A few slices from the fiscal cake

After a prolonged tug of war between the Senate and the Presidency, Nigeria’s N6trn budget for this year was signed into law in May. The budget shows retained revenue projected at N3.86trn, resulting in an assumed deficit of N2.2trn. The FGN expects oil revenue for the year to hit N820bn. Given the current level of oil prices which is around the average oil price projection of US$38/b in the budget as well as lower production due to sustained sabotage of pipelines in the Niger Delta region, the revenue target seems like a tall order.

Proper fiscal housekeeping is required to keep the economy afloat in the near term and drive it towards double digit growth in the longer term. The government aims to earn N1.45trn from non-oil revenue this year. Based on data from the CBN, non-oil revenue hit N603bn in the first quarter; companies income taxes accounted for 29% of this.

For the economy to grow meaningfully over the longer term, SMEs need to thrive. Infrastructure remains a major roadblock inhibiting the growth of this segment of the economy, however. For example, the epileptic power situation feeds heavily into operational costs. Improved power supply should drive operational expenditure down, which would effectively increase taxable income.

Nigeria’s energy demand is well over 12,000MW. Due to current gas supply constraints, energy output has dropped to as low as 2,984MW. Large manufacturing companies depend on private power generating systems for their production processes. This is not sustainable for SMEs. Capital expenditure for this year is estimated at N1.4trn and according to the ministry of finance, N247.9bn has already been released to fund infrastructure projects. The FGN intends to spend N9.2bn on eight specific power projects this year.

Turning to revenue collection, the Federal Inland Revenue Service (FIRS) is at the forefront of managing the country’s fiscal responsibility to boost non-oil revenue collection. According to the agency, the total tax base for individuals in Nigeria is 10 million (about 5% of the population); evidently there is a shortfall. Nigeria currently collects only 7% of its GDP in tax, compared with the 20% average for emerging market economies. To improve collection as well as widen the tax net, the FIRS recently rolled out three electronic tax payment platforms. This will enable taxpayers remit their taxes with ease via online payment portals. In addition to this, it will reduce the cost of administration, collection and create a database for monitoring compliance.

The agency’s revenue forecast for this year is marginally higher than that in the budget at N4.9trn. The agency’s tough stance is paying off as over 70% of their target has already been achieved in the first half of the year. Over 350,000 new taxpayers have been included to the system.

Another innovative strategy to enhance collection can be seen in a new partnership between Uber Nigeria and PricewaterhouseCoopers (PwC). This is expected to assist with closing the transport industry tax gap.

As for VAT, the sales tax rate is currently 5%, compared with 14% in South Africa and 18% in Rwanda. There has been some public debate on doubling the VAT rate; the IMF recommended a hike to 7.5%. Last year VAT collection amounted to N779bn. Essentially, VAT is shared among the three tiers of government, with state governments receiving the largest share.

Unlike the FIRS, revenue collection from Customs has plummeted. The agency lost N138.9bn between January and May. It only earned N312.9bn. The CBN’s forex policy has been cited as a major reason for the drop. The policy affects imports adversely; with lower import volumes, import duty shrinks. The FGN has disclosed that it is investing about N20bn in equipment upgrades and capacity enhancement to boost the efficiency of customs collections. If import volumes remain low, this is likely to have minimal impact.

A recurring issue affecting Nigeria’s fiscal standing is that of leakages through unnecessary expenses. Last year the federal ministry of finance set up an efficiency unit modelled after that which was established by the British Prime Minister Margaret Thatcher in 1979 with a mandate to review and rationalise the overhead expenditure of the FGN. On travel expenses alone, N4bn in annual savings is projected.

To put these frivolous expenses into perspective, last year N64bn was spent on travel; meanwhile, only N19bn was spent on road construction. Furthermore, 40% of recurrent expenditure is on payroll. Based on official data, there are 1.2 million civil servants; through the elimination of ghost workers, about 43,000 payroll entries were removed. This translates to a corresponding average reduction in the monthly wage bill of N4.2bn.

Another area that has gained a lot of attention is recoveries. Last year the authorities began pursuing custodians of misappropriated public funds. It seems a pragmatic approach has been adopted. As at June, over N300bn had been recovered. This is slightly lower than the target of N350bn projected for this year in the Medium Term Expenditure Framework. However, the bulk of the recoveries is non-cash items.

Non-oil exports can also contribute significantly to Nigeria’s revenue. Unfortunately, it is largely untapped. It accounted for just 6% of total exports in the final quarter of 2015 on a balance of payments basis. The figure would be higher if products smuggled out of Nigeria’s porous borders are recorded.

The CBN has set aside N500bn for loans to non-oil exporters. Loans for up to three years will be granted at a maximum interest rate of 7.5% per year while those with a tenor above three years will be granted a maximum rate of 9% annually. This facility should improve export financing and offer opportunities for exporters to scale up their businesses.

At the state government finance level, Lagos stands out as the poster child with internally generated revenue (IGR) at N271bn (in 2014). Aggregate IGR grew by 37% y/y to N801bn in 2014, with Lagos accounting for 34% of this figure; Rivers, Anambra, Kano and Ogun accounted for 11%, 3%, 4% and 4% respectively.

Given that the oil price has steadily declined since mid-2014, states have no choice but to reduce their dependence on the oil-driven monthly distributions from the Federation Account Allocation Committee (FAAC) by bolstering their IGR. Since the start of this year, the FAAC pay-out has fallen short of the projected pro rata monthly average of N477bn set for 2016 as the net distribution from the federation account and the VAT pool combined is projected at N5.72bn.

Arrears in salary and pension payments by state governments have soared as a result of the oil price slide and fall in FAAC distributions. In response to the arrears, the FGN is now in the process of disbursing the third programme of fiscal relief. This is the N90bn loan facility available to states which have been able to meet a set of conditions and applied for support. It would be shared among qualified states at a 9% interest rate. Given the financial crisis that most states are facing, more transparency on their loan books is expected as the need for fiscal discipline is imperative.

Efforts being made towards achieving this year’s non-oil revenue target are laudable but a lot more needs to be done in the second half of the year to achieve at least 80% of the total revenue target. The minister of budget and planning disclosed that only 55% of the total revenue target (oil and non-oil) for the first quarter has been achieved. The attacks on oil facilities in the Niger Delta region are to blame for the poor revenue collection.

Given the dire situation in the oil sector, the government needs to cling on to every possible stream of revenue from the non-oil sector. The anthem of diversification has grown louder. However, setting up basic infrastructure required to drive this has remained sluggish. An industrial take-off is required to boost productivity in the non-oil economy; private sector participation is also essential in expanding this non-oil economy. Nevertheless, participation will remain low until structural issues are eliminated.

For cohesive movement forward, Nigeria’s monetary and fiscal policies need to complement each other. So far, monetary policy has been prominent. More fiscal policy tools need to be deployed in order to spur growth and lift Nigeria’s economy out of a possible recession.

• Chinwe Egwim Macroeconomic & Fixed Income Research Analyst at FBN Capital.