Tuesday, June 03, 2015 9.33AM
/ Dr. Temitope Oshikoya*
Closely related to the direct equity programs are the education and healthcare programs to enhance the productive capacities of citizens, costing another 662 billion naira or $3.31 billion. These programs include new vocational schools; new six universities of science and technology; and world class hospitals. In addition, BudgiT estimates suggest that N8.8 trillion or $44 billion per year will be required as national health expenditure.
Prioritization of all the equity programs will be necessary, giving the total costing of N11.5 Trillion or $58 billion. While the core social welfare program can be initially scaled down by half, establishing six new universities or new world class hospitals cannot be of immediate main priorities. It is also difficult to meet over the medium term the targets of increasing by two-half times the number of physicians per 1,000 population from 19 to 50, and increasing national expenditure per person per annum five times to N50,000. The RGF may be targeted initially as a Marshall Plan for the North East, as the NDDC is essentially a RGF for the South-South. While the NIS is crucial to the effectiveness of the social inclusion program, it should build on the ongoing Biometric programs at the CBN, INEC, and NIMC and the e-wallet program in the agriculture sector.
The expenditure on social inclusive equity program should initially be targeted at N5 trillion or about 5% of GDP, and half of the current projected estimated spending. This benchmark is in line with cost of social protection programs in Ethiopia, Kenya, and Tanzania. According to Cash Transfers Evidence Paper by DFID, the cost of Ethiopia’s Productive Safety Net Program is estimated at 5.3% of GDP. Large middle-income countries spend less per GDP. India’s National Rural Employment Guarantee is estimated to cost 2.2% of GDP; Indonesia’s Safety Net Scheme, which covers 84 million people or a third of the population, is estimated to cost 0.7% of GDP. Brazil’s Bolsa Familia program created in 2003 cost 0.36% of GDP and covers 46 million people or a quarter of the population and has lifted million of families from poverty. The Brasil sem Miséria established in 2011 has a fiscal cost of less than 0.6% of GDP at an average of $65 per family according to the IMF.
The low hanging fruit to meeting some of the financing needs for the social welfare equity program is ensuring governmental effectiveness. The cost of governance is very high. Recurrent expenditure account for 90% of total 2015 budget; with personnel cost accounting for nearly half while statutory transfers including the National Assembly, overheads and other service votes together accounting for a fifth, and servicing of about $60 billion in local and international debt accounting for the rest. The Federal Government has to borrow N473 billion, slightly over half of 2015 planned borrowing requirements, to pay salaries. A third of 36 States is unable to pay salaries of civil servants and several are heavily indebted.
An essential step to achieving a social democratic welfare state is the need to re-engineer the government through effective governance, accountability, transparency and value-for-money. A starting point for the incoming administration is to showcase its austere style by reducing the number of presidential aides, cars, and jets; and followed by pruning the jumbo salaries and allowances of legislators. Overall, reducing personnel cost by 15%, and statutory transfers, overheads and other service votes by a third will yield close to N1 trillion in savings. It has been estimated that a savings of over N700 billion could be realized from implementing Oronsaye’s report on civil service and parastatals.
Removing oil subsidy remains the elephant in the room, but can be achieved given the current low oil prices and the public trust of the incoming administration on integrity issues. The sum of N143 billion is in the approved 2015 budget for subsidy payments, which have benefitted mostly the oil marketers and the oligarchs in the oil industry.
As part of efforts to ensure effective governance and pluralistic economic management, the position of the Coordinating Minister for the Economy should be abolished immediately. The core treasury functions of resources mobilization and revenue generation by the Ministry of Finance for the Federal Government have been overshadowed by the task of economic coordination, in addition to budgeting and policy functions. Budgeting is a programming function and should be combined with national planning or be directly under the Vice President. Economic policy coordination should be with the Chief Economic Adviser to the President, much as security coordination is with the National Security Adviser.
Enhancing effectiveness and simply reducing the cost of governance, which could yield savings of over N1 trillion will be necessary but not sufficient to financing the social welfare programs over the short-to-medium term. Shared FAAC revenue, however, already slumped by nearly half in six months. The emerging deep fiscal holes is symptomatic of near-term vulnerabilities of a slowing economy, with a real GDP growth rate that decelerated by more than a third from the rate achieved in 2014 and oil exports projected to be 40% lower in 2015 compared to 2014, putting pressures on reserves and exchange rates, with a restrictive MPR of 13%.
The constraint of an almost empty treasury is also due in part to fiscal leakages. Prior to the economy being buffeted by a permanent oil prices shock, which declined from $115 to below $50 in six months, it has been estimated that of the $100 per barrel earned, half is wasted or lost through fraud. According to the IMF, the ratio of oil revenue to the market value of oil lifting declined from 47.2% in 2011 to 39.5% in 2014 due to quantity theft, secular decline in oil investment and production, and lower yield from NNPC Joint Venture (JV) lifting arrangements. It is estimated that about 100,000 barrels of oil per day is lost, amounting to $5 billion or N1 trillion per annum. Earlier estimates put the figures at 400 barrels at $20 billion naira. Restructuring the NNPC and passing immediately the Petroleum Industry Bill (PIB) will seek to ensure equitable management and allocation of oil resources.
