With the Nigerian economy in dire straits with major economic indicators looking grim amidst increasing vulnerabilities, Obinna Chima writes on the need for urgent reforms to reverse the negative trends.
Few days after the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, revealed that Nigeria’s debt service cost presently outweighs its revenue, the Nigerian National Petroleum Company (NNPC) Limited also disclosed that payment for petrol subsidy now exceeds total revenues from sales of crude oil and gas, which are clear signs of economic dangers ahead.
According to Ahmed, the country’s debt service cost in the first quarter (Q1) 2022 was N1.94 trillion, N310 billion higher than the actual revenue received during the period.
On the other hand, data from the NNPC’s monthly presentation at the last Federation Account Allocation Committee (FAAC) meeting showed that in the first half of 2022, petrol subsidy claims surpassed oil and gas revenue by a whopping N210 billion.
In addition, within the period under review, the NNPC recorded N2.39 trillion as gross revenues from oil and gas receipts, while subsidy claims amounted to N2.6 trillion. The data further revealed that N1.59 trillion was used to cover part of the subsidy costs in the last six months, leaving an outstanding balance of N1.01 trillion to be recovered from July 2022 proceeds in August.
While Nigerians were still trying to recover from these set of negative news, it also emerged that the balance in Nigeria’s Excess Crude Account (ECA) had reduced from the $35.7 million it was as at June 2022 to $376,655.09 as at July 25, 2022, which the federal government later explained was utilised in purchasing security equipment for the Nigerian Navy.
Beside these, the increasing level of insecurity across the country, acute foreign exchange scarcity due to rising dollar demand, which saw the naira depreciate to a record low of N710 to a dollar on the parallel market last week, declining foreign investment inflows, policy inconsistency are other challenges confronting the economy.
With these, analysts and economists have stressed the need for the federal government to urgently initiate reforms in order to reset the economy and save it from total collapse.
They also advised the federal government to end its policy on petrol subsidy, reprioritise its expenditure, drastically reduce the cost of governance and block all avenues of fiscal leakages.
Analysts warned that the situation may worsen as the country fully enters electioneering mood in the coming months.
Anambra State Governor, Prof. Chukwuma Soludo recently stressed the need for the government to phase out petrol subsidy immediately.
“We have had this analysis over and over and so the diagnosis is clear. We know this problem, we know that Nigeria is grappling with several unsustainables, be it in the area of security or in the area of macroeconomic framework and subsidies that nobody gets. We subsidise those who own cars but have no money to build the roads for them to drive on,” he added.
Soludo lamented that sub-nationals were bearing the cost of subsidies, added, “If we continue with subsidy, the central bank would continue to print money, the deficit will continue to rise, and how does the federal government pay its bills? It has got to resort to ways and means and the ways and means continue to fuel inflation and the depreciation of the exchange rate.”
However, the Director-General of the West African Institute for Financial and Economic Management (WAIFEM), Dr. Baba Musa, pointed out that Nigeria’s biggest challenge has always been the debt service cost for its domestic debts, compared to the external debts.
He noted that the interest rate the federal government pays on its domestic debts was twice as much as what it pays on external debt and that they were short-dated instruments.
Musa said, “When you look at the redemption profile of our debts, that of domestic debts are much higher. And the bonds, the government keeps rolling them over and when they roll them over, they do so at higher cost.
“So, the issue is that there is some money kept aside in sinking fund; if I am to advise the Minister of Finance, I think this is the right time to use the sinking fund to pay off all the domestic debts rather than rolling them over. That will reduce our debt burden.
“Another thing is to do what is called debt re-profiling, so that for those that have two to three years maturity duration, we can elongate the tenor, so that it can mature in five to 10 years or beyond. This will enable government to have breathing space, otherwise, our debt service cost would continue to dwarf our revenue, which is a mis-match.”
He added, “The second thing is that we need to bring in innovative way of increasing our revenue. For that, if I were the federal government, I would cancel any tax relief that I had given to people. For now, you don’t need to give any tax relief because the government is in dire need of revenue.
“Our biggest problem has been expenditure; we need to re-prioritise our expenditure and only spend on essential items until our revenue profile improves. Unfortunately, we are going into an election year and naturally, in an election year in every government in Africa, you spend more than what you had budgeted.
“But I pray that we would have that fiscal discipline. Eventually, I see us going back to the International Monetary Fund (IMF) for support. We have to do that because that is the only way we can get support, at least in the medium term.”
The Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismark Rewane, opined that there was need for the government to take steps towards raising its revenue.
“But how do you do that? You have to increase the tax net and the efficiency of collection. But those things don’t work in a low growth environment. When there is growth and people are making money, then you can comfortably tax them. If there is tepid growth and companies are just struggling, the tax revenue would not improve. So, you need to go back to the fundamental of growth,” Rewane added.
In his intervention, the Founder, Centre for Values in Leadership, Prof. Pat Utomi, stressed the need for the government to unfold an austerity programme that would cut costs drastically.
