Gaining few, battling for many in 2020 budget plans
Analysts see 43% revenue shortfall, increased deficit, borrowing
The country’s pitfalls and controversy over its year appropriation is indeed, unending. If it scales through the usual test of frivolous items, the hurdle of bloated provisions come up. When it appears that the total budget package is huge, then recurrent expenditure plans assumes the posture of elephant in the house. The income projections, correspondingly, will become more doubtful.
In the last five years, we have been doing deficit budgets and it has been on steady increase, with an outlook that portends “no end in sight”.“There has not been a clear departure from what used to be and what is happening now, except the presentation of the 2020 budget in October. Many will call the observations pessimism, but the next cycle of budget will also end as usual. You cannot do the same thing over and over and achieve a different result.
Revenue projections have been failing over the years, just as the acclaimed implementation of borrowed funds have failed, because they not invested, but consumed. Consumption does not regenerate. So, where are the regenerative projects that Nigeria will be getting the revenue plan, except the ongoing tax hunt on already burdened taxpayer,” an economist, Emma Wagbo, said.
The 2020 appropriation plan, christened: “Budget of sustaining growth and job creation” and projected at N10.33 trillion, is riding on probability like the previous ones, not possibility.
The proposal represents an 11 per cent increase when compared to the 2019 appropriation of N9.12trillion, with retained earnings estimated at N8.155 trillion, leaving a deficit of N2.18 trillion. The deficit is 1.52 per cent of the nation’s Gross Domestic Product (GDP).Granted, the deficit remains below the stipulated three per cent to GDP limit yearly, as contained in the Fiscal Responsibility Act, but the weight of the accumulated obligations far beyond three per cent.
The key assumptions of the proposal are the benchmark price of $57 per barrel of crude oil; daily oil production of 2.18 million barrels per day (mbpd) and an exchange rate of N305 per dollar. The real GDP is expected to grow at 2.93 per cent while inflation rate is projected at 10.81 per cent.
Statutory Transfers will take N556.7 billion; N2.749 trillion is for Debt Service; N4.88 trillion is for Non-debt Recurrent Expenditure; while N2.145 trillion is for contribution to the Development Fund for Capital Expenditure for the year.
First, the debt servicing is accounting for 27 per cent of total expenditure and 22 per cent higher than N2.3 trillion approved in 2019 budget. It would be worth knowing that 74 per cent of the N2.7 trillion will be used to service domestic debts. As the country contracts more debts, this provision will continue to rise. Unfortunately, the provision is bigger than capital expenditure that is needed to help in servicing debts.
Conversely, consumptions, also known as Non-Debt Recurrent Expenditure, accounted for 47 per cent of total spending at approximately N4.9 trillion, with personnel and pension costs accounting for N3.6 trillion, representing 74 per cent of non-debt recurrent expenditure, due to the agreed minimum wage.
Generally, there is a significant increase in recurrent expenditure from N6.8 trillion in 2019 to N8.2 trillion in 2020, while analysts are already apprehensive that the revenue target will likely not be met, with attendant effects on capital expenditure implementation, coupled with the challenges in the procurement system.
The sustained contradiction between the Federal Government’s mantra of cutting down waste, improving efficiencies and removing ghost workers from the payroll on the one hand and its relationship with the rising recurrent non-debt expenditure is indicting.Actual recurrent non debt expenditure was N2.511trillion in 2016, N2.76 trillion in 2017 and N3.103trillion in 2018. For the half year in 2019, it has reached N2.050 trillion, which is 21 per cent more than the pro-rated value of recurrent non-debt expenditure in the 2019 budget.
This increment to N4.88 trillion in 2020 cannot be the sign of a system that is taking steps to remove waste and inefficiencies. Even though a new minimum wage is kicking in, efforts should be made to reduce the cost of governance through the implementation of fit and good practices contained in the Oronsaye Committee Report on the restructuring of federal MDAs.
For the Managing Director of Afrinvest Securities Limited, Ayodeji Ebo, in the weekly market update, the quick submission of the bill to the legislators should give ample time for deliberations and hasten final approval, especially as the current leadership of the National Assembly is supportive.He noted that the budget allocations and the minuscule sizes suggest a shaky foundation that could affect progress, although the finance bill, which proposes the increase in Value Added Tax (VAT) rate from five per cent to 7.5 per cent, as well as business friendly tax reforms may be supportive.
“The 2020 budget ignores lessons from the recent dire straits of the Federal Government and budget performance. The revenue projections underperformed actual collection by 47.8 per cent in 2017 and was little changed at 44.7 per cent in 2018 and 41.6 per cent as at first half (H1) of 2019. Although the recent trend in core non-oil revenue has been positive, the projected increase is steep and unlikely to be achieved.
“The projections for non-core, non-oil revenues such as independent revenue, asset sales, recovery and fines, which have historically underperformed, are ambitious. Looking at 2017, 2018 and H1:2019 budget performance, total collection from the non-core, non-oil revenue lines was zero if we exclude independent revenue. We believe these unrealistic assumptions set up the budget for poor implementation.
