Nigeria’s post-election financial realities

NairaTHE new government in Nigeria had promised a lot to the citizens in the build up to the elections, and also in its ambitious manifesto, which seeks to implement radical changes in all key sectors of the economy, with the aim to better the lot of all the key segments of the society.

Not only would roads and well equipped schools and hospitals be built, even school children have been promised meals at school, and unemployed graduates have been promised monthly unemployment allowance that is a little over a quarter of the national minimum wage.

But the regime found in its first three weeks in office that the treasury is not only empty, there were huge operational deficits left behind by the former regime, and workers were owed several months in salary arrears in more than half of the states, and in some federal agencies. Finding the money to pay operational deficits and salary arrears must obviously take priority over food for school children and allowances for the unemployed graduates.

The total revenue in the Federation Account was 12 per cent of GDP in 2013. This is to be compared with government revenue averages of 25 per cent of GDP in South Africa, Egypt, and Morocco, who do not export oil, and 33.8 per cent of GDP in Algeria, 41 per cent of GDP in Angola, both of who export oil like Nigeria.

Federal Government revenue was 5 per cent of GDP, States got 4.8 per cent of GDP, and Local Government Areas got 2.2 per cent of GDP. The revenue available to the Nigerian government fell both in absolute terms and relative to GDP in 2014, because of the decline in oil price in the second half of the year, and is expected to fall further in 2015, because of much lower average oil price of about US$60 per barrel expected in 2015, compared to US$95 per barrel in 2014.

Nigeria thus faces a paradox of having the Africa’s biggest economy but not Africa’s biggest government revenue. While Nigerian economy is about 155.4 per cent of South Africa’s economy, the revenue generated by Nigerian government is only about 79.5 per cent of the revenue generated by South African government. The stark fiscal reality is that Nigerian government currently has less than half of the revenue required to deliver quality governance.

Little wonder that health, education, security and basic infrastructure services such as roads, water and sewerage provided by Nigerian government are very poor. A key priority of the new government is, therefore, not what to spend money on, but how to find the money in the first place. However, huge leakages from the nation’s revenue collection processes constitute the bane of Nigeria’s revenue inadequacy. News headlines frequently point to the existence of unbelievably large leakages from oil and non-oil revenue collection processes in Nigeria.
The main types of leakages are:
• Crude oil ‘theft’.
• Unauthorised spurious petroleum subsidy payouts from excess crude savings.
• Abuses of import-duty/tax waivers.
• Autonomy of revenue collecting agencies to spend at will and remit part of their surpluses.

Nigeria needs to put an end to crude oil theft, stop all petroleum subsidy payments, streamline tax/import-duty waivers, amend existing laws to abolish the autonomy granted revenue collecting agencies and create a single-treasury-account for all types of government revenue, with all government ministries, departments and agencies included in a single appropriation process.

Once these leakages are successfully plugged, the government should be able to raise the revenue required to fund outlays on salaries and high quality public goods and quasi-public goods like quality education, health, security, basic roads, and water and sewerage infrastructure, which cannot be recouped by user charges.

However, government should explore self-financing mechanisms for the provision of private goods, like rail transport system and energy infrastructure, on which large scale capital outlays can be recouped by value capture policies, and operational and maintenance costs can be met by user charges.

Thus, in spite of the ambitiously welfarist disposition of the new regime, the regime has to plug numerous large revenue leakages before it can determine what spending commitments it can credibly make. Fortunately, the regime has a good number of people with proven track record of blocking revenue leakages in its fold, even if that feat had previously only been accomplished at the state level, there are reasons to hope that the feat could be repeated at the federal level.

In discussing resource mobilisation within national financial systems, it is usual to distinguish two main types of financing: direct or market-based financing in which individual investors make their funds directly available to individual entities through bond or equity markets; and, indirect financing in which banks intermediate between depositors and borrowers. Bank deposits, bonds and equity issuance have all recorded phenomenal growth since 1999. Total cash and deposits liabilities intermediated by banks, commonly referred to as broad money or M2, had grown more than 36-fold from just N526 billion at the end of 1999 to N19.143 trillion (or 21 per cent of GDP) by mid 2015; outstanding value of bonds had grown 27-fold from N249 billion to over N6.854 trillion (or 8 per cent of GDP, while equity market capitalization had grown more than 45-fold from N257 billion in 1999 to N11.682 trillion (or 13 per cent of GDP). Monetary assets mobilised by banks had proved intermediation to be the most reliable form of financing over the past decade and a half, growing steadily from year to year, and now represents more than half of total financial assets in Nigeria.

Financial intermediaries and markets have thus contributed their bits in mobilising the financial assets required for Nigeria’s growth and stability, but it is time for government to pull its weight as an independent attractor of foreign capital, and also court investors more actively by liberalising growth enabling sectors, getting out of the way, making necessary arrangements to provide concrete assurances of stability, and being more conscious of the sensitivity of inward investment to realities of, and government’s pronouncements about, the fiscal situation.

Specifically, the new regime needs to be more conscious of market sensitivity to innocent and honest utterances by top government officials. Innocent public statements that the new government ‘met an empty treasury’, while honest, are likely to erode investors’ confidence in the ability of the new government to stabilise the market, and push them to take actions that will affect the foreign exchange, equity and bond markets adversely, as they try to ensure safely of their wealth in the face of self-proclaimed fiscal fragility by the government.

While not suggesting that government should be dishonest, public official commentaries about fiscal difficulties should dwell more on the government’s solutions to problems, rather than just stating the problems. Suggesting that the regime has started plugging revenue leakages by ending the ‘crude oil theft’, stopping spurious subsidy payouts and duty/tax waiver abuses would have had a positive impact on the outlook of the treasury, and lifted market confidence. The announcement of the bailout package for states would similarly calm investor’s nerves and build confidence in the ability of the new regime to stabilise the currency.

Senior government officials often inadvertently portray the government as one that is struggling with the present, or one that can hardly contemplate the future, much less engage others to come and invest in that future. Government officials not only need to say and do things that will boost investors’ confidence in financial markets, but they need to more consciously court foreign investments into Nigerian markets. A government regime with foresight can attract longer-term capital inflows by liberalising rail transportation and energy sectors, and by issuing of medium to long term infrastructure bonds or foreign currency bonds like Diaspora bonds.

However, government monopoly and bribery and corruption have long stood between investors and these investment opportunities. The need to end bribery and corruption came to be the defining theme in the 2015 general elections. The last regime was generally perceived at home and abroad as having allowed corruption to fester, while the leader of the new regime is perceived as having credible credentials to put an end to corruption. The new regime should also amend existing laws to end government monopoly in rail transportation and energy sectors, and institute a stronger regulatory regime that will assure and encourage private investors to play leading roles in funding and operating the sectors.

• Ayodele Olalekan TERIBA- Profile Ayo is the CEO of Economic Associates (EA)

1 Comment
  • Anthony Akinola

    A very thoughtful piece on the state of our economy.