Revenue crisis may push budget deficit above N6tr

• Govt defies IMF on new taxes
• ‘Projects must generate returns to pay back debts’
• Operators ask for review of Fiscal Responsibility Act

Revenue crisis, compounded by the coronavirus pandemic, may push Nigeria to further borrowing, therefore pushing budget deficit beyond the projected N4.28 trillion to at least N6 trillion. This comes, even as imposition of new taxes on citizens faces pushback.

Of this year’s revised N10.8 trillion budget signed by President Muhammadu Buhari, a deficit of N5.365 trillion is being funded by domestic and foreign borrowing while direct revenue funding will cover N5.158 trillion.

For 2021, the Federal Government proposed in its 2021- 2023 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), N12.6 trillion as aggregate budget for the fiscal year, reflecting a deficit of N5.16 trillion which is expected to be partly financed by a total loan package of N4.28 trillion. The deficit represents 3.62 percent of estimated GDP, well above the threshold of three percent stipulated in the Fiscal Responsibility Act (FRA), 2007.

Unless government finds new revenue sources, given the limited scope for cost-cutting as it has claimed, it will not be feasible to keep budget deficits within the three percent target set in the Fiscal Responsibility Act 2007, therefore, necessitating a review of the Act to avoid running foul of the law.

With expected rise in huge costs of about N6.1 trillion from contingent liabilities from the power sector and other sectors, as well as N3.1 trillion in preliminary estimate of revenue forgone from VAT policy choices and compliance gaps in 2019, there are worries about imposition of new taxes on already burdened private sector and citizens.

Contingent liabilities are sources of fiscal risk to Government and can cause substantial burden on budget if they crystallise.

In the MTEF/FSP for 2021-2023, the Federal Government noted that much of the increase in public debt globally stemmed from governments’ unwillingness to cut expenditures in the middle of a pandemic, with imminent recession; Private-sector / financial institutions unanticipated bailout requests; and large issuances of foreign-denominated debt that grew rapidly as local currencies depreciated. These were specifically the case in Nigeria.

Already, the decisions by the Federal Inland Revenue Service (FIRS) and the Nigerian Postal Service (NIPOST) to announce new stamp duty charges and fees have received a backlash, as many Nigerians considered the move ill-timed and inconsiderate at a time when countries were granting reliefs to citizens.

The International Monetary Fund (IMF) in its recent policy document, had urged Nigeria to slow down on its aggressive tax drive due to impact of the COVID-19 on businesses and households.

As at end of May 2020, Federal Government’s retained revenue was N1.62 trillion. The share of oil revenue was N844.97 billion (representing 100 percent above the prorated sum) while non- oil tax revenue was N439.32 billion (65 percent less performance). Company Income Tax (CIT) and Value Added Tax (VAT) collections were N213.24 billion and N68.09 billion respectively, representing 62 percent and 58 percent of the prorata. Customs collections was N158 billion (73 percent of target). Other revenues amounted to N339.51 billion, of which independent revenues was N189.31 billion.

A former President, Chartered Institute of Bankers of Nigeria (CIBN), and Professor of Economics, Babcock University, Prof. Segun Ajibola stated that the budget deficit might continue into the next one or two years because of the devastating effects of COVID-19 on global and local economies.

According to him, the exact figures and percentages will depend on many factors some of which cannot be accurately predicted. He urged government to work on improved diversification of the economy, and widening of tax net, as key measures.

On imposition of new taxes and rising liabilities, he said: “The truth of the matter is that the incidence of tax is borne by consumers. Government may forgo one type of tax by way of concession but may be compelled to levy another type of tax to make up for the concessions with a view to balancing out its budgeted figures. Of course, taxes and levies affect the disposable income of ordinary citizens and may increase the poverty index if not well balanced out.

“The only way to address mounting guarantees and contingent liabilities engendered by projects and public private partnership relating to power, rail, heavy industries is to ensure that those obligations are discharged as at when due.

“The projects must generate returns to pay back the actual debts to which the guarantees and contingencies are tied, thereby discharging government from the secondary liabilities. Otherwise, government can become primarily liable for guarantees and contingencies if there are defaults in meeting obligations as agreed.”

On his part, the Director-General of Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, expressed concerns about the country’s debt profile and its sustainability.

Although government argues that what the country is faced with is not a debt problem, but revenue challenge, he said the debt would become problematic if revenue base was not strong enough to service the debt. “It invariably becomes a debt problem.

“Apparently the debt figures have not considered the contingent liabilities listed in the MTEF document. These liabilities are projected to be N6 trillion as at end of 2020. There are also the huge liabilities of AMCON, which are not often reckoned with as Federal Government’s liability.

“The actual interest payments for Ways and Means’ finances in 2019 was put at N339 billion. But no mention was made of the principal exposure. All of these point to the fact that the debt situation is perhaps more serious than figures from the Debt Management Office.

“What is needed is the political will to cut expenditure and undertake reforms that could scale down the size of government, reduce governance cost and ease the fiscal burden on government. This much was also conceded by the authors of the MTEF,” he added.

DIRECTOR-GENERAL of the Nigeria Employers’ Consultative Association (NECA), Dr. Timothy Olawale, described the economic management style of the Federal Government as non-prudent, especially if the provision of the Fiscal Responsibility Act would be adjusted by more than 10 percent of the GDP.

He rated the ninth National Assembly low, describing it as not demonstrating credible leadership in its unbridled approval of loans and other requests from the Executive, which he said, had seriously compromised its role and significance as prescribed in the 1999 Constitution to make laws as representatives of the people.

According to him, while borrowing to finance productive and developmental projects is not bad in itself, the quantum of borrowing, in comparison to GDP and revenue of a nation, could pose great danger.

“In the quest to reduce the rising debt profile, we suggest that Federal Government should sell-off or concession its assets that are lying fallow and moribund, proceeds from them should be channeled into financing annual budget deficits. The crowding effect of borrowing locally has its tolls on the private sector in securing funds, in order to secure private sector-driven development, managers of the economy need to address this angle.

“We equally call on both fiscal policymakers and the Legislature to commence development of strategic plans on easing off deficit budgeting and endeavour to maintain the deficit within the three percent level threshold stipulated in the Fiscal Responsibility Act, 2007 over the coming years.

“We believe that Federal Government Guarantees and Contingent Liabilities add up to the increasing recurrent expenditure and debt servicing burden that Federal Government are borrowing to service, which have not translated to noticeable transformation for the economy, other than piling more burden for future generations,” he added.

Team Lead, Centre for Social Justice (CSJ) and Developmental Law expert, Eze Onyekpere had told The Guardian that the situation offered the Federal Government an opportunity to implement certain governance reforms as recommended by the Oransonye Panel.

According to him, many revenue agencies do not declare their earnings to the Federal Government, despite the resources available to them.

Of the appropriated 2019 budget of N8.92 trillion, N8.29 trillion (representing 93 per cent of the budget) was spent. The spending was largely on recurrent expenditure, including N2.45 trillion for debt servicing, and N2.60 trillion for personnel cost (including pensions).

Between January-May 2020, N9.97 trillion was appropriated, while N3.98 trillion (representing 95.7per cent of the prorate, N4.16 trillion) was spent.

Of the expenditure, N1.58 trillion was for debt service, and N1.32 trillion for personnel cost and pensions. As at end of May 2020, only N378.85 billion has been released for capital.