Debt, deficit narrow budget funding options before next administration
With the Federal Government exhausting its debt window, the only option available for the next administration is to find pathways for sustainable budget funding, experts have said.
The Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, a professor of Economics, Ike Ife and a member of the Central Bank of Nigeria’s Monetary Policy Committee, Prof Adeola Adenikinju all submitted that a radical departure for budget funding options, apart from unbridled borrowing is the way to go.
Indeed, the 2023 appropriation Act presents the widest deficits in the history of budgeting in Nigeria.
President Muhammadu Buhari’s administration has a fiscal position with external loans that is $11.2 billion higher at $39.6 billion than what it was in 1999 at $28.04 billion because the government has operated a fiscal strategy that is based on debt to fund budget deficits.
The sinking fund of N6.5 trillion, which represents 29 per cent of the budget, is proof that the government needs to re-think sourcing N8.8 trillion from bilateral and multilateral development partners, as well as the domestic bonds market.
Emmanuel thinks that for Nigeria to lessen the risk it is exposed to, the Senate needs to suspend the Pioneer Status Incentive established by the Income Tax Relief Act (Number 22 of 1971, as amended in 2011 & 2014) that grants qualifying companies company income tax waivers for the first five years.
He added: “The Senate needs to suspend the export expansion grants scheme under the Export Incentives Miscellaneous Provisions Act (Number 25 of 2003) that gives promissory notes to companies that export from Nigeria. This is because if you look at the Internal Debt Stock, Promissory Notes held by companies, as incentives converted from Export Expansion Grants are N514bn or 2.39% of the total internal debt stock.
“The Senate needs to suspend tax incentives due to companies as waivers due from import duty under the Industrial Incentives Act. Changing from a fixed to floating exchange rate model to unify the rates, will raise government revenues by 50 per cent that are due from oil receipts, given that DSDP on PMS subsidy has its days numbered. The lawmaking chambers must review mines and minerals, including oil fields, oil mining, geological surveys and natural gas from the exclusive to the concurrent legislative lists, as a means to give state governments control of their resources for exploration, production, and payment of royalties to the Federal Government.”
He further argued that this is because state governments owe 24.8 per cent of the domestic debt stock, drawing an example of Osun State with 2.5m ounces of gold owing N407 billion with a monthly N1.8 billion in interest payments from its FAAC account through an Irrevocable Payment Standing Order (ISPO).
The Dairy Hills chief added that deregulating gas prices will attract institutional capital required to build gas-gathering infrastructure midstream.
He noted that IOCs require to offtake gas from well-heads in line with the associated gas re-injection Act that mandates them to find elimination and utilisation for gas within 12 months of operating an oil field, explaining that this is especially because oil and gas revenue projections are 10.2 per cent of the 2023 Appropriation Act.
According to him, in looking at rebalancing the economy, the government needs to understand the nexus between monetary and fiscal policies.
He explained: “A prime example of this is the senate amending sections 24(B) of the CBN Act that expands the scope for the restructuring of Nigeria’s foreign reserves from freely floating currencies – convertibility risk – to as consideration; share of a country’s special drawing rights, number of Central Banks that hold foreign reserves with a Central Bank, the share of manufacturing output and exports. This is necessary to allow the CBN to increase the allocation of Nigeria’s foreign reserves with the People’s Bank of China from 2.7 per cent, considering China controls 26 per cent of Nigeria’s international trade volume.
“This is because, holding sufficient foreign banknotes to back the liquidity that Chinese commercial banks require for settlement is key for enabling the Naira-Yuan Swap that will in part reduce the pressure on the naira, reduce inflation, reduce the MPR and consequently reduce the cost of borrowing from aligned inflation to interest yield curve.”
On his part, Prof Ike Ife believes selling a part of the Nigerian National Petroleum Corporation Limited (NNPCL) is urgently needed to bridge the revenue gap.
He also blames the national oil company for the cash crunch the country is experiencing.
