ECONOMY - 07 JAN 2020

Four economic insights from the 2020 Nigerian budget

Four economic insights from the 2020 Nigerian budget
President Buhari Addresses European Parliament.   Source: European Parliament via Flickr

Every year, the narrative surrounding Nigeria’s primary fiscal tool, the Appropriation Bill, is typically the same: President submits proposed budget - Nigerians worry about the late submission, rising debt service and low allocation to critical sectors - Senate approves budget - President assents - budget is implemented. 

This year, the budget was submitted on time but the other stories remain the same. Media coverage regarding the 2020 budget is currently centred on finance-related issues such as the 2.5% increase in budget size by the Senate to ₦10.59 trillion, our rising debt service costs, and arguments on whether Nigeria has a debt or revenue problem. 

What has been missed in most discussions is pure economics, specifically what the 2020 budget tells us about the economic policy or direction the government is going for this year.

To fill that gap, we look at four insights:

 

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1.  President Buhari: Man of the people

It is easy to tell the type of economist Buhari is from the budget tag line, ‘Sustaining Growth and Job Creation’.

During his first term as President, Buhari was the champion of providing economic prosperity through social intervention programmes. This was evident in the introduction of schemes such as the Home-Grown School Feeding Programme, N-Power and Trader Moni.

Today, there are already telltale signs that we are likely to see a consolidation of these programmes during his second term; the launch of a Ministry of Humanitarian Affairs, Disaster Management and Social Development, his commitment to ‘lift 100 million Nigerians out of poverty in 10 years as well as earmarking ₦430 billion (4.06% of total budget) for Special Intervention Programmes.

The World Bank projection of an increase in Nigeria’s poor population by more than 30 million in 2030 could likely be the push Buhari needs to intensify his intervention schemes despite calls of current flaws in his approach. 

 

2.  Much ado about VAT 

Since news of a proposed hike in VAT (from 5% to 7.5%) broke, consumers and corporates have braced themselves for tough times in 2020. More so now that President Buhari has confirmed the VAT increase as a key funding strategy for health, education and infrastructure programmes. 

While the groaning of consumers is valid, it is important to understand a few things about taxes:

First, there is no country in the world where taxes are not a fundamental part of revenue collection. Government deficits are funded by either borrowing or taxes. And because of our reliance on oil revenues, Nigeria has slacked in terms of using taxes to fund expenditure. Our VAT to GDP ratio is 0.8% compared to Ghana (4.6%), South Africa (7.0%) or Kenya (4.2%). 

That said, to effectively boost Nigeria’s tax revenue two key issues must be addressed – the regressive nature of taxes and the trust deficit. We see from the proposed 2020 budget that the government has structured the VAT system in such a way to address the first issue. Increasing the turnover threshold for VAT registration to ₦25 million per annum effectively means that pressure is off small businesses who would otherwise have been challenged with the decision to pass the burden on to consumers or not. Also, the list of VAT-exempt food items was expanded to include bread, rice, fish, and yam amongst others. The exclusion of these commodities from a VAT hike would ease the pressure on consumer disposable income and ebb fears of its inflationary impact. 

Sadly, the budget is unable to address the trust deficit between the tax-paying Nigerians and the government. For good reason, Nigerians don't trust the government with their money - hence we have a high tax avoidance and evasion rate. Solving this problem would require structural reforms as well as government transparency and accountability.  

 

3.  Move over Economic Recovery & Growth Plan (ERGP), there’s a new plan in town

The current development plans for Nigeria – Vision 2020 and ERGP – have now expired.

Targets were not met in those plans. For instance, Nigeria’s real GDP growth was targeted at 2.93% in the budget, a far cry from the 7% 2020 growth target in the ERGP. The same applies to the inflation rate (10.81% in the 2020 budget versus 9.9% in ERGP) and oil production (estimated at 2.18mbpd in the budget compared to 2.5mbpd in the ERGP).

The reason for Nigeria’s failure to meet the set targets could be one of two reasons – overambitious targets and/or a failure to plan. Whatever the case, Buhari directed the Ministry of Finance, Budget and National Planning to draft a successor medium-term development plan. The Minister in charge, Mrs Zainab Ahmed, has already hinted at the possibility of two new development plans to succeed the ERGP – a medium-term Economic Growth Acceleration for 2021-2024 and a longer-term Vision 2040.  However, without a proper assessment on why the outgoing plans failed, the words of George Santayana come to mind, Those who cannot remember the past are condemned to repeat it’.

 

4.  Double-digit inflation rate assumption – has the monetary team failed us?

The proposed 2020 budget has been formulated against an inflation benchmark of 10.81%. This is compared to 2019’s budget when the FGN’s single-digit inflation target (9.98%) was roughly in tune with the CBN’s target of 6% - 9%. This begs the question, what has changed? Can the Central Bank of Nigeria (CBN) not meet its targets this year?

In the short term, the border closure is one reason for higher inflation. Since the borders were closed in August, headline inflation has jumped from 11.0% in August to 11.9% in November.

The CBN, whose primary responsibility is price stability, is of the view that the uptick in commodity prices from the closed borders is only temporary. The CBN believes that their range of agriculture initiatives will boost the local supply of commodities and fill the supply gap created when the smuggled supply is cut off. 

So why is the Government not as optimistic about the inflation outlook for 2020? This may be because the payment of the new minimum wage and its arrears, as well as the increased lending by banks to meet the new loan-to-deposit ratio would result in ‘too much money chasing too few goods’ - aka inflationary pressures.  

Both the federal government and the CBN are in for an interesting 2020. For the monetary team, their hands will certainly be full as they grapple with inflationary pressures while trying to boost growth and finance the agriculture and creative industries. For Buhari and team, getting Nigeria out of its current slow pace of 2% in the short term and boosting long term capital investment at the same time will be the order of the day. One can only hope that this time next year we won't be discussing the same old problems in the 2021 budget.

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