It has become a truth, universally acknowledged, that Nigeria currently faces an unprecedented revenue crisis.
A report on the Medium-Term Expenditure Framework and Fiscal Strategy (MTEF/FSP) recently released by the Federal Ministry of Finance, Budget, and National Planning, revealed that during Q1 2020, the government’s debt-servicing obligations had risen to a staggering sum of N943.12 billion. Revenue during the same period stood at N950.56 billion. This is to say that Nigeria’s debt service to revenue currently stands at a mind-blowing 99 percent. This is obviously unprecedented in the annals of public finance in our country.
A revenue crunch or fiscal crisis arises when the state is unable to bridge the deficit between its expenditures and its tax revenues. A revenue crisis often arises because the extractive capacity of the state has been undermined one way or the other, making it difficult for government to raise enough money to meet its obligations and to implements its core economic, social and infrastructure development programmes. A revenue crunch can be temporary or more permanent in nature. It can also be structural or merely institutional and operational.
Fiscal crises often force governments to cut back drastically on essential expenditures while also raising taxes on firms and households, with all the social and political implications.
From a purely technical point of view, a debt crisis arises when a nation is unable to meet up with its debt payment obligations in a situation where its debt-servicing obligations are higher than its tax revenue. To be so defined, a debt crisis must persist over time to such levels that it becomes virtually impossible for the government to solve the problem without a major intervention either through debt relief, rescheduling or even outright debt forgiveness.
There has been some controversy over whether what we face today is merely a revenue crunch or indeed a looming debt crisis. I find that to be a rather pedantic debate. While I am persuaded that what we face is more of a fiscal revenue crunch, the line between this and a debt crisis is often a thin one. Revenue crises can easily lead to debt crises. Both can conspire to unleash a downward spiral in terms of capital flight, financial markets volatilities, banking crises, financial meltdowns and even economic collapse. Some economists believe that we live in the best of all possible worlds, in which the capitalist system by its very nature, engenders overproduction; leading falls in aggregate demand, debt crises, revenue crunches and “manias, panics and crashes”, to echo the late Harvard financial historian Charles Kindleberger.
Nigeria’s fiscal crisis did not start yesterday. It had been long in the making. There are two aspects to this issue. The first has to do with the extractive capacity of the state itself and its ability to raise the necessary revenues and taxes. The other is the rising debt burden. I will deal with each in turn.
At the time of independence, most of our foreign earnings were derived from agricultural products such as groundnuts, cotton, cocoa, rubber and palm produce. The government relied on these for the bulk of its foreign earnings. Interestingly, by the late sixties, Nigeria was also becoming important as an exporter of manufacturing products, including industrial machinery and vehicles. The tax base was modest but significant. The Nigerian pound exchanged one-to-one with the British pound, owing largely to the fact of prudent macroeconomic management in combination with the fact that our currency was tied to the pound sterling within the framework of the Commonwealth free-trade area.
By the 1970s the oil boom changed everything. Money was no longer the problem, but how to spend it. Oil provided the massive fiscal space to build infrastructures, including highways, airports and harbours. The education system was expanded. Higher spending came with a bourgeoning bureaucracy. Petroleum contributed to the curse that the economists know as “the Dutch Disease”. Oil fostered artificially high exchange rates that catered to the import appetites of the new urban elites. Domestic manufacturing suffered. High inflation and slow in the context of misguided economic policies led to massive capital flight and de-industrialisation.
High exchange rates also meant that domestic food products became more expensive compared to cheaper foreign imports. We ended up becoming a food import-dependent economy. And given that peasant farming was the basic occupation of 70 percent of the population, falling rural productivity meant more poverty in the rural countryside, leading to massive rural-urban migration. With a rising population that doubles every generation, we faced an urban influx without the necessary industries to absorb the rising army of the unemployed. The net effect was sprawling urban slums, overcrowding, prostitution, criminality and armed robbery, in addition to extremist ideologies and terrorism.
Our rentier petrodollar political economy is anchored on the state collecting rent from multinational oil companies. Nobody was interested in taxation outside the narrow confines of the oil enclave economy. Political theory establishes incontrovertibly that taxation is good for democracy. Where government relies only on oil rent, its functionaries feel no moral obligation to the populace and the latter haveno locus standi to demand accountability from the rulers. The ruling elites and their comprador allies became stupendously wealthy while the people got poorer and poorer.
When revenues were in decline, succeeding governments continued borrowing. Most of the loans were incurred on flexible interest rates terms. And when interest rates in the advanced countries ballooned, so did our debts. When General Abacha refused to pay up, interest and accumulated to rose to more than US$36 billion.
For Nigeria, the return to democracy in 1999 opened a new window of opportunity. Macroeconomic reforms and liberalisation of the economy ushered in massive capital inflows both as FDI and as portfolio investments. The reform of the banks helped in ensuring a safer banking and financial environment which was an added boost to investments. In 2005 we negotiated ourselves out of the stranglehold of the Paris Club of public creditors. It gave us a better fiscal breathing space.
Tax reforms also helped in building up a revenue base that cold mobilise more resources for the budget. Dwindling oil revenues over the past decade have also meant greater reliance on other sources of revenue, including taxation, VAT, excise duties, and internally-generated revenues (IGRs) among the states.
As the world moves towards a post-oil economy, it is evident that we have to rely increasingly on the non-oil sector to finance the budget. Nigeria remains one of the lowest performers in terms of tax-to-GDP ratio. As of 2019, our tax-to-GDP ratio is seven per cent , compared to Ghana (12.6 per cent); Côte d‘Ivoire (15.9 per cent); Kenya (18.2 per cent); and South Africa (28.4 per cent). The current administration’s fiscal reforms aim to raise tax-to-GDP ratio to 15 per cent by 2023. But there are still huge institutional challenges. The leadership of the FIRS deteriorated considerably over the years. Tax regulations remain opaque and ambiguous.
Today, we face a rising debt burden. According to the DMO, as of June 2015, our total national debt was N12 trillion (US$63.8 billion). The external component amounted to US$10.3 billion. As of March 2020, the national debt has ballooned to N27.4 trillion (US$84 trillion). The foreign component today stands at US$27.7 billion. With recent borrowings from the IMF and other creditors, we are well on the road to hitting the US$100 billion in terms of our national debt.
Debt-servicing on average has gulped 50 per cent of revenues. The recent revelation that during Q1 2020, debt-servicing was 99 per cent of total revenues was shocking but not unexpected. No doubt Covid-19 and the ensuing lockdown have played their part. As oil prices begin to rally, we would hope that the worst is over. But that experience should be a sobering moment for our economic managers.
According some analysts, Nigeria needs a fiscal break even price of US$144 per barrel to balance its books. The figure for Iran is much higher (US$389 per barrel). But Angola is in a much happier position than we are, with US$55. Our IOCs claim to require a break even of US$35- US$40 per barrel just to remain in business.
We must therefore begin to think beyond oil. There is need for a rules-based system in which any revenues beyond the budget benchmark are automatically transferred to a fiscal stabilization fund. There is urgent need to expand and deepen the tax base and to make revenue collection easy, clear and cost-effective. The operational cost of governance must be brought under control. It is only a fool who does not learn to cut his coat according to his own size.
Above all, fiscal prudence is critical. If we must borrow from abroad at all, it must only be for capital projects with guaranteed returns on investments. And there must be robust controls on public expenditure to ensure zero hemorrhage and zero rent-seeking. We must institute mechanisms to ensure financial accountability at all levels. We can make Nigeria work. Government must be reinvented as the servant of the people, not their master.
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