Nigeria’s revenue crisis worsening on the back of rising debt costs
Nigeria may not be broke yet, but it is well on its way. Africa’s largest economy has a worrisome revenue crisis that has compounded fiscal deficits, hampering its ability to support expenditure and debt servicing.
On July 21, Finance Minister Zainab Ahmed said debt servicing, for the first time, surpassed revenue between January and April – a clear signal of the government’s gross revenue shortfall, amid growing debt stock, which currently stands at N41.60 trillion, about $100.07 billion.
The government insists the debts are relatively low, compared to the GDP. Pundits believe otherwise. The International Monetary Fund, IMF has repeatedly warned that despite the low debt to GDP ratio, the revenue challenges make debt servicing unsustainable.
Only last month, the Fund warned that debt servicing might take all of Nigeria’s revenue by 2026. The chicken may have come home to roost, much earlier than expected.
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With the persistent revenue declines, the government continues to rely on unorthodox means including heavy reliance on Ways and Means and reserves to fund recurrent spending. The law allows the Central Bank to step in, through Ways and Means, to finance the government’s deficit, once the government’s expenditure overshoots revenue.
However, this law clearly states, “the total amount of such advances outstanding shall not at any time exceed five per cent of the previous year’s actual revenue of the Federal Government”.
Ways and Means advances to the government stood at N18.16 trillion as of January 2022, completely above the 5% threshold. Analysts have blamed the country’s rogue inflation partly on this abuse as the Central Bank simply continued to print the Naira for the government to meet recurrent spending needs, thereby worsening the money supply glut, a recipe for higher inflation. The central bank has attempted unsuccessfully to explain this obvious breach. Worse, it has not published its books in three years.
Another clear indication of the government’s revenue crisis is the dip in the country’s crude proceeds savings. This was a reserve established primarily to save the excess from oil receipts based on budgeted benchmarks.
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In 2015 when the Buhari government assumed office, the reserve known as the Excess Crude Account stood at $2.1 billion, but by the end of 2020, the account has been eroded to $72 million. By 2021, the account has been drawn down to $35 million. As of the end of Q2, 2022, the ECA is all but empty, with less than $400,000 left.
The government had explained that a part of the sum in the ECA, which once had up to $20 billion, had been spent on the procurement of arms for the fight against the decade-old insurgency in Northeast Nigeria. Others went to Paris Club Refunds to States and invested in the recently established Sovereign Wealth Fund/NSIA.
Revenue from oil, which the government relies on for more than 90% of its earnings, has slumped, even though prices of crude in the international market are at a historically high level. Dilapidated infrastructure and worsening oil theft have meant that the government cannot even meet its OPEC production quota of 1.7 million barrels. Therefore, the country is unable to benefit from the rising oil prices.
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At the heart of its oil revenue problem is fuel imports, which gulped about N4.56 trillion in 2021. With the rising cost of crude comes higher import cost for refined petrol, eroding the gains from the crude export. The country’s four refineries have a combined capacity of 445,000 barrels, barely enough to meet local daily consumption.
To shore up revenue, the government raised taxes on consumer goods, luxury goods and on some imports. Nevertheless, this had helped only a little, as the government has taken no practical steps to cut spending and curtail waste such as the one on the controversial petrol subsidy.
Removing the petrol subsidy seems an obvious measure that could add more than N5 trillion to government revenue yearly, but it is not that simple. Subsidy on petrol is more political than economic. Nigeria has been hooked to the subsidy for such a long time that sudden, absolute removal will throw up economic, social and political shocks. Removing the subsidy, for instance, will trigger cost-push inflation that will worsen already soaring costs. The outcome may include labour disputes, protests and possible uprising – an unwanted outcome for a party that is seeking reelection in 2023.
The government had planned to end the payment on subsidy from July this year, but backtracked at the last minute, probably after counting the political cost. It is now the burden of the next government, but until then, this government must struggle to find the means to finance it in the midst of a worsening revenue crisis.
Subsidy payment is projected to hit N6 trillion by year-end. The government does not have many options. It plans to borrow to finance the subsidy payment. Many are outraged but with the US fed raising rates, the cost of borrowing has become a concern, and even the government is beginning to hesitate.
Earlier last month, the government suspended plans to raise about $950 million from the Eurobond market. It cited unfavourable market conditions. Borrowing is unlikely to get easier. Rating agencies, S&P Global Ratings, Moody’s Investors Service and Fitch Ratings all rate the country’s debt several notches below investment grade, albeit with a stable outlook, according to Bloomberg.