Sunday, February 25, 2024

As IMF, Agusto raise fresh alarm over Nigeria’s debt situation

Nation’s fiscal challenges due to poor earnings from oil scary

Another election cycle has begun, and while we watch with keen interest as political figures jostle for a chance to be elected to the highest office in the land, the only certain thing is that whoever emerges president will be confronted with a significant fiscal overhang. When the campaigns resume, a key question on the minds of the electorate should be how the next administration intends to approach fiscal consolidation and debt sustainability in the face of revenue constraints. BAMIDELE FAMOOFO writes.

Uba Group

The last seven years have seen Nigeria’s public debt burden skyrocket with minimal investments in infrastructure to show for it. While the Federal Government of Nigeria’s capital expenditure averaged N1.6 trillion ($3.85 billion @ N415/$) over the last seven years, it has lagged behind both budgeted levels and the amount required to close the infrastructure gap (estimated at $150bn annually over the next 30 years). It also pales in significance when compared with its regional peers.

However, during the same period, total public debt has soared by a staggering 226 percent to N39.56 trillion in December 2021, up from N12.5 trillion in June 2015.

The International Monetary Fund in its outlook report on Sub-Saharan Africa released Monday, last week, warned that Nigeria, biggest economy in Africa will spend about N6trillion on fuel subsidy before the end of 2022.

The implication is that the Nigerian government will spend nearly 100 per cent of its revenue on debt servicing by 2026.

The Bretton Wood institution raised concerns over Nigeria’s fiscal conditions, adding that the nation spends about 89 per cent of its revenue on debt servicing at the moment.

The IMF’s Resident Representative for Nigeria, Ari Aisen, explained that fuel subsidy payments averaging N500 billion monthly will increase total expenditure on subsidy to a record N6 trillion by the end of the year.

The IMF said that it is a reflection of the low revenue of the country, adding that it needs to mobilise more revenue to be able to have macroeconomic stability.

“The IMF’s Resident Representative for Nigeria, Ari Aisen, explained that fuel subsidy payments averaging N500 billion monthly will increase total expenditure on subsidy to a record N6 trillion by the end of the year”

Aisen lamented that as an oil exporter, Nigeria is unable to take advantage of the current global high oil prices to build reserves. He noted that the nation is equally confronted by low earnings due to the subsidy on petroleum products.

Earlier in April, the Nigerian Senate approved N4 trillion for petrol subsidy in 2022, following two separate requests by the Nigerian president to the National Assembly. The government had shelved a planned move to suspend the subsidy payment a few weeks earlier.

Situation analysis

A bloated wage bill and interest payments (cumulatively 114 percent of FGN revenue in 2021) continue to consume a substantial portion of the nation’s finances. For more context, Nigeria spent more on non-debt recurrent expenditure in 2021 (approximately N5trn), than its estimated revenue of N4.39trn within the period. This implies that it had to borrow to meet a considerable part of the public sector wage bill and its actual capital expenditure in 2021 – estimated at N3.7trn. Revenue growth has been significantly outpaced by the rise in expenditure. The fiscal deficit-to-GDP ratio (6.3% in 2021) has now exceeded its 3.0 percent threshold over the past five years.

The country’s revenue troubles have also been exacerbated by production and terminal shut-ins that have stopped Nigeria from benefiting from what should have been a crude oil windfall.

Nonetheless, the IMF in its 2021 Article IV Consultation with Nigeria in February 2022 assessed Nigeria’s public debt to be manageable.

However, the fund also highlighted Nigeria’s susceptibility to significant risks and uncertainties. One of which is the external debt servicing costs for emerging market and developing economies that are likely to rise in response to tightening global financial conditions which have been triggered by persistently higher inflation in advanced economies. Domestically, as inflationary pressures mount and the CBN’s monetary policy committee appears increasingly more hawkish, a rate hike to contain inflation was implemented by the MPC on Tuesday, May 24, 2022. It was the first time since 2016 that interest rate was jacked up to check rising inflation.

Alternative revenue

The IMF also stated that: “Liquidity-based indicators – driven by weak revenue mobilisation – remain concerning, with the interest payments still representing a high share of government revenue”.

This underscores a revenue problem that is steeped in Nigeria’s dependence on oil revenues and its failure to diversify its revenue sources and its capacity to enforce tax compliance. At 7.5 percent of GDP, down from 17.7 percent in 2011, tax revenue collected by the Federal government is among the lowest globally. It pales in comparison to that of South Africa (24.2%), Kenya (15.1%) and Ghana (12%).

