Nigeria’s 2020 budget is unsustainable, say Analysts

Nigerian lawmakers are asking how President Muhammadu Buhari’s record-breaking N10.33trn ($28.5bn) budget for 2020 will boost growth. The business community is even more sceptical.

Companies are worried that Buhari’s ambitious revenue targets will mean a new tax war on their profits.

Targeting big oil

Two days after Buhari launched the budget on 8 October, his attorney general, Abubakar Malami, told Reuters that the government was seeking $62bn in back taxes from international oil companies operating in the country.

That aim might make it difficult for the government to persuade big oil to ramp up production in Nigeria. But it also touches on the country’s wider revenue crisis.

  • The budget projects revenue at N8.18 trillion in 2020. That’s 7% higher than the budgeted estimates for this year.
  • Nigeria’s revenue service has pulled in just 58% of the targeted amounts so far for this year, triggering a war of words between Buhari’s office and the outgoing chairman of the revenue service, Babatunde Fowler.
  • This week, Buhari warned there would be “serious consequences” if the country’s revenue agencies missed their target again.

Buhari’s spending plan is also based on the country pumping an average of 2.18 million barrels per day (bpd) at an average price of $57 a barrel. It assumes the official exchange rate will stay constant at N305 to $1.

Key provisions of the budget

  • Capital expenditure is set at N2.46trn in total. Some of the important allocations include: works and housing, N262bn; power, N127bn; transportation, N123bn; universal basic education, N112bn; defence, N100bn; other education spending, N48bn; and health, N46bn.
  • A move to increase Value Added Tax from 5% to 7.5% is still being debated after its announcement by the Federal Inland Revenue Service.
  • The budget is based on a fiscal deficit of N2.8trn, which the government aims to finance with local and foreign borrowing.
  • The government will spend N2.45bn on servicing debt, compared with its N2.14trn allocation for investing in infrastructure.
  • Two proposed laws could bring the government more money from the oil sector: the Petroleum Industry Governance Bill and a finance bill amending current tax laws.
  • Another bill – the Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Bill 2018 – is to go back to the National Assembly, which rejected it in Buhari’s first term. If passed into law, it could produce another $500m from oil production, according to Buhari.
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Critics in the Assembly

As Buhari’s ruling All Progressives Congress (APC) has a majority in both chambers of the National Assembly, the budget should pass more speedily than its predecessors.

However, some senators have already criticised the submitted budget, saying they can’t see how it will boost growth, according to Senate Majority Leader Yahaya Abdullahi, an APC senator from Kebbi in north-west Nigeria.

  • “The injection of this amount is a mere drop in the ocean,” said Abdullahi, “and is incapable of stimulating the economy to higher growth, wealth creation and employment generation.”
  • Government must improve tax collection, he added. “But to do this, there must be robust investments in the real sector so that it could grow to earn taxable revenues.”
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Past failures

Due to fluctuating oil revenues, several provisions of the 2019 budget were not implemented, a problem acknowledged by the president. Daily oil production averaged 1.86bpd as at June 2019, as against the estimated 2.3bpd that had been forecast, Buhari told the National Assembly.

In fact, tax revenues have fallen well short of target for the past three years. Over half the country pays no direct tax at all, and income tax for the country’s richest business people is “an optional contribution to the state”, according to a Lagos banker who wished to remain anonymous.

Other analysts say the only way to achieve the government’s ambitious tax revenue targets would be a wide-ranging restructuring of the tax system with far more accountability.

“The question is how do you transition from an oil distribution state to a tax collection state,” says Nonso Obikili, chief economist at the Lagos-based Business Day. “There would have to be a change in who collects what and who has the right to collect […] and that doesn’t seem to be on the agenda at all.”

Revenue and investment fall short

Nigeria is still recovering from a recession which it formally exited in early 2017. But growth has been lacklustre since then: 0.8% and 1.9% in 2017 and 2018 respectively.

The economy has grown by 2.01% in the first half of this year. This shows that recovery is not yet overtaking population growth, says Macdonald Ukah, senior research analyst at Lagos-based Kainos Edge.

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It suggests that investors have low confidence in policymaking. “This is on top of the unmistakable fiscal pressures in Nigeria’s low levels of revenue (cumulatively about 8% of GDP across all tiers of government) and the fact the federal government now spends more than half its revenues servicing debt obligations in the budget,” says Ukah.

Analysts say the economy needs double-digit growth over a consistent period. The projected real GDP growth of 2.93% falls far short. Hefty capital spending will be required to drive growth, says Andrew Nevin, advisory partner and chief economist at PwC Nigeria.

“Everyone agrees that we need growth of 6-8% to lift Nigerians out of poverty and reduce unemployment […]. However, the capital investment required for this level of growth is 26-28% of GDP […]. The Federal Government is spending N2trn on capital projects […]. It is mathematically impossible for the FGN to provide the fuel to reach 6-8% growth.”

Bottom line: 

With Buhari’s new economic advisory team and his ambitious budget, there is a new urgency to the government’s policy response. But state spending in Nigeria – per head – is still way below levels in economies such as South Africa and Kenya, and falls far short what is needed to drive economic growth, let alone to finance critical social investment in education and healthcare.

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