Meanwhile, the N2.5 trillion or 24.3 per cent allocations to capital spending is unsupportive of the boost needed in infrastructure. Notably, this capital allocation falls short of the 30.0 per cent target stipulated in the Economic Recovery and Growth Plan (ERGP).“The budget deficit is projected at N2.18 trillion, but our estimate of N3.8 trillion exceeds this by a considerable margin, as we expect revenues to underperform by 43.9 per cent.
In the 2018 and 2019 federal budgets, Nigeria proposed to earn revenue from the proceeds of oil assets ownership restructuring. But in the two years, not a kobo was earned as no steps were taken to kick-start the process of restructuring. Surprisingly, in the MTEF 2020-2022, this revenue head was omitted.
“Has FGN abandoned the idea? There should be clarity and consistency in policy implementation considering that Nigerian extant Petroleum Policy canvasses this divestment. Again, is it reasonable to expect the divestment process to be concluded before the end of 2019 when it is yet to start by October 2019, considering that the process of restructuring and divestment will take a fairly long period of time?, Martins Eke of the Citizens Wealth Platform queries.
For the Centre for Social Justice (CSJ), the early presentation of the budget estimates and the legislators’ decision to approve the plan before the middle of December 2019 to ensure the restoration of January-December fiscal year in line with the provision of the Financial Year Act is welcome development.
The group also lauded the steps taken to renegotiate and increase revenue accruals to the treasury on production sharing contracts under the Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act through a new Bill in the National Assembly. “This is expected to fetch by the estimation of the Nigerian Extractive Industries Transparency Initiative, a minimum of N576billion ($1.6billion) in the year 2019,” the Lead Director of CSJ, Eze Onyekpere, said.
Sustained Borrowing and Stuttering Revenue
Another principal issue in the 2020 plan is the deficit projection at N2.18 trillion, which would be financed mainly by new foreign and domestic borrowings, privatisation proceeds, signature bonuses and draw-downs on loans secured for specific purposes.By the end of June 2019, a deficit of N1.35 trillion had been recorded in the implementation of the 2019 budget, representing 70 per cent of the budgeted deficit for the full year, and the deficit was recorded at a time not a single kobo has been spent of capital expenditure for the year, then the extent of the proposed deficit financing for 2020 raises very critical challenges. It is like sinking further into a slippery hole.
“This will further add to our already high debt profile of $81.27billion. The deficit is 21.10 per cent of the overall expenditure of N10.33 trillion. Also, the deficit is 26.7 per cent of the projected revenue of N8.155 trillion,” Onyekpere said.
The yearly argument and political intrigues that play out in fixing the oil benchmark for budget’s revenue projection seem to override realities, as opinions still remain divided over the choice of $57 per barrel, when uncertainty in the international market, geo-political tension and trade wars are ongoing.
All three of the major forecasters – the Organization of the Petroleum Exporting Countries (OPEC), International Energy Association (IEA) and the U.S Energy Information Administration (EIA) generally see non-OPEC production growing by around 2mbpd in 2019 and by even more next year.U.S. shale oil accounts for most of the total supply increase, but new projects in Norway, Brazil and Australia will also contribute to the increase in non-OPEC supply. Also, market sentiments do not support an expansion in demand. In fact, the growth in demand for OPEC oil specifically is projected to slow down next year.
“The $57 benchmark seems overtly optimistic considering the projected dynamics of the international oil market. The draft MTEF 2020-2022 had stated that ‘a lower benchmark oil price of $55/b (against $60/b for 2019) is assumed, considering the expected oil glut in 2020, as well as the need to cushion against unexpected price shock. There are strong indications of an oversupplied market in 2020.’
“Thus, the oil price projection was not guided by the cautionary approach to plan on the conservative side and if the price is exceeded, to save same in the Excess Crude Account (ECA) and later budget for it. The fact that ECA has little or no funds left in it shows that the country has no buffer to fall back upon,” Onyekpere added.
Investigations revealed that 2018 Revenue Framework projects that Nigeria will produce 2.18mbpd. This is less than projections in previous year’s (2017) 2.3mbpd. However, in 2018, the actual was 1.86mbpd, while data from the first half of 2019 indicates actual production as at June 2019 of the same 1.86mbpd.
Further, Nigeria’s quota from the Organisation of Petroleum Exporting Countries (OPEC) is currently 1.774mbpd. This projection of 2.18mbpd also seems overtly optimistic and may not materialise. There has been no change in circumstance to warrant the new production volume.“Oil revenue was below target by 41 per cent as at June 2019 and in 2017, it had a negative variance of 47 per cent and in 2018, it fell short by 23 per cent. Thus, the expectation from oil revenue seems not to be founded on empirical evidence and may need to be downwardly reviewed,” the Programme Officer, Good Governance Office, Fidelis Onyejegbu, said.