“Selling a stake in the NNPCL is a reasonable way of raising funds. The NNPC threw a spanner in the works. You do not subsidise consumption as a matter of principle, but production is subsidised to enable wealth creation. The reason I focused on selling some stakes in the NNPCL is that the signing of the Petroleum Industry Act, which is meant to transform the oil and gas industry, has not achieved that. After the NNPCL was transformed into a profit-oriented company, the NNPCL did a direct swoop of the crude, which meant that about three billion dollars the company was sending to the CBN stopped. That money is used to help the CBN fund $1.8 billion of imports monthly.
The net effect of all of these is that we now have more and more crises on the foreign exchange front. This was further exacerbated by the opacity of the actual barrels of crude oil Nigeria exports and the number of PMS we import,” he said.
He believes that expansion of the revenue base remains a veritable option for Nigeria to raise funds.
“Not just by overtaxing those that are already within the tax net, but widening the dragnet, which I think the government is already doing with a strategic revenue initiative. It is the quantum of it that is not enough to cover the gap,” he stated.
Prof Ife identified the N24 trillion CBN’s ways and means of debt to the Federal Government as another albatross.
“The overall debt will move from N43 trillion to about N77 trillion. That is the big elephant in the room and unless that is sorted through a bond swap, which is considerably cheaper at nine per cent, then there is trouble.
Otherwise, the government will be forced to pay 18.5 per cent as interest. Until we come to a sensible arrangement, the debts will have to be paid at 16 per cent, plus a two to three per cent margin, which brings the whole debt to 19.5 per cent. So, that is a lot of interest to charge on money that is as huge as 24 trillion. That interest alone will clear the treasury. Government needs to roll it into a bond and bring the interest rate down to nine per cent, which is cheaper than a treasury bill. Treasury bills are for one year. The bond will be spread over many years and it can be restructured in the future and that will give the government the fiscal space,” he stated.
According to the professor, another way of generating revenue is for the government to block revenue leakages.
“The leakages are still horrendous. For instance, waivers are way too much. I heard some lawmakers claiming that the waiver could be as high as N15 trillion. How can a waiver be higher than government revenue? With only five companies accounting for this N15 trillion is another poser that is difficult to understand,” he said.While he will not advocate a complete removal of the waivers to encourage companies to invest in the country, Prof Ife urged the Federal Government to reduce the waiver considerably by half.
Prof Ife also recognises the N206 billion proceeds that are expected from the privatisation exercise, but cautioned that the projected revenue is small considering where Nigeria is at the moment.
In a slight departure from arguments presented by Prof Ife and Emmanuel, a professor of Economics at the University of Ibadan, Adeola Adenikinju, said the attacks received by the CBN over granting ways and means more than its ceiling are misplaced and misunderstood.
He said that most countries of the world are going through excessive borrowing at the moment due to COVID-19 and the present war between Russia and Ukraine, saying to ensure that economies keep going, many countries have had to rely on debt.
He argued that when a country’s revenue dips, the option is to cut back on the expenditure and live within her means, adding, “if the Nigerian government had chosen that option, many states will not be in a position to pay salaries by now. State governments can pay salaries because funds are made available by the Central Bank of Nigeria.”
Adenikinju defended the N24 trillion ways and means granted the Federal Government thus: “If there had not been these interventions, Nigeria would have been in bigger trouble by now. Government could not have held back from spending, otherwise the economy could collapse. Some countries are borrowing more than half of their budgets. Here, Nigeria did about 2.3 per cent of her budget during the COVID-19 pandemic, which I think was very good. A lot of that money came from the CBN. Government itself was having a lot of fiscal constraints. The fact that we came out of recession very fast against what the World Bank and IMF projected was hinged on the extra money that the CBN was spending.”
He lamented that the PMS subsidy is one of the major challenges inhibiting the ability of the Federal Government to spend, saying the next President already has his job well cut out for him.
He added: “Whoever becomes the President in next month’s election must find an answer to this subsidy. Out of about six trillion naira, the country’s spending this year is almost equal to the subsidy. As a country, we must agree on how to move forward. If the subsidy continues and Nigerians do not want the government to borrow, where will the government find money to spend? The government revenue divided by population is one of the lowest in the world.”
While the new government must address the revenue challenge, Adenikinju stressed the need for Nigeria to fully develop its federal structure where most of the responsibilities of the Federal Government will shift back to the states and the provision of infrastructure taken up by the private sector.