Investors await resumption of ministers to chart fiscal policy direction

The direction of Nigeria’s fiscal policy over the medium-term still hangs on a balance as ministers are yet to resume. Analysts say, while the delay is costly, a more pressing concern is seeing the Federal Government (FG) sustaining the policies of the past four years.

Specifically, analysts at Afrinvest said, since the collapse in the prices of crude oil in mid-2014, the FG’s revenue has fallen sharply to 3.1 per cent of Gross Domestic Product (GDP) in 2018 compared with the record high of 5.0 per cent to GDP in 2013.

With expenditure outpacing revenues at 5.4 per cent of GDP, the FG has accumulated N3.9 trillion in debt from the domestic and external debt markets to partly plug its fiscal deficit of N8.2 trillion between 2016 and 2018. In addition, the FG received N5.6 trillion in monetary financing from the CBN, which is more than half of the FG’s total deficits.

“This support has breached the constitutional threshold of 5.0 per cent of the prior year’s revenues by N5.2 trillion. With the cost of servicing debt and recurrent expenditure at 60.8 per cent and 146.9 per cent of revenues respectively, this strategy is unsustainable”, said Afrinvest analysts.

The FG needs a strong revenue boost and cost containment strategies to improve its finances and enhance its contribution to economic growth.

Analysts say, the strategies to boost revenues in the first term of President Buhari fell short of expectations. This includes a whistle-blower policy which helped in recovering looted funds and the Voluntary Asset and Income Declaration Scheme (VAIDs) that supported a broader tax net and N30.0 billion in receipts despite a target of N305.0 billion. Accordingly, FG’s revenue to GDP only improved to 3.1 per cent in 2018 from a low of 2.3 per cent in 2017.

The believe, in other to achieve revenue targets, there is a need for comprehensive fiscal reform. This would include action plans to improve the tax system and administration in a bid to drive efficiency by reducing costs and boosting collection. In addition, more transparency and accountability would be required by the citizens to encourage tax payments. The VAT increase being mulled given Nigeria’s lower VAT rate of 5.0 per cent when compared to peers represents a quick fix.

However, this would not be a silver bullet as total Value Added Tax (VAT) receipts for the entire country is weak at 0.8 per cent of GDP in 2018. Similarly, as two cities – Lagos and Abuja – account for 75 per cent of the VAT receipts, the FG should work on bringing more businesses into the VAT net rather than imposing more taxes on current taxpayers. In Lagos, for instance, consumers already pay twice the national rate of 5.0 per cent as consumption taxes.

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