By Babajide Fowowe

Federal Government’s budget has been rising consistently over the past decade. In 2011, the Federal Government (FG) planned to spend N4.484 trillion. By 2021, the budgeted aggregate expenditure was for N12.512 trillion, indicating an increase of 178.9% over the period.

With the rapid rise in FG’s expenditure, there are some concerns that it has increased by too much. This is particularly so given that revenue has not kept up with the increases in expenditure, with the consequent rise in debt. But has FG’s expenditure really increased by too much? Not necessarily so. A comparison of Nigeria’s government expenditure as a percentage of GDP with other Emerging Markets and Developing Economies (EMDEs)shows that Nigeria actually has the lowest ratio of government expenditure to GDP amongst its peers.

In 2011, Nigeria had the lowest government expenditure to GDP ratio of 8.57% while Hungary had the highest with 20.59%. By 2021, this ratio had fallen to 5.11% in Nigeria and it was still the lowest amongst EMDEs. The highest ratio of government expenditure to GDP was 24.43% in Saudi Arabia. Thus, considering the size of the economy, FG expenditure needs to further increase.

Government Expenditure as % of GDP in EMDEs, 2011 and 2021

With government expenditure at such low levels, there is limited scope for robust spending to improve development outcomes. Thus, government expenditure needs to increase. But such increases can only be reasonably and sustainably driven by increased revenue. Improvements in revenue will need firm, fast and innovative policy actions and reforms. As stated in Agora Policy’s maiden report, such actions will have to be two-pronged: blocking leakages from FG’s coffers; and innovating on revenue generation.

For blocking leakages, three major options are recommended:

(i)  Downstream Oil Reform: End Subsidy on Premium Motor Spirit (PMS)

Since 2021, as oil prices have increased and the exchange rate has depreciated, petrol subsidies have increased and the country has been edging towards subsidy payments last seen in 2011. Subsidy payments, termed under-recovery or value shortfall by the NNPCL, were N1.16 trillion from January to November 2021. For January to June 2022, subsidy payments have totalled N1.59 trillion. The sheer size of subsidy payments, coupled with other expenditure/deductions by NNPC, has meant that the national oil company has not remitted any money to the Federation Account in 2022 out of the total oil and gas sales revenue for this period of N2.38 trillion. Thus, Nigeria is in a situation where the major source of government revenue for many decades has been cut-off.

Expenditure on petrol subsidies is diverting resources from critical socio-economic sectors. The expenditure on petrol subsidies of N1.59 trillion for the first half of 2022 has already exceeded total annual budgeted expenditure for critical sectors such as Education, Health, Infrastructure, Social Development and Poverty Reduction Programmes. These subsidy payments are already 9.28% of the total budget, implying they will rise to at least 15% of the budget by the end of the year. Thus, if the subsidies are diverting resources away from critical sectors that positively impact the poor, it is hard to see any further justification for the subsidies.

2022 Budget – Subsidy Payments Compared to Critical Sectoral Allocations

(ii)   Upstream Oil Reform: End Oil Theft

Just like the petrol subsidy, crude oil theft has been a recurring problem in the oil sector and has been difficult to curb. Nigeria’s oil production fell from 2.49 million barrels per day in January 2011 to 1.08 million barrels per day in July 2022. Between 2009 and 2018, a total of 488.6 million barrels of crude oil was lost to oil theft and sabotage. More recently, 42.24 million barrels valued at $2.772 billion; and 39.16 million barrels values at $1.63 billion were lost to oil theft and sabotage in 2019 and 2020 respectively.

Ending oil theft will require strong determination from the government and crucially, cooperation from host communities and the military. Strategic communications and engagement with communities is critical. Again, the issue of lack of trust in government needs to be addressed. A first step could be working with state governors and other agencies like the Niger Delta Development Commission to execute critical projects to provide visible evidence of ‘their money working’.

A very important step is reviewing the security architecture for combating oil theft. There have been suspicions of official complicity in oil theft during military rule and this has been reported to have continued under civilian rule. In a bid to curb oil theft, a Joint Task Force (JTF) comprising personnel from Army, Navy, and paramilitary agencies has been operating in the Niger Delta for many years. Despite their operations however, oil theft has continued unabated and there have been claims of complicity of the JTF in oil theft. There is the need for a thorough review of the security architecture and ensure that personnel of the JTF are properly trained and oriented for the purpose of stopping oil theft.

(iii)  Enforcement of Fiscal Responsibility Act on Remittance of Operating Surplus by Agencies

There are many revenue-generating agencies that either fail to remit any revenue, or remit a very small fraction to the government. This is a serious problem that needs to be addressed. Apart from depriving the FG of much needed revenue, the action of such agencies is in violation of the Fiscal Responsibility Act. This Act mandates revenue generating agencies to remit 80% of their operating surpluses to the Consolidated Revenue Fund and retain 20% in their reserve fund. Operating surplus is simply defined as the excess of income over expenditure. While the Act was amended in the Finance Act 2020, some amendments are still needed. First, the practice of funding some revenue generating agencies from the Federal budget needs to stop. Second, the expenditure cap of 50% of income grants agencies undue leeway in embarking on unnecessary expenditure. Third, there should be penalties for agencies that fail to remit their stipulated operating surpluses.

