8.46 trillion. This indicates that the expected aggregate revenue is between only 37.20% and 42.81% of the projected expenditure for the year. 

The Medium-Term Fiscal Framework (MTFF) puts projected debt service at least at N6.30 trillion and personnel for Ministries Departments and Agencies (MDAs) and Government Owned Entities (GOEs) at N5.33 trillion. This puts debt service at between 74.47% and 87.71% of expected aggregate revenue and FG’s hard expenditure (debt service and personnel costs) at 137% of projected revenue. The picture acquires darker hues once you factor in the fact that projected revenue is hardly fully realised. 

Nigeria’s current revenue challenge cannot be overstated, even after taking due cognisance of spending and governance issues. In earlier instalments of this series, I made two key points: one, we cannot borrow our way out of this fiscal hole; and two, FG needs to eliminate and block wastes and leakages within and outside of government to give itself more fiscal headspace. 

Eliminating petrol subsidy, estimated to cost at least N500 billion per month in 2023, is one obvious candidate. That is a tidy sum that can be repurposed to more useful areas, especially if channelled into sectors that will benefit the poor and disempowered. But there are other areas of leakages as well, including money retained by government agencies as collection costs or as a portion of internally generated revenue, and usually frittered on bogus expenses. 

As stated earlier, trimming fats and blocking drain-pipes can only be a good starting point, not the panacea to Nigeria’s mounting fiscal problems. Ultimately, government’s revenue needs to go up and be more prudently and impactfully applied. Today, I will conclude this series by focusing on three areas for boosting revenue in the immediate to long term. 

*Sale and Concession of State Assets*: It must be said upfront that asset sale should be seen as a stop-gap measure, and not as a sole or a sustainable revenue strategy. As an asset sold cannot be sold again, and since there is a finite stock of such assets, it is reasonable to expect that there would be a time with no viable assets to sell again. There is also the challenge about inter-generational equity: how investment by one generation is pawned off by another to meet its immediate needs without a care for the coming generation. This means that asset sale has to be handled with utmost care, including ensuring that adequate value accrues and possibly earmarking resultant revenue for human and physical capital that will benefit the coming generation. 

That said, there are many underperforming or dormant yet viable assets that government and the larger society can get good value for by selling whole or parts of them or by handing them over to private management in return for sizeable upfront cash and reasonable cash-flow. For example, the government can reduce its stake in Nigeria Liquified Natural Gas (NLNG) from 49% to between 30% and 40%. Similarly, government can reduce its joint venture stakes in onshore oil assets from 55% or 60% to about 45% when the Incorporated Joint Ventures (IJVs) are set up, and it can mandate NNPC Limited to speed it up its public offer process to reduce government’s stake in the company from 100% to between 60% and 80%. Sizeable dollar revenue in billions can accrue from this set of assets if well managed. 

Many public assets that are rotting away or lying fallow like stadia can be concessioned to achieve multiple goals: raise upfront and steady revenue, reduce stress on the public purse, ensure proper maintenance and value addition, and put the assets to better use. Stadia across the world host major events outside their original use, including concerts. Think about that, and then think about the fate of a prime asset like the national stadium in Lagos. Also, think about postal service remaining under government control while sitting on prime property across the country. 

Then think further about major airports, railways, roads and ports etc., that can be better run, and better maintained and even upgraded through a range of public private partnership arrangements that can additionally boost government revenue in the short term and on a consistent basis. Getting government agencies to continue to run some of these key facilities is suboptimal. Take the few new rail service. The facilities are grossly under-utilised, given the opportunities that exist for restaurants, bookshops and other goods and services. The fares charged could hardly cover basic maintenance for facilities built with foreign loans.  

For this option to deliver the desired revenue and value to society, it will be important to come up with a list of viable assets, categorise them in terms of readiness and options, prepare proper business cases for these entities, and ensure that the sales and partnerships are transparently and accountably done. 

*Increasing Oil Revenue*: For the first time since it became an oil producing country, Nigeria is not benefiting from high oil prices. It is not securing a corresponding increase in net oil revenue or in its foreign exchange reserves. This is largely because of many factors: reduced oil production, increased oil theft, reduced federation share of oil, and steady hike in deductions by the national oil company for petrol subsidies and other reasons. 

According to the latest Nigerian Development Update from the World Bank, Nigeria’s gross oil and gas revenue is projected at N7.76 trillion for 2022 but the deductions are projected at N5.02 trillion (with N4 trillion for petrol subsidy alone), and net revenue at N2.74 trillion. This means that only 35% of the oil and gas revenue will be available to the federation while subsidy alone will gulp about 52% of gross oil revenue. 

