Market News

By Femi Adekoya (Business Editor) and John Akubo (Abuja)

• FG acknowledges concerns, hopes to improve revenue generation
• Lawan: Govt will keep borrowing to fund development until revenue rises
• Scale downsize of government, cost of governance, says Yusuf

As the Federal Government continues to explore new measures of raising revenue through tax reforms, there are concerns that no amount of tax revenue will be enough to finance the magnitude of fiscal indiscipline by the executives, if the cost of governance is not addressed, even as debts mount.

  
Already, debt has become the default option for the government in addressing gaps in its financing, raising concerns about repayment capacity and abuse by the executive.

Currently, Nigeria’s deficit is N7.05 trillion, with a higher figure expected at the end of the 2021 financial year. The government had targeted a budget deficit of N5.6 trillion in 2021.
  
For the 2022 fiscal year, the government hopes to achieve a deficit of N6.4 trillion amid concerns about revenue generation.

Meanwhile, Nigeria’s total debt stock rose from N32.9 trillion as of December 2020 to N39.6 trillion in November 2021. The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, during her presentation of the 2022 approved budget, disclosed that the government borrowed N6.7 trillion between January and November 2021.
  
Despite higher revenue from rising oil prices, production challenges have put the country on the edge, with production averaging 1.3 million barrels per day, despite getting a higher quota from the oil cartel. From a projected oil revenue of N2.01 trillion in the 2021 budget, the country barely earned N970.3 billion between January and November 2021.
 
With over N7 trillion in fiscal deficit as predicted by The Guardian last year, there are concerns that the country may be heading towards double-digit deficit financing in the 2022 financial year. Fiscal indiscipline is a major contributor to inflation and ratchets up domestic borrowing.
 

 
According to the Fourth Quarter and Consolidated 2020 Budget Implementation Report, “overall, a total of N6,598.96 billion deficit was recorded in 2020, representing a budget-to-GDP ratio of 4.33 per cent, which is above the target rate of 3.30 per cent.” This is against the N4.6 trillion targeted in 2020.

ALREADY, the Senate, yesterday, stated that it would develop a strategy of engagement with revenue-generating agencies on how to make them achieve their targets and generate more revenues in 2022 to narrow the margins of borrowing by the government.
  
Senate President, Ahmed Lawan, said they would ensure that the revenue-generating drive of the agencies was boosted with a view to reducing borrowing for the development of the much-needed infrastructure.  

According to him, funding the 2022 Budget is presently predicated on significant borrowing, a situation that has made the country caught between the devil and the deep blue sea.
  
“We must, therefore, strategise on effective oversight of the implementation of the 2022 Budget. This is going to be the last budget that would be fully implemented for 12 months in the life of the ninth Senate. We, therefore, need to supervise very closely. 
   
“Distinguished colleagues, funding of the 2022 Budget is predicated on significant borrowing. Our country is caught between the devil and the deep blue sea. We have to construct and provide infrastructure in all parts of our country because infrastructure is needed for our nation to develop.  

   
“However, we do not generate enough revenues to fund the provision of such infrastructure. Until more revenues are generated, the country has to borrow and also resort to other sources of funding for our infrastructural development.  
   
“But we cannot continue to borrow endlessly. It is imperative that we need to improve on the revenue to Gross Domestic Product (GDP) ratio. At about eight per cent revenue to GDP ratio, our country is basically at 50 per cent of what is required of the revenue to GDP of 15 per cent for it to support any significant economic development.”
TO meet the country’s large appetite for borrowing, the Debt Management Office (DMO) leaned on non-competitive bids worth N392 billion at bond auctions – the highest in five years and equally explored the treasury bills segment.
   
Analysts at Cordros expect the fiscal deficit to remain significantly elevated over the medium term in line with the expectation of revenue underperformance given the over-optimistic revenue projections and near-perfect execution of the expenditure items (save for capital spending) in line with historical trends.

   
Accordingly, the analysts do not see any respite to debt accumulation over the medium term.
 
During the public presentation of the approved 2022 budget, the Minister of Finance disclosed that the Federal Government’s actual retained revenue (including GOEs) settled at N5.51 trillion in the 11-month period of 2021, 26 per cent below the pro-rated budget (N7.44 trillion) but the highest revenue print on record.
 
The revenue underperformance was due to a 47.4 per cent and 75.4 per cent underperformance of oil revenue and FG drawdowns from Special Accounts, respectively.