The sharp decline in oil prices exposed the paucity of non-oil fiscal revenue, which is about 4.0% of non-oil GDP, three times lower than in peer economies and ten times lower than in some OECD countries. According to estimates, increasing non-oil fiscal revenue to 10% of GDP will yield about N9.5 trillion, compared to N3.4 trillion in 2014, and close to gross federally collected projected revenue of N9.8 trillion in 2015 budget. Doubling VAT rate from 5%, one of the lowest in Africa, and improving collections efficiency by a third by tightening exemptions and increasing compliance, VAT revenue could triple to N3 trillion. Our Corporate Income Tax rate is comparable to peers, but its revenue as a ratio of GDP is half of peers due also to low tax collections efficiency and abuse of tax holidays. Nigeria will also face revenue constraint arising from harmonization of customs and excise tax within ECOWAS.
All revenue generating and collection agencies including the FIRS, Customs and NNPC should remit their entire revenues to the Federation Account. Raising non-oil revenues will require increasing tax rates as well as broadening the tax base of non-oil GDP through an enhanced tax administration reform of collections, compliance and enforcement. The burden of taxation should, however, fall more on the wealthy with an enhanced progressive tax structure.
Over the long-term, improving the efficiency of productive resources will be needed to growing a dynamic market economy capable of sustaining the welfare of a majority of the people within a social democratic state. The incoming administration is targeting GDP growth-rate of 10-12% annually, nearly three times the most recent growth rate. It is difficult to achieve this with a capital expenditure of 10% of GDP, the lowest among the BRIC and MINT countries and compared to over 30% in Indonesia and 45% in China. Inadequate infrastructure alone cuts economic growth by more than 2%, while electricity shortage increases business costs by over 15%.
The administration plans an infrastructure spending program of N18 Trillion to construct 5,000 km of super-highway and up to 6,800 km of modern railway; and N5 Trillion for electricity; and N100 billion for petroleum refinery. In addition, N16 Trillion will be required for a National Mortgage Scheme. Of immediate priority is reviving the petroleum refinery to perform to optimum capacity. Financing the infrastructure programs requires an investment of over N5 trillion a year. As public sector investment alone is not sufficient, public private partnership, commercialization, and privatizations, Diaspora Infrastructure bonds, and long-term external financing from multilateral and bilateral sources will be crucial to meeting the financing requirements.
While economic diversification is underway with services sector contributing half of GDP, premature de-industrialization is manifested in the farm-to-factory move being by-passed for hawking and informal retail trade services in cities. Nigeria has the smallest share of manufacturing to GDP among the BRICS and MINT countries. It is essential to boost agriculture productivity and triple the share of manufacturing, especially from small scale enterprises, value added to GDP from about 7% to over 20% by enhancing synergies with metals and mineral processing, agri-business, food processing, and petro-chemical processing through appropriate investment climate incentives and industrial vocational skills. The APC plans to tackle economic diversification and ensure labour-intensive manufacturing and agro-processing with and SMEs Loan Guarantee of N10 trillion or $50 billion and Agriculture commodity trade board of N250 billion or $1.25 billion.
The vision of a social-democratic welfare state with a dynamic market economy is a noble one. The immediate social inclusion equity programs for achieving it partly work through fiscal stimulus to consumption and aggregate demand, Keynesian economics style. On the other hand, the efficiency related programs are geared towards removing long-term supply side constraints to the economy through structural reforms for competitiveness and enhancing infrastructure investment-led productive growth.
The total cost of implementing the APC manifesto amount to about 60 trillion naira or $300 billion (60% of GDP), with the equity portion accounting for a fifth; the efficiency portion (38%) and guarantees (42%). The equity portion alone requires an annual expenditure of about 12 trillion naira. The total annual revenue for the Federation account is less than 10 trillion naira. From reducing the cost of governance, the effectiveness pillar could yield one trillion naira. The extra burden will then fall on the economy pillar with efforts made to plug the fiscal leakages from oil revenue and more non-oil revenue will need to be raised from increasing the tax rate, broadening the tax base, and increasing collection efficiency.
Buharinomics faces a quadrilemma in trying to achieve equity, efficiency and effectiveness in a slowing economy. As the administration faces difficult short-to-medium term policy choices and opportunity costs requiring trade-offs with long-term consequences, prioritization and sequencing of its policies and programs are in order.
1. Microeconomics of Banking and High Lending Rates
2. The Central Bank's Capitulation
8. 9. 10. Standard & Poor’s Good News on Nigeria
11. Halfway to Vision 20: 2020
12. Best Practices in Central Banking
13. Monetary policy committee at crossroads