Nigeria’s Federal Government (FG) has a revenue problem. Don’t just take my word for it, though. Both the Finance Minister and the Director of the Budget have said the same on separate occasions in the last year. Only yesterday, the Nigerian President, Muhammadu Buhari, stated: "What we earn from oil does not meet our needs." As he re-submitted a request to the Senate seeking approval for a $29.96 billion loan.
The federal government’s ability to invest in the country, be it physical or human capital, relies on raising enough money to meet those needs. Plus, the government has to make enough money to keep up with its expensive civil service and rising debt servicing costs.
So, how did we get here?
What does a revenue problem look like?
In total, the FG made ₦9.5 trillion in 2018. Sounds like a lot, right? Well, you can’t make sense of revenues without thinking about expenditure and the FG’s revenue does not cover all of its expenditures; the rest is funded by debt. According to the Central Bank of Nigeria's (CBN) data, the deficit has been growing since 2014, mainly driven by a ₦3.3 trillion rise in expenditure. Meanwhile, revenues have been rising in the last few years, but are still below the ₦10 trillion collected in 2014.
There’s another part of this story: budget performance. Each year, the FG sets aside some money from its earnings to spend on the economy, and this proposed spending is expressed in the annual budget.
That’s the thing though, it’s all proposed. The 2020 Budget proposes a 7% increase in government revenue but that does not mean it will actually happen. As at June, the government had only achieved 70% of its revenue target for that period, an outcome that has become as predictable as an old Nollywood script.
This is problematic as if budget revenue underperforms then budget spending will similarly fall short. Let’s think through what might not get funded if the government does not hit revenue targets. Salaries will likely get paid and the government’s debtors will definitely get what they are owed. It seems to follow that government transfers such as welfare and pension schemes as well as capital expenditure on infrastructure projects will bear the brunt of continued poor budget performance. No surprise then that underspending on capital projects is mainly caused by over-optimistic budgeting.
What’s going on with revenues?
FG revenues come from two sources: oil and non-oil. The former has historically been the largest contributor; CBN data shows that 2016 was the only year since 1981 where non-oil revenues were larger than oil revenues—hence our title as an oil-dependent economy.
Oil revenues hit ₦8 trillion in 2011 and have never been as high since. The big drop happened in 2015 when oil revenues fell from ₦6.8 trillion to ₦3.8 trillion following a plunge in oil prices and a subsequent drop in oil production due to militants in the Niger Delta.
Oil prices were above $100 per barrel prior to the collapse; now, we have an assumed price of $57 per barrel for the 2020 Budget. Moreover, future projections are equally modest. The United States Energy Information Administration (EIA) expects oil prices to average $60 in 2020 and the World Bank expects $70 in 2030. So, oil revenues will grow in the future, but probably not fast enough to solve our revenue problems.
Furthermore, the price of oil is out of the government’s hands. Meanwhile, non-oil revenue is very much in their control, and the government knows it. It has already started the process of increasing VAT and royalty rates from some oil contracts, while the Senate has even suggested a communication services tax.
Taxes are typically the primary source of government revenue, accounting for 94% of federal revenue in the U.S., 98% in South Africa, and 80% in Ghana. Nigeria’s Federal Inland Revenue Service (FIRS) has apparently doubled the number of taxpayers since 2015, but we haven’t seen a corresponding increase in non-oil revenues. Nigeria has always had plans to boost tax collection but without much success. The finance ministry tried to raise $1 billion through a tax amnesty scheme in 2017 but met only 8% of its target. Part of the problem is that a big part of Nigeria’s economy is informal—as much as 65%, according to the IMF.
Nigeria struggles to collect taxes
Almost every statistic on taxes shows that Nigeria lags behind the rest of the world. Less than 30% of the labour force pays taxes. The latest Tax to GDP ratio estimate released by the OECD in 2016 was 6%, compared to 29% in South Africa, 18% in Ghana, and 15% in Egypt. Research from the International Monetary Fund (IMF) suggests that 15% is the required ratio for economic growth and poverty reduction.
The Nigerian government's current scramble for taxes was predictable. Research shows that when natural resource revenues fall, states improve efforts to increase tax receipts. But Nigeria’s shoddy tax system is linked to its reliance on oil. A World Bank report suggests oil dependence has resulted in a weak tax system along with little economic diversification. An Oxford University study explained this further, highlighting that “political behaviour is patterned around rationales of access to national petroleum wealth.”
Put simply, it is easier for politicians to share oil revenue than to work on widening the tax base and fixing tax avoidance. In addition, corruption drives higher levels of tax evasion. This makes sense: I am less likely to pay taxes if I think they will be squandered by corrupt public officials.
We aren’t the first
Greece has gone through a rough economic patch in recent years, requiring a bailout by the European Union and the IMF. As part of its bailout conditions, the Greek government was forced to increase taxes and cut spending, so it created an independent agency in charge of government revenues. Tax evasion was tackled by auditors who carried out random inspections and cash-less transactions were pushed to allow the government to collect more VAT. The jury is still out on whether these measures helped or harmed its economy, but the government now has more leeway to negotiate planned budget cuts.
Closer to home, the Tanzanian government partnered with the World Bank on its revenue drive. The government implemented several policies to reform its tax system, including the use of technology and increasing taxpayer awareness. Revenues subsequently rose by 21% between 2007 and 2011, while the Tax to GDP ratio increased from 10.8% in 2005 to 14.6% in 2010.
These experiences show that Nigeria can improve its non-oil revenues, with the right mix of political will and smart policies. Increased tax revenues, however, must not be accompanied by reduced long-term welfare. Higher taxes will be unacceptable if it doesn’t come with improved governance that results in tangible welfare benefits for Nigerians.
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