   
On the expenditure side for the period between January and November 2021, N12.56 trillion (or 94.1 per cent) has been spent out of the N13.57 trillion pro rata budget. The performance is inclusive of expenditure estimates of the GOEs but exclusive of project-tied loans.
   
Of the expenditure, N4.20 trillion was for debt service, and N3.02 trillion was for personnel cost, including pensions. As at November 2021, N3.40 trillion had been expended for capital. Of this, N2.98 trillion represents 83 per cent of the provision for MDAs’ capital, N369.9 billion for Multilateral/Bilateral project-tied loans, and N49.52 billion as GOEs capital expenditure.
  
In 2018, the DMO sold $3 billion in Eurobond debt under a plan to reduce rollover risk by cutting down on Nigerian Treasury Bill (NTB) outstanding, which led to the redemption of nearly N1 trillion of NTB instruments.

Special Adviser, Media and Communications to the Minister of Finance, Yunusa Abdullahi, acknowledged the concerns about the rising deficit, noting that the government has also assured that the country’s debt profile is ‘healthy’ because the size of the borrowing is still within ‘healthy and sustainable limit.’

He said: “What we have is a revenue problem and on that course too, the government has shored up revenue and will continue to do that. This government has made infrastructural development a priority and will continue to do that and we will source for funds to do it because the country really has no choice but to build roads, power, bridges, railways and other developmental projects.
   
“The Minister has emphasised that the government is doing a combination of cutting costs and increasing revenue to be able to borrow less and still provide the necessary infrastructure. The Customs and FIRS have done a lot to shore up revenue and that will continue in this fiscal year too, hoping that with increased revenue, the government will borrow less,” he added.

AN economist and Chief Executive Officer of Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said it has become necessary to scale down the size of government and cost of governance, adding that fiscal sustainability is driven by both cost and revenue.
 
According to him, what is needed is the political will to cut expenditure and undertake reforms that could scale down the size of government, reduce governance cost and ease the financial burden on the government.
  
“It is important to ensure that the debt is used strictly to fund capital projects, especially infrastructure projects, that would strengthen the productive capacity of the economy. This is the position of the Fiscal Responsibility Act. Additionally, emphasis should be on concessionary financing, as opposed to commercial debts, which are typically very costly.

  
“Therefore, managing the major drivers of cost and revenue is imperative. As far as possible, the government should push back in sectors or activity areas where the private sector has the capacity to deliver desired outcomes. We should see more concessioning and privatisation at all levels of government. This would allow for the infusion of more private capital into the infrastructure space.”
  
Managing Director and Head of Frontier Markets Research, EFG Hermes, Kato Mukuru, in an email response to The Guardian, said: “We clearly appreciate the risk of a double-digit deficit and strongly believe that the only sustainable solution to address this is a combination of accelerated GDP growth, increased tax collections and reduced spending. Whilst we believe that the government appreciates what is needed, a well-coordinated plan to return growth to Nigeria is needed to arrest the deficit.”
  
For Ronak Gadhia, EFG Hermes Director, sub-Saharan African Banks, Research, apart from introducing new taxes to reduce the deficit, the government can also seek to improve revenue mobilisation by improving tax collection rates through digitisation and ensuring more stringent compliance, clamping down on corruption; and reducing tax holidays/exemptions, especially for the large corporates.

 
Gadhia added that government tax receipts could also be boosted by an acceleration in GDP growth and in this regard the regulators need to expedite the implementation of investor-friendly reforms, such as liberalisation of the exchange rate.
  
“It is also worth noting that the oil and gas sector remains a significant contributor to government revenues; despite the increase in global oil prices, revenue contribution from the sector has remained stagnant due to the underinvestment in the sector, resulting in below capacity production levels. Thus the government also needs to expedite the implementation of the Petroleum Industry Act (PIA), to attract investments into the sector, which will also have a positive impact on the exchange rate,” Gadhia added.
   
On his part, the Chief Executive Officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane, said deficit spending has not yielded the intended impact on the economy, maintaining that fiscal spending is currently not complemented with adequate local and foreign investments.

  
He stated the need to address Nigeria’s fiscal challenges by increasing injections through quality investments in productive sectors, fiscal consolidation and diversification of revenue base.
  
He also stated the need to reduce leakages through accountability, transparency in public finance and elimination of subsidies.