Utomi stated, “There is so much waste in governance and too much stealing in the system. We need to reform the civil service. Most of the people who have been directors of finance in Ministries, Departments and Agencies have been in an elaborate web of corrupt scamming of the system today.
“So, we must go after those places and reform them, reduce corruption and cut down the leakage. But the more important part is increasing production. How do you increase production? Right now, the confidence level in the world is very low; so even though there is abundance of capital in the world, very little of that capital come to Nigeria because of the low confidence level. That is why there is a need for a dramatic change in leadership.
“If a leadership the world perceives as more serious, more prudent comes up, there would be a surge of new investments into Nigeria. In my mind, there is need to build production. And part of the strategy of our third force movement is to use limited industrial policy, focus on our factor endowments and try to dominate value-chains in which we have factor endowments.”
On his part, a former member of the Monetary Policy Committee and ex-WAIFEM DG, Prof. Akpan Ekpo, advised the Debt Management Office (DMO) to be transparent about the country’s borrowing and debt profile.
“I say this because as at today, we don’t know whether they are borrowing to finance infrastructure or to pay salaries and other recurrent expenditure. A lot of these monies come from Eurobond where you do not have much scrutiny like the IMF, World Bank or AfDB loans.
“So, they are not transparent about it. If they transparent about it, people would have advised the government to stop borrowing to refinance recurrent expenditure, but to finance capital projects”, Ekpo said.
He further said, “The other thing is that we need to increase internal revenue. We have to look at our tax regime again and have the Finance Act fully implemented to raise the desired tax revenue. Another issue is that, over the years, we have been advising them to be calculating debt-to-revenue ratio and use that to decide whether to borrow or not, instead of using debt-to-GDP ratio. GDP does not pay debts, it’s your revenue that pays debts.
“In the Nigerian case, the source that you are sure of is crude oil and the oil, you don’t control the price and output. That is what is called exogenous source of revenue, and you cannot use that to finance development. So, if you are using debt-revenue to calculate, you will know that it is not healthy to borrow, except it is really important. The third issue is that, we need to look at the expenditure side of our fiscal profile.”
Ekpo also expressed concern over the cost of governance in Nigeria, advising the federal government to cut down its expenditure, “or do what economists call expenditure switching.”
According to him, “If you look at the cost of governance at the federal level, from the executive, Senate and House of Representatives, you will cry. Don’t forget that what we are talking about today is the cost of servicing the debts, we are not even talking about paying the principal.”
“Going forward, let the economy be a productive one where we produce non-oil goods, export and earn foreign exchange. We are more of a consuming economy; the things we consume, we import virtually all of them, using forex.
“Now, how are they going to be paying from subsidy? They are going to borrow. Where in the world do you borrow to fund petrol subsidy? On this subsidy issue, we have told them over the years to fix the refineries so that we can preserve our forex. Today, two—thirds of our forex inflow is used to import refined petroleum products, which is crazy. There is also an expenditure crisis, we are spending too much on governance,” he added.
But Chief Executive Officer of Global Analytics Consulting Limited, an international consulting firm, Tope Fasua, believes the major challenge with the dwindling rate of naira is the fact that Nigeria remains a consuming nation that imports virtually all the goods it consumes.
He stated, “Our chief import, year-on-year is technology (hardware, software, machinery for our few industries, spares, cars, and the expensive gadgets of which we are very fond of). Nigerians love carrying their expensive phones around, and they love their glistening luxury cars. But we can ill-afford these.
“After technology, our next biggest import is refined petrol. If we import technology, gadgets, phones and cars worth about $40 billion annually, we also import petrol and diesel for close to $20 billion. The problem is that we don’t make up to $20 billion from crude in some years – being our 30 per cent.
“Some point to remittance of about $25 billion, and the CBN has tried to encourage more of that, but what about corruption that sucks out more than $200 billion or more, yearly? Even legitimate earners take their monies out. There are all sorts of things that put our currency under pressure. The gambling business, which is now ubiquitous among Nigerian youths is one. Purchase of high-end foreign beverages like champagnes, brandies, whiskies, is another.”
To the World Bank Country Director for Nigeria, Shubham Chaudhuri, Nigeria would continue to face fiscal pressures because of the ballooning cost of fuel subsidy at a time production continues to decline.
The World Bank chief pointed out that Nigeria, for the first time since its return to democracy and as the only major oil exporter, hasn’t been able to benefit from the windfall opportunity created by higher global oil prices presently.
According to World Bank’s estimates, the present economic challenges the country is facing are likely to push an additional one million Nigerians into poverty by the end of 2022, in addition to the six million Nigerians that were already predicted to fall into poverty this year because of rising prices, particularly food prices.
The Founder of Agusto & Co, Mr. Olabode Agusto, advised the Central Bank of Nigeria to adopt a “crawling peg” to manage the country’s foreign exchange.
A crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates.
Agusto advised the government against pegging the value of the naira to the dollars.
The foregoing shows that the looming economic crisis facing the country can only be addressed through urgent reforms that would help revive investor confidence, prevent more people from entering into poverty and achieve sustainable recovery.
