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Coronanomics (15) - Nigeria's National Income - Understanding The Black Box

Nigeria Economy	2015 VIEWS
Nigeria Economy
2015 VIEWS

Sunday, June 21, 2020 07:00 AM / by Proshare Content/ Header Image Credit: EcoGraphics

A major reason for the country's rising debt is its dwindling revenues caused by tumbling oil prices. The Nigerian economy is primarily hinged on oil revenue making it susceptible to external oil shocks. Since the discovery of oil in 1956, the emphasis on revenue as slowly drifted from the Agricultural sector which was previously the mainstay of the economy to the oil sector. Despite various calls for the diversification of revenue away from oil, the economy is still primarily hinged on the oil export revenue.

The economic reality for the need for diversification of revenue has become clear, with the spread of COVID-19 affecting the global oil market. Various economic experts and in most recent times the Minister of Finance Mrs. Zainab Ahmed have emphasized that Nigeria's problem is not a debt problem rather a revenue problem. Due to the emerging fiscal risk which the coronavirus pandemic has caused, the President approved the sum of $150m to be withdrawn from the stabilization fund of the Nigerian Sovereign Investment Authority (NSIA) to support the June 2020 FAAC.

Chart 35: FAAC Monthly Disbursement (N'bn)

Proshare Nigeria Pvt. Ltd.

Source: NBS, Proshare Research

Nigeria's major source of revenue can be classified majorly under oil and non-oil revenue. Unfortunately, it has been unable to grow its non-oil revenue significantly while its oil revenue which it mainly relies on has been negatively hit with uncertainty arising from the novel coronavirus. The need to grow its non-oil revenue stems from the fact that non-oil revenue is very much in their control compared to its oil revenue susceptible to supply and demand shocks e.g. the coronavirus which has affected the global oil market negatively.

Nigeria recorded an oil revenue of N8trn in 2011 and has never been as high since. The big drop happened in 2015 when oil revenues fell from N6.8trn to N3.8trn following a plunge in oil prices and a subsequent drop in oil production due to disruptions from militants in the Niger Delta. Oil prices were above $100 per barrel before the collapse; now we have an assumed price of $30 per barrel for the 2020 budget. Brent crude oil price has a downward trend, this is predicted to worsen if travels and movements are restricted and a vaccine is not found for the novel coronavirus. With a dim oil price outlook given the pandemic coronavirus, Nigeria's fiscal position and external balance will be threatened (see Chart 36).

Chart 36: Brent Crude Price Jan 2020 - May 2020 $/b

Proshare Nigeria Pvt. Ltd.

Source: Bloomberg, Proshare Research

To reduce its reliance on oil revenue, the Federal Government increased its VAT from 5% to 7.5%. Whilst this mounts pressures on the average Nigerian consumer and threatens their disposable income, the increase in Nigeria's non-oil revenue is important to fund the country's ambitious expenditure and investment programmes scheduled for the near to long term. Taxes are typically the primary source of government revenue, it accounts for 94% of federal revenue in the U.S, 98% in South Africa, and 80% in Ghana.

The intensified drive by the Federal Government to boost its non-oil revenue should be commended. However, the drive would have limited impact without addressing some structural challenges. First, the attempt of the FGN to introduce creative ways to raise its non-oil revenue would be a futile effort without blocking inherent leakages within the system e.g. the economy has a very large informal system which is yet to be appropriately captured. Second, increasing the tax rate is not nearly enough without improving tax administration and collection.

Chart 37: Nigeria's VAT (N'bn) Q1 2018- Q1 2020

Proshare Nigeria Pvt. Ltd.

Source: NBS, Proshare Research

The latest data from the National Bureau of Statistics reveals that the total Value Added Tax (VAT) collected in Q1 2020 was N338.94bn the highest recorded since NBS began publishing the data in Q1 2013, a growth of 10% when compared with N308.48bn collected in Q4 2019. The significant growth in VAT is a reflection of the impact of the increase in VAT from 5% to 7.5%.

The increment in VAT collection in Q1 2020, could be predicted given the mild impact of the coronavirus on the Nigerian market and its supply chains. Going forward, it is predicted that there will be a reduction in VAT collected as demand weakens due to a reduction in income levels, job losses, closure of hotels and bars etc. It is also expected that VAT on imported goods will be constrained by the disruption in the global supply chain, as importers and manufacturers cut back on purchasing plans in response to the slowdown in demand for goods and services.