Monday, April 26,
2021 / 08:47 PM / by
Wole Obayomi / Header Image Credit: KPMG
Nigeria recorded a Gross Domestic Product (GDP) growth of 1.87% in the first quarter of 2020, keeping pace with its average GDP growth rate of 1.88% over the previous 11 quarters. However, the economy was stopped in its tracks in Q2 2020 by the Twin Shocks of the COVID-19 pandemic and the significant reduction in the oil price.
At the end of the 2nd quarter, the Nigerian economy had contracted by 6.1% and this decline continued in the 3rd quarter of 2020 with a further contraction of 3.62% resulting in the economy going into a recession. However, the economy experienced some respite in the last quarter of the year with a GDP growth rate of 0.11%, which extricated the country from its second recession in five years and moderated the annual GDP growth rate to -1.92%. The recovery in the second half of the year was largely due to the positive growths recorded by the Agriculture, Information and Communication, and Financial Services sectors of the economy.
Despite the fall in oil demand in 2020 and the oil production cuts mandated by the Organization of the Petroleum Exporting Countries (OPEC), Nigeria achieved an average crude oil production level of 1.78 million barrels per day (mbpd) in 2020. This is close to the 1.80 mbpd estimated in the revised 2020 National Budget.
The oil sector contributed 8.16% to the country's GDP in 2020, according to statistics published by the National Bureau of Statistics (NBS), while the non-oil sector contributed the balance of 91.84%.
The purchasing power of Nigerians deteriorated in 2020, as inflation remained in double digits and increased steadily from 12.13% (year-on-year) in January 2020 to a three-year high of 15.75% (year-on-year) in December 2020. The rise in inflation is largely attributable to the closure of land borders in 2019 and part of 2020, the increase in Value Added Tax (VAT) rate in February 2020, COVID-19 induced lockdowns and movement restrictions, rising insecurity and the depreciation of the Naira.
Despite the severe economic challenges experienced by businesses, the Federal Inland Revenue Service (FIRS) achieved revenue collection of N4.95 trillion in 20201 . This represents about 98% of the tax authority's budgeted revenue and is N0.31 trillion short of the N5.26 trillion it collected in 20192 . We applaud the FIRS' effort in adopting technology to improve tax compliance and collection, which aligns the nation with global best practices and further enhances the ease of doing business in Nigeria.
The 2021 National Budget has support for economic recovery and growth as its top priority and focuses on internal generation of revenue and investment in capital infrastructure. The Budget, which was termed the Budget of Economic Recovery and Resilience, leverages on the 2020 Budget of Sustaining Growth and Job Creation to foster and boost the country's recovery from the impact of the COVID-19 pandemic.
As anticipated, the Federal Government (FG) adopted conservative crude oil price and production benchmarks of US$40 per barrel and 1.86 mbpd, respectively, in the 2021 Budget, following the fall in oil prices recorded in 2020. Accordingly, there is more revenue generation focus on the non-oil sector of the economy.
One of the ways by which the FG intends to mobilize non-oil revenues in 2021 is through incremental tax reform. The FG has initiated this process with the enactment of Finance Act, 2020 ("the Act") which introduced targeted tax incentives and tax relief measures aimed at cushioning the effect of the COVID-19 pandemic on businesses and easing tax administration. The Act amends extant tax laws to align with global best practices, provides further clarifications on areas of contention between taxpayers and tax authorities and aids revenue generation for the 2021 Budget.
It is imperative that the FG achieves or even surpasses its budgeted revenue of N7.99 trillion in 2021, to ensure effective implementation of the N13.59 trillion budgeted expenditure and curtail the country's budget deficit which currently stands at N5.60 trillion (i.e., the equivalent of 3.9% of the country's GDP).
The effective implementation of the 2021 Budget will also spur economic growth. The question, though, is "How much growth?".
The FG has projected a GDP growth rate of 3% for 2021 fiscal year, which is double the 1.5% projected by the International Monetary Fund (IMF), and higher than the 1% and 0.7% projected by the World Bank and the African Development Bank, respectively. The FG's projection is consistent with the 2021 - 2023 Medium-Term Expenditure Framework and Fiscal Strategy Paper which documents Nigeria's plan to achieve year-on-year GDP growth rates of 3%, 4.86% and 3.86% in 2021, 2022 and 2023 fiscal years, respectively. However, it remains to be seen if the FG would be able to deliver the forecasted GDP growth by taking bold, concerted steps to stabilize the macroeconomic environment, leverage its human capital, improve the country's competitiveness and attract capital flows.
This Publication reviews Nigeria's economic performance in 2020, FG's budget for 2021 and discusses the impact of the budget allocations and policy changes on the various sectors of the Nigerian economy.
For further enquiries, please contact the author, Wole Obayomi via firstname.lastname@example.org