Generally, our revenue projections have severally missed the mark over the years. In 2016, revenue projections fell short by 23 per cent; in 2017, it fell short by 47.73 per cent and in 2018 by 45 per cent. This indicates that overall, a good part of our revenue projections has not been based on empirical evidence. “If projected revenue in 2018 was N7.1trillion and we missed the mark by 45 per cent and have also missed the mark by 30 per cent in the half year of 2019, the further increase in projected revenue to N8.155trillion in 2020 seems to be hanging in the air.
“The revenue projections for 2020 should have been greatly influenced by the trend and actuals of 2018 and 2019 except there has been a dramatic change in economic circumstances warranting the new projection,” he added.Nigeria’s tax system, as a major component of the country’s non-oil revenue, has become a basket of items with varying controversy. The increase in Value Added Tax (VAT) from 5 per cent to 7.5 per cent is a welcome development considering that Nigeria has one of the lowest VAT rates in the whole world and the need to increase available revenue.
It is however imperative for the tax authorities to expand the tax net to improve compliance and increase revenue due from this source, rather than over-tax the few that are already complying. In reality, the economic situation is not supportive of improved earnings, much-less of taxable income.For VAT, Federal Government’s share underperformed by 46 per cent in 2017, by 45 per cent in 2018 and for the half year in 2019, it has underperformed by 15 per cent. However, the projection of N292.5billion for 2020 is realistic considering the increase of the rate from 5 per cent – 7.5 per cent.
Generally, while the 2020 budget projections on tax appear hopeful, pervading low confidence in governance, challenging economic situation, natural resistance to emerging multiple taxes and a seemingly uncoordinated tax system cannot be discounted easily.The Partner/Head of Tax and Corporate Advisory Services at PwC, Taiwo Oyedele, while speaking on the general issues of taxation, including the controversial VAT, said that government would only need to lead by example and ensure that all its agencies fully comply in their remittances collected from their contractors.“Ensure transparent reporting and efficient utilisation of the revenue for public services and infrastructure to act as palliatives and catalyst for growth.
“A fundamental principle of taxation is that people should pay according to their abilities. The question is, can everyone afford a 7.2 per cent VAT rate? The answer is NO. But are there people who should pay 7.2 per cent or more, the answer is YES,” he said.A Fellow of the Chartered Institute of Taxation of Nigeria, Dr. Titilayo Eni-tan Fowokan, lamented that other tax avenues for government like the much-touted luxury tax was suspended, while no one is sure if the new Minister of Finance will resuscitate the discourse, considering that there were plans to amend the tax laws and revisit the issue of luxury tax before the end of last administration.
She advised that government should intensify efforts in monitoring the TSA framework, which seems to have helped in blocking some revenue leakages, while FIRS should ensure that taxes expected are actually based on agreed liabilities and not estimated liabilities.
“The question we should first ask ourselves is that are those tax debts actually debts owed the FIRS or arbitrary amounts assessed on tax payers which are either in dispute or estimated. With the recent collection and recovery method adopted, the FIRS may even be making taxpayers to pay taxes not actually due, especially for taxpayers whose accounts are under lien and have little or know knowledge about how tax is determined.
“If the FIRS encourages voluntary tax compliance and improve on its taxpayer services approach, there is tendency to collect more and minimise the level of Tax debts. Creation of a taxpayer friendly environment and adopting a business partner approach to tax collection will also help in managing the tax debt level.
“The attitude of non-transparency of public sector accounting amounts to lack of integrity and accountability on the part of the officials. The Ministry of Finance should ensure there is compliance with the financial regulations on expenditure and advances through enforcing accountability via the Accountant-General and Auditor-General’s offices. Sanctions should be in place for any personnel that breach the controls,” she said.
An economist at FSDH Merchant Bank Limited, Ayodele Akinwunmi, said that while the government needs to increase its tax base, he raised concerns over the move that looks like creating more burdens on the few compliant institutions, in the midst of difficult environment.While the hurdle of budget presentation has been scaled and the commitment of the lawmakers for speedy passage of the plan received, the remaining and immediate challenge is thorough vetting of the items and possible reviews, to avert the inherent distortions that would soon crystalise.
Expeditious steps should be taken for the upward review and increase in accruals to the Federation Account from production sharing contracts under the Deep Offshore and Inland Basins Production Sharing Contract Act. This can be done before the end of the first quarter of 2020.
The revenue projections should be based on empirical evidence and trends from recent years, taking into considerations innovations from revenue collection agencies, as wells as change in social, environmental and economic circumstances. Realities must lead optimism.The lawmakers should conduct proper investigations on the electronic collection of stamp duties domiciled with the Central Bank of Nigeria to ensure accountability and increase revenue base. It should insist on remittance of accrued stamp duties from previous years to the treasury.Any extra monies accruing from any of the recommendations made above should be channeled to capital expenditure, while a mechanism for strict implementation of capital expenditure against all odds, should be enacted.