0 13 mins 5 mths

On Nigeria’s Dire Revenue Challenge (2)

Postscript by Waziri Adio
The fragility of Nigeria’s public finance has always been there. However, this vulnerability had long been masked by the steady flow of petrodollars, which created an illusion of not just normalcy but also of extreme wealth. The illusion, in turn, sired a propensity for work-avoidance, misplaced priorities and mismanagement. After decades of living a lie, Nigeria has come face-to-face with the unflattering reality that accompanies mismanaged natural resource wealth, otherwise known as resource curse. The hour of reckoning, ironically, arrived at a time of record-high oil prices, a period when ordinarily the country should be having a ball, and smiling to the bank.
The moment of feasting for other oil producers is thus paradoxically a moment of anguish for Nigeria. High oil prices are not resulting in corresponding increase in government revenue due to inability to meet oil production quota and ballooning subsidies, among others. Foreign exchange inflow has slowed to a trickle. Federal Government’s revenue is about half of what was expected in the first four months of 2022, even when oil was selling more than 30% about the budgeted price. Then this: the debt service obligation of the Federal Government (FG) was almost 120% of FG’s aggregate revenue for the same period.
As I stated in the first instalment of this article, that dispiriting landmark should force us all to focus on the urgent need to rescue our public finance from worsening ill-health. And in trying to do this, we cannot run away from the need to address the country’s dire revenue challenges. Borrowing more, even if it will offer temporary relief, should not be an option. More borrowing will amount to continuing to dig while inside a hole. Even seeking debt restructuring will not help much. We cannot borrow or beg our way out of this crisis. We need to do a lot of heavy lifting and make necessary adjustments.
In this piece, I will focus on how spending available revenue well and blocking revenue leakages will give the government greater fiscal headspace and will be a good place to start on the road to recovery. In the next and concluding instalment, I will look at areas where government can boost revenue.
Last week, I made the point that the record N17.3 trillion federal budget for 2022 is still paltry for a population of about 206 million. Additionally, I argued that in absolute and per capita terms Nigeria actually needs a bigger and not smaller budget, if we hope to make a dent on development outcomes. This, however, does not mean that Nigeria’s budgets are optimally deployed.
It will be important to shift the bulk of the annual budgets away from paying the salaries and allowances of public servants who constitute less than 0.5% of the population to areas that will benefit the mass of the populace and stimulate economic growth. Starting with the 2023 budget proposal, it will also be important for the government to lead by example by ensuring that every line item in the budget can be justified under the prevailing circumstances and is put through the metric of value to the greatest number. For example, most of the budget in health and education is salaries and overhead, and services provided by teachers and health workers directly impact on human capital development. But this doesn’t mean all budget items can be justified and at a time like this.
While it may not amount to much savings and it may even be counterproductive to rationalise the workforce, the talk about increasing salaries of civil servants is out of sync with the current revenue crunch. Even if for symbolic reasons, public officials should take pay cuts, starting from the president and his ministers.
A sharp knife should be applied to overheads and service-wide votes, for which N822 billion and N987 billion were allocated respectively in the 2022 budget. For some time, release of overhead ranged between 60% and 80% and the agencies managed. It is better to slash overhead by 20% to 40% and ensure prompt and full releases so that the agencies can plan and perform better. It is important to look at service wide votes again and see if what they are expended on cannot be budgeted for individually to ensure greater transparency and accountability.
Under recurrent expenditure, there should be freeze on trainings, conferences and travels, unless absolutely necessary. Under the capital budget, similar freeze should be applied to office furniture, office buildings, computers and cars etc.
The commission collected by some agencies on generated revenue, called the cost of collection, needs to be revisited. In 2021, the total amount shared from the Federation Account was N8.2 trillion. Out of this, the Federal Inland Revenue Service (FIRS), the Nigeria Custom Service (NCS), and the former Department of Petroleum Resources (DPR) got N335 billion or 4% as cost of collection. That is N335 billion that wasn’t available to be shared by the three tiers of government. And N335 billion as commission to just three agencies or average of N111.6 billion per agency.
In similar vein, the concept of revenue generating agencies should be re-examined. According to the Fiscal Responsibility Act, these agencies are expected to remit 80% of their operating surpluses to the Consolidated Revenue Fund and are allowed to retain 20% in their reserve fund. Operating surplus is defined as excess of income over expenditure. Expenditure is capped at 50% of income, irrespective of the quantum of money generated by the agencies, and even when some of these agencies are still funded fully or partially by the government. The latitude granted the revenue generating agencies clearly has negative implication for government revenue.