Various numbers exist on the size of this problem of agencies not remitting operating surplus. In December 2018, the Director General of the Budget Office of the Federation noted that some agencies had failed to remit N2.81 trillion. In May 2021, The Chairman of the Fiscal Responsibility Commission noted that agencies have failed to remit N1.2 trillion. In May 2021, the Senate Committee on Finance investigating unremitted revenue between 2014 and 2020 found that agencies failed to remit over N3 trillion. These numbers are cumulative over a number of years. The Office of the Auditor General noted that in 2019 agencies failed to remit N127 billion. Despite the differing figures, there is no doubt that the government needs to put in place appropriate measures to ensure its agencies respect the law and remit much needed revenue.

For innovative revenue generation, four policy options are recommended:

(i)  Ensure Compliance and Widen the Tax Net to Increase Company Income Tax 

In 2020, after oil revenue, CIT was the largest contributor to FG’s revenue with N639 billion. This accounted for 16.15% of FG’s revenue. However, the FIRS has admitted that less than 20 million out of over 68 million business actively pay taxes. Thus, less than 30% of businesses pay tax. This is not good enough.

The FIRS needs to embark on a drive to enforce payment of CIT. It cannot achieve this alone; inter-agency collaboration is crucial. This can be achieved on two fronts. First, the FIRS should ensure compliance by registered businesses. The data on the number of businesses was provided to the FIRS by NBS, while the Corporate Affairs Commission (CAC) has data on company registration. The FIRS should actively collaborate with the NBS and CAC to ensure compliance in payment of CIT by these companies.

Second, the tax net needs to be widened. The Small and Medium Enterprises Development Agency (SMEDAN) has data on small and medium enterprises. There is need for the FIRS to collaborate with both the NBS and SMEDAN to widen the tax net and register micro and small enterprises for tax purposes.

(ii)  Ramping up Automation of VAT and Extending to Other Sectors

The FIRS has started VAT automation, where they carry onsite visits and install software to automatically collect VAT. However, this has been restricted to some large cities and some sectors, largely retail. This VAT automation drive needs to be ramped up to all states and cities. In addition, it needs to be extended to all sectors of the economy. Thus, VAT will be collected at source, and this will go a long way in improving revenues from VAT.

(iii)  Re-invigorating the Joint Tax Board to Streamline Operations of Tax Bodies and Generation of Single Tax Identification Number for Individuals and Businesses

The Joint Tax Board (JTB) was established by Section 86 (1) of the Personal Income Tax Act cap. P8 LFN 2004. The JTB was established due to the inefficiencies observed in tax administration across the different tiers of government. Such inefficiencies have led to a myriad of issues which have ultimately resulted in entities either over-paying tax due to multiple taxation, or under-paying tax. However, the JTB has not been able to effectively address these issues. A case in point is in the issuance of tax identification numbers (TIN). At present, three different bodies issue TINs: FIRS, JTB, and state revenue bodies. The multiplicity of TINs has led to inefficient monitoring and collection of taxes. Although the has JTB tried issuing Unified TIN, this was not concluded. It would be beneficial if the project of Unified TIN can be revisited and driven to completion. At present, only the FIRS TIN is linked to banks, making monitoring difficult. Having a unique tax identifier for individuals and businesses will massively boost monitoring and ultimately improve revenue collection. 

(iv)  Increase Value Added Tax (VAT) and Excise Taxes on Luxury Goods, Tobacco and Alcohol

Excise taxes and VAT in Nigeria are amongst the lowest in Sub-Saharan Africa. Increasing excise taxes on alcohol and tobacco can be increased to the ECOWAS average of 50%. Also, VAT can be increased to 10%, and subsequently increased to the ECOWAS average of 15%.

(v)  Sale/ Concession of Government Assets and State-Contingent Debt Instruments

There are many government assets that are either not generating revenue at all, or are generating revenue grossly below their potential. Some of the assets can be sold out rightly to provide immediate/short term funds for the government. In addition, some other assets can be offered to private operators who pay a lump-sum fee upfront, and then make payments at agreed regular intervals.

Another avenue for generating non-tax revenue is through state-contingent debt  instruments (SCDIs). SCDIslink contractual debt service obligations to a pre-defined state variable. With SCDIs, payment obligations ofa country that contracts debt are tied to its repayment capacity. This ensures that the burden of debt servicepayments will fall as the performance of the underlying asset falls, and vice-versa, freeing up governmentrevenue from debt service payments and so reducing the likelihood of sovereign debt crises. Examples of SCDIsinclude oil-linked bonds which linked payments to the price of oil (Mexico and Venezuela); GDP-linked treasurycertificates with payments linked to GDP growth (Portugal); revenue-linked bonds with payments linked toincome from state owned enterprises (Turkey).

Of particular interest to Nigeria are the revenue-linked bonds. Nigeria has an abundance of SoEs where leakagesand wastages have occurred on a massive scale over time. As discussed previously, many SoEs have contravenedthe Fiscal Responsibility Act by failing to remit surplus revenue over time. SCDIs can be used to contract debtwhere the instruments are linked to revenues of SoEs.

*Dr Fowowe, a Reader in Economics at the University of Ibadan, is the lead author of Agora Policy’s maiden report titled “Options for Revamping Nigeria’s Economy.”