Last week, the Minister of Finance presented the draft Medium-Term Expenditure Framework 2022-2024 to stakeholders. The MTEF is the strategic framework that underlies the federal budget and the revenue parameters that go into the Distributable Pool Account known as the Federation Account. The presentation also provided an opportunity to report on the performance of the 2021 federal budget in terms of federal government revenue and expenditure as well as the entry of revenue into the Federation Account. I seek to review the main issues and questions arising from the execution of the 2021 federal budget.
In reviewing the execution of the 2021 federal budget, the link between revenue and expenditure emerged as a huge challenge. At the end of May 2021, the federal government‘s retained earnings stood at N1844 billion, or 67% of the pro-rated target. The total FGN expenditure was 4.86 trillion naira, or 92.7% of the pro-rated target. In essence, while the realized target of revenue in a budget that was heavy on deficit financing in the initial period was 67%, spending was much higher at 92% of projection. Thus, retained earnings as a proportion of actual expenditure was 37.8% – not up to 40% of expenditure. The inference is that the remaining 62.2% of expenditure came from deficit financing. The expenditure breakdown shows that 1.80 trillion naira was used to service the debt, which represents 37% of overall expenditure. As a percentage of retained earnings, debt service was 97.8%, leaving only 2.2% of retained earnings after debt service. The sum of 1.50 trillion naira has been allocated for personnel costs which represent 31% of expenditure as well as 81.5% of retained earnings while 973.13 billion naira has been released for capital expenditure which represents 20% of overall expenses.
The disaggregation of revenues showed that non-oil revenues performed much better than oil revenues. Corporate income tax and value-added tax collections exceeded budget targets with 290.90 billion naira and 123.85 billion naira, respectively representing 102% and 125% of the pro rata targets for the period. Customs collection amounted to 204.0 billion naira (86% of target). Independent revenue of N 478.01 billion exceeded projection by 10.1 percent. In addition, the tax on electronic money transfers (stamp duty) underperformed by 77.4%. On the other hand, the share of the FGN in oil revenues was 289.61 billion naira (which represents a performance of 50%.
The very poor performance of the e-money transfer tax is unexplained given that there is no evidence to show a reduction in e-money transfers. It further questions the empirical basis and the credibility of these revenue forecasts. Is the poor performance the result of poor revenue forecasting or leaks in the system? This discourse leans towards the latter because the collections of stamp duty for 2020 have not yet been recorded. The consolidated report on budget execution for the 4th quarter and 2020 indicated that nothing was taken into account at a time when a stamp duty was levied for the whole year. This is not true and cannot be true.
For the poor performance of the oil sector, the CDMT specifies that it is mainly attributable to the cost of oil subsidies which was not foreseen in the 2021 Budget. It is the big elephant in the room and the Nigerian National Petroleum Corporation benefits from it to withhold the allowances due to the Federation’s account. Recent reports from the NNPC indicate that we are subsidizing as much as 60 million liters of petroleum products every day and that there have been days when we have allegedly consumed up to 103 million liters of petroleum products. At 103 million liters per day, the subsidy to N96 per liter amounts to N9.88 billion per day and N296 billion per month. At an average of 60 million liters per day, the subsidy is 5.76 billion naira per day and 172.8 billion naira per month. It is literally “insane” and unsustainable in the short, medium or long term.
Moreover, these numbers cannot be the real consumption of Nigerians. These figures are grossly inflated and could be actual consumption for the whole of West Africa. Recall that at the time of Jonathan, when the economy was performing better in terms of gross domestic product, employment and general macroeconomic fundamentals, which implied higher economic activity at the time, declared consumption was not has never exceeded 35 million liters per day. Even then, many Nigerians thought the numbers were inflated by five to 10 million liters. With reduced GDP and economic activities, closures of businesses and factories, increased unemployment, consumption is expected to decline. However, consumption would have more than tripled. It cannot be true. It is a sad story of theft, smuggling, economic sabotage and banditry at the highest level. The NNPC and the Ministry of Petroleum Resources must clean up. They can try another story on the quantity of products consumed because the current one does not even manage to convince a baby of a month.
The implication of the above is that Nigeria is bankrupt and if it is a private sector company it should have been liquidated. A situation where debt servicing absorbs 98% of income cannot be a sign of sustainability. This is a clear sign of a lack of fiscal prudence. Borrowing money to pay wages as in the present case violates the provisions of the 2007 Fiscal Responsibility Act. to solve the income problem. The unfortunate part of this is that the federal government is still proposing to borrow more and more because it has obviously concluded that there is no alternative to borrowing. Borrowing at a time when the source of debt repayment is highly questionable can only be defined as fiscal recklessness.
Allowing aggravated leaks in the tax system in times of fiscal crisis – transfer of electronic money and oil subsidies – can only lead to bankruptcy. In addition, after spending more than 3 trillion naira on deficit financing in the first five months of the year, the FGN will exceed the deficit projection for the year. If we remember that the fuel subsidy was allegedly removed last year, but the depreciation in the value of the naira coupled with the improvement in the price of crude oil has led to a situation where the NNPC appears to be providing a subsidy again. . The subsidy challenge will not go away until we address the stability issues of the naira and our macroeconomic fundamentals. A situation where debt service and personnel costs represented 68% of expenditure while capital expenditure represented a paltry 20% is not sustainable, especially in an economy lacking infrastructure like Nigeria.
Like the political and security situation, the Nigerian economy is in a desperate situation and needs urgent measures to begin the process of its recovery. A national dialogue on economic measures that will restore the country is urgently needed. It is not about current ministers or members of the National Assembly because their best is not good enough for the nation.
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