Theoretically, Governments can finance their spending in three ways. First, it can raise revenue through taxes, such as personal and corporate income taxes. Second, it can borrow from the public. Third, it can simply print money.
The revenue raised through the printing of money is called seigniorage, which is the difference between the cost of printing money and the value of the money when it’s in the financial system.
- Nigeria is approaching its bandwidth in all three ways. Tax collection has been dire. Nigeria has one of the lowest tax collection rates in the world at approximately 10.8 percent of gross domestic product (GDP). Muhammadu Buhari left a 77 trillion naira ($167bn) debt to local and foreign creditors.
- Already, 96 percent of the government’s revenue is being used to service debt and there have been fears that the government’s cash crunch could worsen if additional revenue is not generated.
- The third measure which is printing money is economically unpopular because inflation is at over 26.72% as a result of the central bank through the monetary phenomenon of illegal financing of the federal government’s massive deficits to the tune of N23 trillion, in ways and means lending.
- So the CBN should be heading towards mopping up excess liquidity.
Additionally, just 47% of the 2023 budget would be funded by revenue. The other part – borrowing. The makeup of the budget is also not inspiring.
1. Debt service cost of about N6 trillion represents about 31% of the Budget. This underscores the need for urgent action to address revenue underperformance and expenditure efficiency.
2. The non-debt recurrent expenditure (NDRE) of N8.27 trillion remains the largest expense in the budget (about 40%). It includes personnel cost of 4.99 trillion. That’s a problem – a quarter of the country’s budget spent on less than a million of the country’s population seems a bit horrendous especially as government workers don’t exude transparency, accountability, and efficiency.
3. Total annual revenue is estimated at N10.49 trillion ($13 billion) – Apple made more from just selling iPads ($23 billion) in 2023. Nigeria has one of the lowest government revenues in the world
4. FG’s share of oil revenue was N1.86 trillion, less than $2-4 billion depending on what exchange rate you use. But our politicians live lifestyles like we made Saudi Aramco’s $161 billion net income from oil in 2022.
5. Debt servicing and Expenditure are elevating but revenue is not elevating.
Nigeria is an oil-producing country, but many of her citizens have yet to come to terms with the cold truth that its oil proceeds cannot grow the country.
As of today, there has been only a partial recovery in oil production, to 1.57 mbpd (including condensates) in September from a low of 1.25 mbpd in September 2022, and an anticipatory moderate increase in 2024-2025, averaging 1.81 mbpd, helped by improved onshore surveillance.
However, this is still well below the 2.09 mbpd in 2019, reflecting chronic underinvestment in the sector, and likely ongoing production outages.
Overall, we have not been able to get to 2.5 million barrels per day – our supposed production capacity, but Nigeria’s population has elevated as seen in the diagram below, while oil production is going lower over the last 20 years.
So we have a sticky situation where oil is not performing to its capacity but the country’s population is growing higher.
Financially, the sub-nationals are not doing great as well. State governors are not innovative in their revenue-generating capacities.
There is nothing left after they pay salaries and do a few roads. Most states are not economically viable and are heavily dependent on FAAC.
Interestingly, they now embark on white elephant projects and build airports they cannot operate – which stretches FAAN’s resources.
The truth is Nigeria does not have the financial framework to ensure prosperity for 200 million Nigerians. There’s a note from the World Bank concerning our poor spending levels.
- “To promote economic development, Nigeria needs to increase its spending from its current very low levels.
- Despite its vast development needs, Nigeria spends only $220 per Nigerian per year, and at merely 12% of GDP, this is one of the lowest levels of spending in the world.
- Unfortunately, low public spending translates into poor development outcomes. The country is among the eight economies with the lowest human capital in the world, ranked 167th out of 174 countries on the World Bank’s Human Capital Index.
- As a result, a child born in Nigeria today will only be 36% as productive when he grows up as he could be if he had access to effective education and health services.
- In addition, infrastructure needs also remain extremely high: to provide all the infrastructure the economy needs to maximize its potential, the country would need to invest $3 trillion by 2050.
These numbers are not looking great. The maths is not mathing. Something needs to be done. Something has to change. The country is on a cliff – hence the uproar and strife for the 2023 Presidential elections was understandable.
From a financial lens, the top 3 candidates had antecedents that guided their financial ideologies. For the incumbent president, his antecedents are hinged on taxation and making bold financial reforms.
The runner-up, Atiku Abubakar is pro-capitalism, and pro-restructuring to give states more power and resources to deliver better outcomes for their people.
Peter Obi, who emerged third is very big on cost-cutting measures, reducing the high cost of governance and saving money/revenue.
He championed the saving of excess crude oil proceeds a decade ago which would have saved the country when macro-economic shocks came knocking.
All 3 have brilliant ideas to salvage the country’s financial problem but the debate would be which should be Nigeria’s priority given our economic realities – Should we grow the national wealth (BAT), or allow sub-nationals to grow their wealth (AA), or reduce how Government spends the current national wealth (PO).
That’s the question that should be at the forefront of our political debates.
For the President and his team, my expectations are;
- a) Improving tax collections and tax to GDP. The outcomes of the Presidential Committee on Fiscal Policy and Tax reforms are key. The committee is led by ex-PWC partner Mr Taiwo Oyedele, who once said Nigeria has the potential to generate N40 trillion from tax receipts (four times higher than current tax incomes)
- b) Unlocking Nigeria’s oil and gas potentials to drive in more FX inflows, revenue, and investments
- c) Removal of the petroleum subsidy which cost $10 billion in 2022 – an expectation he has met.
- d) Support the Devaluation of the currency/FX adjustments to reduce dollar wastage – a met expectation.
- e) Re-investing subsidy savings and revenue windfall from the devaluation of the naira to grow new money
For the Central Bank Governor, my expectations would be;
- a) Managing inflation and price stability.
- b) Achieving FX stability by expertly managing the floating exchange rate mechanism – dependency would be on FX inflows and acknowledging the link between inflation and FX volatility
- c) In cahoots with the Fiscal side, clearing the FX backlog and fostering an environment for the repatriation of dollar capital is paramount
- d) Restoring the transmission between policy rates and market rates.
- The Government has to do all it can to gain the trust of its citizens. If people see their taxes are judiciously spent, they will be incentivized to pay taxes. Quid Pro Quo. No ‘yachts’ and SUVs.
- Following the permanent removal of the subsidies, stoppage of oil theft should follow with improved tax compliance, taxpayer segmentation, customs modernization, and adoption of excise and VAT rates similar to those prevailing in peer countries in West Africa.
- The Executive must also pay greater attention to export promotion (which a weak currency supports) and the sustenance of non-oil revenue. There has to be a structural macroeconomic framework for new money to grow. Nigeria has to ask itself one question – what can we produce for the world, similarly to how Taiwan produces semiconductors?
- Spend money on productive things – A direct result of Nigeria’s high cost of governance is that less than 30 percent of FGN’s resources have been available to fund capital projects since 2017 when the government set itself a minimum target of 30 percent. Even then, a significant part of this is for “administrative capital” rather than core capital expenditure. Capital projects should bring in future revenue. Roads and transit projects that link farms to markets should be the priority and this has to be cascaded to state governments and local governments. The decision-making process of the government should be governed by the time-tested rule in a democracy: do what gives the greatest benefit to the greatest number of people within the location of the project. With scarce resources, you have to channel funds to projects that bring returns on investment.
- Invest in Agriculture – Food prices need to come down. Data shows that Nigerians spend 60% of their income on food. For comparison, an American spends 10% of income on food. This would be more acceptable.