Nigerian State Fiscal Sustainability and Resilience
Monday, Aug 23, 2021 / 10:53 a.m. / By FDC / Header image credit: The Guardian
The federal government of Nigeria spent 1.8 trillion naira on its debt service obligations between January and May of this year. This was revealed by the Minister of Finance, Budget and National Planning, Ms. Zainab Shamsuna Ahmed, during the presentation of the budget execution report. The figure represents about 98% of the overall Nigerian government revenue during the period (1.84 trn N), which is 44.6% lower than the projected revenue of 3.32 trn N for the period. This is mainly due to lower than expected oil revenues and rising debt levels. Despite the rise in oil prices, incomes have remained low as Nigeria has yet to take advantage of the increase in its oil production quota.
Budgetary shocks and adjustments: what additional leeway
Nigeria’s financial fragility means that the shocks associated with COVID-19 are large-scale and long-lasting. Weaker than expected economic performance threatens Nigeria’s ambitious income growth targets. Declining oil revenues and spending related to COVID-19 this year and last have exacerbated an existing revenue problem. The income picture means Nigeria is likely to borrow even more than originally planned to cover its deficit in 2021, while also trying to increase capital spending.
Total public debt now stands at 33.11 billion naira ($ 87.24 billion) in March 2021, up 163% from 12.6 billion naira in 2015. As a percentage of GDP, the Public debt stock is low (21.3%) but rising, giving government some leeway to borrow more. The government has also implemented an upward adjustment of its borrowing limit from 25% of GDP to 40% of GDP as part of the new medium-term debt management strategy. This is to welcome new loans to finance the budget deficit. The new limit is still well below the World Bank / IMF recommended threshold (55%) for Nigeria’s peer group countries.
In addition, the medium-term debt strategy also allows for a move from a domestic-to-exterior loan at 50:50 to 70:30. This will further deepen the domestic debt market and reduce the cross-border risks associated with external debt in a context of limited export earnings. Given the significantly higher domestic interest rate environment compared to the start of the year, this strategy is also under scrutiny.
Non-oil revenues are the key to fiscal sustainability
However, precarious tax revenues have made debt servicing decidedly difficult. At 6% of GDP, below the sub-Saharan African average of 15%, the federal government’s tax revenues are among the lowest in the world. This situation is compounded by widespread fraud, inefficient tax administration and a large informal sector. Nigeria’s debt-to-exports ratio is projected at 111.6% in 2020. The situation also calls into question the government’s ability to credibly cover its future deficits and debts given its other long-term obligations.
The external debt picture, at $ 32.86 billion, is expected to rise to approx. $ 40 billion in the coming months following the approval of $ 6.2 billion in external borrowing. Given the inevitable rise in global interest rates, as central banks in advanced economies reflect on monetary policy normalization, the costs of servicing external debt will rise and could push Nigeria’s debt beyond the limit. point of sustainability. Achieving fiscal sustainability and the government’s macro-fiscal targets will require bold, decisive and urgent action.
Grants are reverse taxes
Nigeria’s continued subsidy on imported gasoline (estimated at 5.5 billion naira per day), more than a year after attempting to completely deregulate the downstream oil sector, is perhaps its biggest revenue drain . The IMF, during its meetings from June 1 to 8, 2021 with the Nigerian authorities, stressed the importance of completely eliminating subsidies, especially in a context of weak revenue mobilization.
“The mission expressed concern over the resurgence of fuel subsidies. She reiterated the importance of introducing a 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 revenue and help address pressures on priority spending “
While gasoline subsidies are only one of many other subsidies (electricity, fertilizer, foreign exchange) that exist in Nigeria’s economic system, their removal is likely to face the greatest reluctance. The Petroleum Industry (GDP) Bill, as passed by the National Assembly, contains sections that ensure the elimination of subsidies, and it remains to be seen whether unions and society groups civilians can be convinced that it is in the best interests of Nigerians. . If and when gasoline subsidies are removed, an estimated N2trn will be added to government revenues which will be shared by the three branches of government. To put the amount in context, N2trn represents 14.78% of the total spending budget, 38.65% of the budget deficit, and more than 15 times the total federal government spending on education and health. The government will be pressured to match rhetoric to action and roll out the savings to tackle the infrastructure deficit, which is estimated by Moody’s Investor Service at $ 3 billion over the next 30 years.
Nigeria’s momentum for economic reform appears at first glance to be irreversible, but the pace of reform will require political will rooted in an ideology that leaves no room for turning back. While efforts to significantly increase the performance of non-oil revenue are well underway, they need to be intensified and sustained. Breaking the debt trap may require such drastic policy measures as increasing non-oil taxes, especially as the ability to capture the informal economy remains severely compromised. Building the non-oil economy requires investments in infrastructure which should be made possible by the removal of fuel subsidies and would put Nigeria firmly on the path to prosperity – a difficult but winnable battle.
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