Nigeria needs to undertake swift and audacious reforms to stop the rapid decline of its economy and the resultant negative impact on its citizens, a report released by Agora Policy, an Abuja-based policy think tank, has advised.
Entitled “Options for Revamping Nigeria’s Economy,” the report maintains that despite posting positive GDP growth in six consecutive quarters and having the biggest GDP in Africa, Nigeria’s economy is not in sound health.
“Many of the macro-economic fundamentals have worsened and the level of inclusive development is low,” analysts said in the report which analysed Nigeria’s economic datasets from 2011 to 2021.
“Nigeria needs to undertake swift, bold and far-reaching reforms to halt the precipitous decline and the attendant negative impacts on citizens’ welfare. These reforms must be undergirded by inclusion, transparency and accountability.”
According to the report, Nigeria’s economy is in desperate need of quick and bold actions to get out of the rut of low and fragile growth, lean and narrow revenue and export base, soaring debts and deficits, limited trade and investment, suboptimal government spending, and growing inflation, unemployment and poverty.
Nigeria, the report states, needs “to deepen and diversify sources of revenue, re-calibrate expenditure to spend smartly, and invest efficiently. To achieve this, a re-thinking of the drivers of the economy is needed.”
Some of the prescribed actions—which will require not just deft economic management but also strong political will, effective communication and trust building—include removing the progressively ruinous petrol subsidies, increasing tax revenue, curbing the growing and suffocating appetite for debts, ending restrictive trade practices, and adopting a more realistic and more transparent exchange rate regime.
The report identifies the domestic and external drivers of the key challenges confronting Nigeria’s economy and provided options for reforms, especially in terms of government’s revenue, debt, trade and investment, inflation, interest and exchange rates, and unemployment and poverty.
According to Waziri Adio, the founder/executive director of Agora Policy, the decision to focus on the economy was driven by the need to expand policy and programmatic options for the current and next administrations.
“Everything revolves around the economy and there is no better time than the electioneering period to do a health check on the economy and come up with ideas and prescriptions for better economic outcomes.
“We commissioned this report to elevate the discussions during this important campaign season and to facilitate the search for solutions in an area that is central to national growth and human development,” he said.
Data points from the report show that Nigeria has not only underperformed its peers but also regressed on most socio-economic indicators between 2011 and 2021.
Finances of the federal government, the report states, have been defined in the last decade by a stark mismatch between expenditure and revenue on the one hand and by an explosion of debts and deficits on the other.
For example, while FG’s expenditure rose by 179 per cent from N4.48 trillion in 2011 to N12.51 trillion in 2021, FG’s actual revenue increased by only 81 per cent from N2.57 trillion in 2011 to N4.63 trillion in 2021.
The growing gap between expenditure and revenue has been bridged with growing debts, translating to a 436 per cent rise in FG’s debt from N6.17trillion in 2011 to N33.11 trillion in 2021. Significantly, domestic debt rose by 242 per cent from N5.17 trillion in 2011 to N19.2 trillion in 2021 while external debt increased by 2,435 per cent from N546 billion in 2011 to N13.86 trillion in 2021.
However, the increase in expenditure and debts has not translated to improvement in human welfare. For example, the rate of unemployment rose from 5.9 per cent in 2011 to 33.3 per cent in 2020 while youth unemployment soared from 8.04 per cent in 2011 to 42.49 per cent in 2020. The number of Nigerians living below the poverty line is projected to increase from 82.9 million in 2019 to 95 million by the end of 2022 and inflation as of August 2022 was at 20.52 per cent.
Other key highlights and recommendations of the report include the following: Domestic debt is understated, as Ways and Means grew by over 7000 per cent and is granted in contravention of the CBN Act.
The report states that the advances by the CBN to the federal government, called Ways and Means, is not captured in the official figures for domestic debt, and this understates FG’s domestic debt by about half.
According to the report, FG’s domestic debt as of December 2021 was N19.2 trillion, but FG’s domestic debt would have been N36.6 trillion if the N17.4 trillion for Ways and Means at that time had been included, meaning the domestic debt as of December 2021 was understated by 47.5 per cent.
