Monday, August 23, 2021 / 10:53 AM /
By FDC / Header Image Credit: The Guardian
The Federal Government of Nigeria spent N1.8 trillion on its debt service obligations between January and May this year. This was disclosed by the Minister of Finance, Budget & National Planning, Mrs Zainab Shamsuna Ahmed, during the presentation of the budget implementation report. The figure represents approximately 98% of the Nigerian government's aggregate revenue within the period (N1.84trn), which is 44.6% lower than the projected revenue of N3.32trn for the period. This is primarily due to lower-than-expected oil revenues and rising debt levels. Despite higher oil prices, revenues have remained subdued as Nigeria is yet to take advantage of the increase in its oil production quota.
Fiscal Shocks & Adjustments: How Much More Room
Nigeria's financial fragility means COVID-19 related shocks are far-reaching and long-lasting. Weaker-than-expected economic performance is threatening Nigeria's ambitious revenue growth targets. The fall in oil receipts and COVID-19 related expenditure, this year and last, have exacerbated an existing revenue problem. The revenue situation means Nigeria is likely to borrow even more than initially projected to cover its shortfall in 2021, while it also attempts to boost capital expenditure.
The total public debt is now N33.11trn ($87.24bn) as at March 2021, up 163% from N12.6trn in 2015. As a share of GDP, the stock of public debt is low (21.3%) but rising, giving the government some latitude to borrow more. The government has also implemented an upward adjustment to its borrowing limit from 25% of GDP to 40% of GDP in the new medium-term debt management strategy. This is to accommodate new loans to finance the budget deficit. The new limit is still well below the World Bank/IMF's recommended threshold (55%) for countries in Nigeria's peer group.
In addition, the medium-term debt strategy also okays a shift from a 50:50 domestic-external loan split to 70:30. This will deepen the domestic debt market further and lower cross border risks associated with external debt in the context of limited export earnings. In light of the significantly higher domestic interest rate environment in comparison to the start of the year, this strategy is also coming under scrutiny.
Non-oil Revenues Key to Fiscal Sustainability
However, precariously low tax revenue has made debt servicing decidedly arduous. At 6% of GDP, lower than the sub-Saharan African average of 15%, the federal government's tax revenue is among the world's lowest. This is compounded by widespread evasion, inefficient tax administration and a large informal sector. Nigeria's debt/export ratio is projected at 111.6% in 2020. The situation is also calling into question the ability of the government to credibly cover its future deficits and debt given its other obligations over the long-term.
The external debt picture, at $32.86bn, is projected to increase to approx. $40bn in the coming months following the approval of $6.2bn in external borrowing. Given the inevitable rise in global interest rates, as central banks in advanced economies ponder the normalization of monetary policy, debt service costs on external debt will increase and could push Nigeria's debt be-yond the point of sustainability. Achieving fiscal sustainability and the macro-fiscal objectives of the government will require bold, decisive and urgent action.
Subsidies are Reverse Taxes
Nigeria's continued subsidy on imported petrol (estimated at N5.5bn daily), over a year after it attempted to fully de-regulate the downstream oil sector, is perhaps its biggest revenue leakage. The IMF, at its June 1-8, 2021 meetings with Nigerian authorities, underlined the importance of doing away with subsidies completely, particularly in the context of low revenue mobilization.
"The mission expressed its concern with the resurgence of fuel subsidies. It reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor. The mission recommended stepping up efforts to strengthen tax administration to mobilize additional revenues and help address priority spending pressures"
While petrol subsidies are just one of several other subsidies (electricity, fertilizer, foreign exchange) that exist in Nigeria's economic system, its removal is likely to face the most pushback. The Petroleum Industry Bill (PIB), as passed by the National Assembly contains sections that ensure the dis-appearance of subsidies, and it remains to be seen if labor unions and civil society groups can be convinced that it is in the best interest of Nigerians. If and when petrol subsidies are done away with, an estimated N2trn will be added to government revenue to be shared by the three arms of government. To put the amount in context, N2trn is 14.78% of the total expenditure budget, 38.65% of the budget deficit and over 15 times the total federal government expenditure on education and health. The government will come under pressure to match rhetoric with action and deploy the savings to tackle the infrastructure deficit, which is estimated by Moody's Investor Service at $3trn over the next 30 years.
No Going Back
Nigeria's economic reform momentum appears, on the surface, to be irreversible, but the pace of reform will require political will that is rooted in an ideology that gives no room for backsliding. While efforts at significantly boosting non-oil revenue performance are well underway, they need to be intensified and sustained. Escaping the debt trap may require policy action as drastic as raising non-oil taxes, particularly as the capacity to capture the informal economy re-mains severely impaired. Building the non-oil economy requires investment in infrastructure that should be enabled by the removal of fuel subsidies and would place Nigeria firmly on a path to prosperity - a hard but winnable battle.