The concept of multiple revenue generating agencies is not only problematic, it creates all sorts of perverse incentives. To start with, the money retained by these agencies is the money not available to government to meet its obligations. In most instances, these agencies earn these commissions just by existing or merely by doing their work, not on account of anything extra. The promise of a cut creates the incentive to bat more on extracting as much revenue as possible than on providing services to the public or the private sector.
Whatever the provenance of these special agencies—whether those retaining a portion of the revenue they ‘generate’ or those earning a cost of collection—the level of waste and leakages within these entities is palpable. The agencies are usually awash with cash, and once there is money, it must be spent. A variant of Parkinson’s Law is at play here: expenditure will always grow to meet income. And most of their extra incomes goes into bogus buildings, shiny offices, cars, local and foreign trips, endless trainings, and sundry allowances.
The practice also creates different tiers within government, with pockets of prosperous agencies in the vast desert of under-resourced ones. There is scant evidence that these special agencies (including those on special salary scales) are more productive or more ethical or more professional than the rest. Rather, they create avenues for patronage and rent-seeking from the well-heeled and the authorisers. They are beloved and courted and protected because they have juicy jobs and contracts to dispense.
By the way, this is not an argument for under-resourcing government agencies or for not paying civil servants well. It is about blocking wastes and leakages and making sure that every expenditure counts and serves the greater good. It must be acknowledged that the Treasury Single Account, the inclusion of government owned entities in FG’s budget and the drive to increase FG’s independent revenue have reined in some of these super agencies and have reduced their propensity for profligacy and patronage. But much more needs to be done.
It will be important to restrict regulatory agencies to regulations, to let the regulators publish their schedules of fees and fines and do assessments, and then have all revenues collected by one central revenue agency as in other countries. Even the revenue collection agency should not be a commissioned agent. Let its expected costs be budgeted, each line item approved and justified through appropriation, and any increase be seen as investment and be tied to commensurate return to government.
These measures will help to telegraph a sense of urgency and signal government’s readiness to make internal adjustments to boost revenue. Such will make it easier to address revenue-draining wastes and leakages that affect the larger populace. I will touch on two areas here. One is the co-funding of public higher education by parents and students. This should increase the quantum of resources available to our public tertiary institutions and enhance accountability and performance.
According to Statista, 1.8 million undergraduates enrolled in Nigerian universities in the 2018/2019 academic session. Out of this number, 1.2 million or 66% enrolled in federal universities. Assuming the number has not changed and assuming that the federal universities charge an annual tuition fee of N100, 000 (or N50, 000 per semester), this means the federal universities would have N120 billion per annum from tuition fees alone.
The argument against tuition fees in federal universities can no longer be sustained, not only because of dwindling revenue but because also because the construct around inability to pay cannot stand scrutiny. A significant number of the undergraduates attended fee-paying primary and secondary schools. Government’s investment in education should go more to primary and secondary levels. Let the universities start with low fees, put a cap on increase, and provide scholarship, loan and work opportunities for those who cannot afford to pay. The fact that a university is publicly owned doesn’t mean only the government should bear the entire cost of running it.
The second revenue leakage that needs to be addressed pronto is petrol subsidy. In the 2022 revised budget, N4 trillion was appropriated for petrol subsidy. That’s 23% of the 2022 federal budget and almost 3% of the 2021 GDP. That N4 trillion is the revenue not available to the three tiers of government, and money that could have been applied to more productive and impactful areas.
In the 2023 to 2025 MTEF, the Minister of Finance, Budget and National Planning presented two scenarios for petrol subsidy for 2023: N3.36 trillion for six months and N6.72 trillion for full year. One serious point many people missed in that presentation is that with full year subsidy, FG will make zero allocation for capital expenditure for MDAs in 2023 and that only donor-funded and loan-backed capital expenditure will be budgeted for. If those do not materialise, it means no capital for 2023.
About two weeks ago, there were hints that FG will budget for only six months of petrol subsidy in 2023. I will argue for subsidy to end by 1st January 2023. It is better to re-allocate some of the more than N500 billion that will go into petrol subsidy every month to areas that will directly benefit the poor, and plough the rest in other areas that will increase the productive capacity of the populace and the economy as a whole.
I fully acknowledge the political and social risks of such a move, especially with rising inflation and an approaching election. But we need to face up to the gravity of the situation before it is too late. The government has four full months before January 2023 to engage Nigerians and convince them about its plan to repurpose the savings from petrol subsidy. By showing the stomach for needed internal and external reforms, the government may be able to convince development partners to provide some soft landing. It is time to be bold.
(Series to be concluded next week.)
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Credit: ThisDay

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