The report also reveals that in eight years, Ways and Means ballooned by more than 7000 per cent from N265.7 billion in January 2014 to N18.89 trillion in March 2022.
Additionally, the report maintains that the CBN grants Ways and Means to the FG in contravention of the CBN Act 2007. The reports states that “from the CBN Act, there are strict stipulations of the maximum amount that can be borrowed by the FGN, including the repayment period. These stipulations have not been adhered to.”
According to Section 38 of CBN Act, Ways and Means granted cannot exceed 5% of FG’s actual revenue for the previous year, must be repaid in full within the financial year it is granted, fresh advances cannot be granted until the previous one is paid off, and cannot be repaid through promissory notes or securitisation, contrary to the recent plan announced by the government.
Also, the report noted that Nigeria has a major debt challenge. Despite official statements about the sustainability of Nigeria’s growing debts, the report shows that the public debt is not only understated but has also become a major drag on public finance.
According to the report, the proportion of expenditure going to debt service is consistently expanding, and debt service has grown to become the highest component of expenditure, thus crowding out other expenditure critical to economic growth and human development.
The report interrogated the suitability of using the Debt Sustainability Framework (DSF) for low-income countries for Nigeria.
“For a country like Nigeria where domestic debt is higher than external debt, negating domestic debt service in any analysis will not give a true picture,” the report states.
“Already, using only external debt service as a ratio of revenue has the country just under the strongest threshold. If the analysis is conducted for total debt service (including interest on Ways and Means) as a ratio of revenue, the figure of 90.92 per cent is obtained, indicating very high risk of debt distress.”
On options for tackling the revenue challenge, the Agora report said the most critical policy issue for the federal government is inadequate revenue. The report shows that FG’s tax revenue-to-GDP shrank from 8.2 per cent in 2011 to 4.4 per cent in 2019.
The tax figure for the FG is the lowest for central governments in Africa and among Nigeria’s peers. The revenue problem is compounded by leakages such as increase in oil theft and petrol subsidy, both of which significantly reduce the revenue from oil sales that used to account for the bulk of government revenue. Oil theft has reduced Nigeria’s oil production by almost half while most of the revenue that should accrue from sale of federation oil is swallowed by petrol subsidy, which the report argues goes more to the rich than the poor.
According to the report, petrol subsidy alone gulped N1.59 trillion in the first half of 2022 (January to June). The N1.59 trillion half-year expenditure on petrol subsidy dwarfs the full-year 2022 budget for social development and poverty reduction (N462 billion), health (N876 billion), education (N1.34 trillion) and infrastructure (N1.42 trillion).
The report contends that petrol subsidy is no longer sustainable and should be removed but its removal should be accompanied with effective communication and targeted transfer to the vulnerable.
Some of the measures recommended to boost revenue include: Undertaking petroleum sector reforms to end petrol subsidy and check oil theft; ensuring greater compliance in remittances by revenue-generation agencies; further diversification of revenue sources for government; increased tax base and improved efficiency of tax collection; raising tax rates on luxury items and VAT, and selling and concessioning some government assets, among others.
The report observes that Nigeria’s infrastructure stock, low level of inclusion, and restrictive and unpredictable policies negatively impact productivity, investment and human welfare.
Among others, the report recommends the following: prioritise and finetune job creation strategies, with special focus on SMEs; scale-up investment in education, especially technical and vocational skills training; expand investment in critical infrastructure, including through public private partnerships; increase coordination across tiers of government on poverty alleviation programmes; diversify export base, especially agro-processing and light manufacturing; conduct a comprehensive review of Nigeria’s trade policy framework; replace distortionary and inefficient non-tariff measures with import duties; phase out restrictive trade practices like border closure and import bans; address cumbersome customs processes and tackle corruption and leakages at the ports, and redefine exchange rate policy towards making Nigeria a more competitive economy with regards to present and potential non-oil exports.
The CBN, it says, should prioritise inflation management and work with the federal government to end Ways and Means.
The report, which was produced with the support of the MacArthur Foundation, is the first of four policy papers commissioned by Agora Policy to contribute to national debate before, during and after the landmark 2023 elections in Nigeria. The other three reports, which will be released soon, focus on security, gender and social inclusion, and transparency and accountability.