Nigeria’s petroleum sector has witnessed sharp decline in a few years due to historical and recent choices. Oil production has shrunk from 2m barrels per day to between 1.2m bpd and 1.4m bpd, the percentage of government’s take from the shrunken output has diminished to about 30% of total production as the companies have moved offshore where they have better terms and are better protected from ballooning oil theft, and government’s take is barely enough to cover domestic supply of subsidised petrol. This perfect storm negatively impacts not just the fiscal position of all tiers of government, but also the external reserve, the exchange rate and even inflation. 

Despite its present challenges and how its mismanagement has imposed a drag on the country, the petroleum sector still remains a major pathway for boosting government revenue. Even in the context of the discourse on energy transition, the oil sector (especially gas) still holds substantial revenue potential for the country, much more than its present underperformance suggests. And even if oil price tumbles to $50 per barrel, Nigeria can do multiples of its current earnings from the sector. 

We need to regain lost capacity and return to 2 million barrels per day or even higher. We need to close lingering discussions on Final Investment Decisions (FIDs), address issues around some contentious oil assets, launch new bidding rounds, incentivise more explorations, cut losses, reduce costs (Nigeria has one of the highest production costs in the world), expand local refining capacity, ensure that NNPC Limited is managed as a profit-facing entity should be run, and move more aggressively on gas, including approving more NLNG trains. But we need to prioritise stamping out the lingering and worsening haemorrhage of oil theft. Without that, the promise of the remaining years of oil will only be a mirage.   

*Rev-up Non-Oil Revenue and Tax Compliance*: The non-oil component of aggregate revenue has increased dramatically in the last few years. Ordinarily, this should be good news, as Nigeria appears less oil-dependent. But that is not the full picture. Nigeria is still plagued by the volatility of oil revenue, and the relative improvement in non-oil revenue is largely a reflection of the underperformance of the oil sector. With more focus and greater efficiency, the country can generate more than five times its present non-oil revenue. 

As a starting point, we need to diversify and expand non-oil exports to maximise their potential for foreign exchange and for government revenue. Oil and gas still constitute more than 85% of Nigeria’s exports. We need to identify at least five potentially big export earners and deploy a suite of pragmatic policies to support their growth. For example, Nigeria is the world’s leading producer of cassava but does not feature at all in the global trade in cassava or cassava pellets or starch. We need to ensure that we have more things and in significant quantity to sell to the world than oil.

Improving the efficiency of tax collection will be the most critical component of addressing the revenue challenge. Currently, Nigeria’s has one of the lowest tax-to-GDP ratios in the world, lower than the average in Africa, lower than its poorer neighbours. Clearly, Africa’s biggest economy is not leveraging its GDP for tax purposes. But significantly boosting tax revenue does not necessarily mean an increase in tax rate or an over-burdening of the very few who pay taxes, which has been the default position in recent efforts to increase tax revenue. 

What the country needs to do is to expand its tax base by bringing more individuals and entities into the tax net, ensuring greater compliance, and collecting taxes more efficiently and more strategically. We may need to review some tax expenditures that amount to incentives to businesses but lost revenue to government to see whether they are achieving the intended purposes and to assign sunset clauses. Waivers and exemptions, such as pioneer status, fall into this category. The VAT is now our biggest source of taxes but even VAT can perform better with fewer exemptions, alignment with regional average, and greater compliance. We may need to also increase ‘sin taxes’ as well as taxes and duties on luxury items.

Personal income taxes constitute the bulk of government revenue in most countries. Not so here. There are a few reasons for this. One is because we have a large informal sector and there is an inherent difficulty in tracking the incomes of those not formally visible. Second is that the formal part of our economy is capital intensive, with most of the value going to owners of capital (according to the NBS, >60% of GDP by income goes to capital, which makes taxes by companies higher than taxes by individuals). And three because the state tax authorities that collect the personal income tax mostly lack the capacity to do so efficiently. 

Personal Income Tax (PIT) has consistently been under N1 trillion. We need to change the structure of our formal sector in favour of labour-intensive industries especially agro-processing and manufacturing. We need to provide incentive for compliance for payment and filing of income tax returns, even for those in the informal sector. And we need a single and efficient revenue authority that can collect all revenue not just at the federal level but across tiers of government. 

Even when tax evasion is a crime, most people loath paying taxes, especially when they see their government as wasteful and insensitive. Government needs not only to be less wasteful and less insensitive it also needs to build trust, invest in sensitisation, simplify the tax code and increase the ease of compliance, tie tax payment to incentives, and frontload benefits of tax compliance so that citizens can see good reasons to entrust their hard-earned money to the state. In tax matters, compliance is more effective and cheaper than enforcement.  

*(Concluded)*