With N2.75 trillion for debt servicing alone, only N2.14 trillion for capital expenditure and another N4.88 trillion for recurrent in the proposed 2020 budget, experts are of the opinion that the economy could be stagnated. DAVID AGBA and SEGUN ODUNEWU report.
Nigerian lawmakers are asking how President Muhammadu Buhari’s record-breaking N10.33 trillion ($28.5 billion) budget for 2020 will boost growth. many are worried that Buhari’s ambitious revenue targets will mean a new tax war on their profits.
Targeting big oil
Two days after Buhari launched the budget on 8 October, his attorney general, Abubakar Malami, told Reuters that the government was seeking $62 billion in back taxes from international oil companies operating in the country.
That aim might make it difficult for the government to persuade big oil to ramp up production in Nigeria. But it also touches on the country’s wider revenue crisis.
- The budget projects revenue at N8.18 trillion in 2020. That’s 7% higher than the budgeted estimates for this year.
- Nigeria’s revenue service has pulled in just 58% of the targeted amounts so far for this year, triggering a war of words between Buhari’s office and the outgoing chairman of the revenue service, Babatunde Fowler.
- This week, Buhari warned there would be “serious consequences” if the country’s revenue agencies missed their target again.
Buhari’s spending plan is also based on the country pumping an average of 2.18 million barrels per day (bpd) at an average price of $57 a barrel. It assumes the official exchange rate will stay constant at N305 to $1.
Key provisions of the budget
- Capital expenditure is set at N2.46 trillion in total. Some of the important allocations include: works and housing, N262 billion; power, N127 billion; transportation, N123 billion; universal basic education, N112 billion; defence, N100 billion; other education spending, N48 billion; and health, N46 billion.
- A move to increase Value Added Tax from 5% to 7.5% is still being debated after its announcement by the Federal Inland Revenue Service.
- The budget is based on a fiscal deficit of N2.8 trillion, which the government aims to finance with local and foreign borrowing.
- The government will spend N2.45 billion on servicing debt, compared with its N2.14trillion allocation for investing in infrastructure.
- Two proposed laws could bring the government more money from the oil sector: the Petroleum Industry Governance Bill and a finance bill amending current tax laws.
- Another bill – the Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Bill 2018 – is to go back to the National Assembly, which rejected it in Buhari’s first term. If passed into law, it could produce another $500 millio from oil production, according to Buhari.
Critics in the Assembly
As Buhari’s ruling All Progressives Congress (APC) has a majority in both chambers of the National Assembly, the budget should pass more speedily than its predecessors.
However, some senators have already criticised the submitted budget, saying they can’t see how it will boost growth, according to Senate Majority Leader Yahaya Abdullahi, an APC senator from Kebbi in north-west.
- “The injection of this amount is a mere drop in the ocean,” said Abdullahi, “and is incapable of stimulating the economy to higher growth, wealth creation and employment generation.”
- Government must improve tax collection, he added. “But to do this, there must be robust investments in the real sector so that it could grow to earn taxable revenues.”
Past failures
Due to fluctuating oil revenues, several provisions of the 2019 budget were not implemented, a problem acknowledged by the president. Daily oil production averaged 1.86bpd as at June 2019, as against the estimated 2.3bpd that had been forecast, Buhari told the National Assembly.
Fallen tax revenues
Tax revenues have fallen well short of target for the past three years. Over half the country pays no direct tax at all, and income tax for the country’s richest business people is “an optional contribution to the state”, according to a Lagos banker who wished to remain anonymous.
Other analysts say the only way to achieve the government’s ambitious tax revenue targets would be a wide-ranging restructuring of the tax system with far more accountability.
Revenue and investment fall short
Nigeria is still recovering from a recession which it formally exited in early 2017. But growth has been lacklustre since then: 0.8% and 1.9% in 2017 and 2018 respectively.
The economy has grown by 2.01% in the first half of this year. This shows that recovery is not yet overtaking population growth, says Macdonald Ukah, senior research analyst at Lagos-based Kainos Edge.
Low confidence
It suggests that investors have low confidence in policymaking. “This is on top of the unmistakable fiscal pressures in Nigeria’s low levels of revenue (cumulatively about 8% of GDP across all tiers of government) and the fact the federal government now spends more than half its revenues servicing debt obligations in the budget,” says Ukah.
Analysts say the economy needs double-digit growth over a consistent period. The projected real GDP growth of 2.93% falls far short. Hefty capital spending will be required to drive growth, says Andrew Nevin, advisory partner and chief economist at PwC Nigeria.
“Everyone agrees that we need growth of 6-8% to lift Nigerians out of poverty and reduce unemployment […]. However, the capital investment required for this level of growth is 26-28% of GDP […]. The Federal Government is spending N2trn on capital projects […]. It is mathematically impossible for the FGN to provide the fuel to reach 6-8% growth.”
Bottom line:
With Buhari’s new economic advisory team and his ambitious budget, there is a new urgency to the government’s policy response. But state spending in Nigeria – per head – is still way below levels in economies such as South Africa and Kenya, and falls far short what is needed to drive economic growth, let alone to finance critical social investment in education and healthcare.
Some analysts are also of the opinion that the 2020 budget is simply not realistic considering the fact that what was budgeted for loan servicing alone is much more than what is allocated for capital expenditure while recurrent expenditure took a larger percentage.
It then implies, projects will suffer, and the dream of bridging infrastructural gap may remain a mirage .
Address deficit issues
Also commenting on the budget, Dr. Chichi Ashiwe said that it’s high time Nigeria found ways to address its deficit issues.
According to him, Nigeria GDP is about $378 billion dollars and our debt to GDP is currently 6 per cent which is about $28 billion dollars and reasonably high.
“The idea that the government keeps saying our GDP is within means must stop. In the Medium Term Expenditure Framework too, the revenue for oil fell N2trillion short if the N4trnillin budgeted for which leaves us with a deficit of almost 46 per cent,” he said.
Invest in the people
He added that the only way forward for the government is to invest more in her people and provide ways of making them productive rather than keep borrowing on frivolous items.
Can 100 million people be lifted out of poverty?
Also, a political economist, Adoke Ijoji has said breaking down the budget does not capture the way and manner which the government will lift the 100 million people it intends to lift out of poverty.
Ijoji said, “If you look at the budget, there is no plan on how to tackle unemployment, growing inflation and linking markets for improved growth.
“Tackling budget deficit and encouraging industrialization is one of the key things that the budget should capture which unfortunately did not. In saner climes, industrialization attracts people to the city, but here people move to the cities without industrialization which is not proper because, by 2025, our population may grow to about 250 million, how we intend to cater to this growing population wasn’t reflected,” he added.
2020 budget under pressure?
For Bayo Rotimi, a financial consultant at Quest Advisory, the National assembly are just optimistic in large budget outlook and the budget has been put under the pressure to perform at all means.
He added that the increased budget benchmark from $55 per barrel to $57 per barrel was unnecessary. He said oil prices shock cannot be overemphasized, which is why the benchmark proposed by the executive.