According to the IMF, only war-torn Yemen and Somalia will have a tax/GDP ratio of less than 7.0 percent in 2022. In 2019, the Organisation for Economic Cooperation and Development estimated that Nigeria had a tax to GDP ratio of 6.0 percent (down from 6.3 percent in 2018), which was significantly lower than the average of 30 African nations assessed by the OECD (16.5%) and also lower than the Latin America and the Caribbean area (23.1%) Recent efforts at tax reforms, while commendable, have been largely fixated on raising the tax rate and introducing new taxes. The phased increase of the excise duty on tobacco and alcoholic beverages between 2018 and 2020 in addition to the 50 percent increase in Value Added Tax from 5 percent to 7.5 percent in 2020, failed to yield a significant impact as the average Nigerian consumer continues to grapple with falling purchasing power and stagnating incomes.

Agusto’s position

Agusto & Co believe that the revenue problem would be addressed more effectively if fiscal reforms were directed at broadening the tax base and capturing the informal economy (estimated to be around 65% of GDP by the IMF), as opposed to intensifying efforts to impose additional taxes on those already subject to taxation. “The reality is that many informal businesses are compelled to pay levies, albeit informally and frequently to agents, commissioned by governments at the sub-national level, who remit agreed-upon sums to the authorities. In many instances, these levies are collected regardless of whether or not the informal business earns revenue; they are compelled to comply by the prospect of force or loss and typically receive little benefit from these non-state collectors,” it noted in a statement.

Agusto & Co noted that the informal levies have also been observed to constitute a larger proportion of their incomes as they contend with multiple levies from all tiers of government.

The International Center for Investigative Reporting estimates that Lagos State National Union of Road Transport Workers rakes in over N123 billion annually.

A key task for the next administration will be articulating the potential benefits of joining the formal sector in such a way that it outweighs the prospects of remaining in the informal sector. This will be crucial in getting the informal players (mainly Small and Medium Scale Enterprises) to willingly formalise their operations.

Significantly increased domestic revenue mobilisation is essential for decreasing budgetary risks and creating policy space. Key near-term actions would include the permanent withdrawal of fuel subsidies in accordance with the Petroleum Industry Act, together with compensation measures for the poor and the efficient and transparent use of the saved resources.

“The incoming administration will be tasked with finding the optimal level of public debt, where it is large enough to stimulate investment, economic growth, and job creation, but also modest enough to keep interest rates and debt-servicing costs low”

The way out

In the midst of the uncertainties, the World Bank Group urged Nigeria to rethink its fuel subsidy regime and multiple exchange rates policy.

Speaking during a media briefing at the World Bank/International Monetary Fund Spring Meetings in Washington DC, the president of the World Bank Group, David Malpass, said that resources being expended on subsidy could be channeled to other sectors of the economy to accelerate growth.

Malpass explained that generalised subsidies have significant negative effects on any system, and the ripple effect isn’t healthy for the economy.

“One is that they are expensive because they go to everyone and they are often used by people with upper incomes than by people with lower incomes so they are not targeted.

“So, we encourage that when there is need for subsidy, either food or for fuel, that it should be carefully targeted at those most in need of it. And so, we have encouraged Nigeria to rethink its subsidy effort.”

In its intervention last Monday, the IMF official reiterated the World Bank’s warning, adding that subsidy payments could worsen the nation’s fiscal challenges due to poor earnings from oil.

Speaking on the economic outlook for the continent, the IMF official advised governments across the region to reduce debt vulnerabilities, balance inflation and growth, and manage foreign exchange rate pressures.

“Unrivalled potential for renewable energy and an abundance of minerals, a successful transition offers opportunities for diversification and job creation; ensuring the green transition is also a just transition,” he said.

The Federal Government of Nigeria is unlikely to contemplate an IMF loan due in part to the conditionalities and in part to the political backlash. Nevertheless, as a debt management strategy, a shift to low-cost and long-term debt would be more effective given the current debt service costs. Multilaterals lenders with conditionalities, which may include exchange rate reform and the elimination of energy subsidies (electricity and petrol), appear to be the only viable option.

Typically, when the returns on what is borrowed outweigh the cost then debt is adjudged to be beneficial.

The incoming administration will be tasked with finding the optimal level of public debt, where it is large enough to stimulate investment, economic growth, and job creation, but also modest enough to keep interest rates and debt-servicing costs low.

In addition, ensuring full transparency and accountability in the deployment of tax revenues and improving government efficiency is crucial to widening the tax net. A huge trust deficit currently exists from decades of mismanaged oil wealth. The country’s citizenry needs to be convinced that the government will utilise tax revenues effectively. The onus lies on the government to prove that it can and therein lies the dilemma.

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