Nigeria’s fiscal authorities are excited that the $1 billion Eurobond issued last week was successful, for three main reasons:
First, they are excited that they finally secured the elusive $1 billion Eurobond. This is understandable because this was supposed to be a support towards 2016 budget. In that year, they only managed to secure the US $600 million from African Development Bank (AfDB). Secondly, they are excited because the issue was oversubscribed, especially by as much as eight times.
The narrative and interpretation is that the international investing community is not only confident, but also excited about Nigeria, and the direction of economic policy. But I think it is a reflection of the pool of global capital available and the high yields. The Third reason they are excited is that this will give some measure of confidence for the remainder US $3.5 billion concession loans expected from the World Bank.
Soon after this success, the narratives have moved to what the government would want us to believe in terms of their general fiscal direction and policy. Kemi Adeosun, the Minister for Finance tweeted on February 10th “the $1 billion Eurobond will go into the 2017 budget, to fund infrastructure projects”. But inadvertently, this narrative exposes some serious underlying weaknesses of the 2016 and 2017 budgets as nothing different from past budgets.
First is that it exposes the notion that the 2016 and 2017 budgets were based on some sort of zero budgeting process. That myth is being gradually shattered in the National Assembly. The 2017 and the 2016 budgets were not based on zero budgeting principles, but estimates of previous budgets.
Second, and this is the focus of this piece. We need explanation on how the estimated recurrent expenditure and that of overhead expenditure have ballooned so dramatically in a matter of two years. In the 2017 budget estimates submitted to the National Assembly late last year, the planned expenditure is N7.298 trillion, the highest federal government budget estimates in history. It is N1.238 trillion higher than the 2016 estimates, and it is nearly double the 2014 figure. The planned capital expenditure is N2.24 trillion, which is less than the N2.36 trillion the government seeks to borrow from both domestic and international sources.
For the second year in a row, the government seeks deficit expenditure that is higher than that of planned capital expenditure. Recent increases of non-capital expenditure have been driven by increases in debt servicing, paying the price of past debt. Another driver is the welfare related expenditure of the government. However, the government cannot claim to be focused on changing our fiscal narrative, expending on infrastructure and putting in place a platform for future economic growth with fiscal statistics that builds, not only on the mistakes of the past, but also continues to build debt on the basis of significant growth in recurrent and overhead expenditures.
I can imagine that the government will argue that it is not the case. That it seeks to expend over N2 trillion on capital. But the total amount of that will have to be borrowed. Invariably, it means that all the resources from oil revenues this year, corporate taxes and customs revenues, and value added tax will be used by the federal government on recurrent and overhead expenditure. How is that different from past budgets?
Let us dig further. To expend all the resources from oil revenues, corporate taxes and customs revenues on recurrent and overhead expenditure means in reality that less than 1% of our population directly benefits. To cater for the rest of us, whom I have described as mere mortals in the past, we need to borrow. And remember that the borrowing will have to be paid for in the future, dragging down the potential growth.
In the last two years, some of the touted fiscal objectives are that the government, claiming to be different from past administrations, will seek to diversify Nigeria’s economy and become less dependent on oil revenues. They argue that they are more determined to diversify Nigeria’s economy (by the way, the economy is already diversified, but exports are not). To do that, there must be clear and obvious evidence that resources from oil revenues are being directed to sectors of the economy that have the potentials to help us achieve diversification of exports. There is no evidence of that.
Essentially, growth that is not dependent on oil prices requires that the diversification of export revenues succeeds. But to achieve that, the government actually needs to change the structure of fiscal policy. The fastest way to achieve that is to provide a strong fiscal platform for future growth, increase Nigeria’s average prosperity overtime by demolishing the top down approach to fiscal policy, and replace it with a bottom up fiscal approach.
In Nigeria today, and this is no different from the fiscal structure since the 1970s, is that the country’s capital, then Lagos, and now Abuja, determines what is “best” for the whole country through a unified approach. This is the only reason we are not growing and diversifying our exports. Indeed, I suspect that current fiscal authorities, like some of the ones in the past, do not have any idea of the productive capacities in the country, and what is required to turn these productions into global competitiveness.
The key requirement is to allow for a fiscal structure and policy that is bottom up, which allows for the understanding of the productive process at the very local level. And the way to do that is to ensure that fiscal authority is closest to the production by allowing states to collect corporate income taxes, or at least a fraction of it. I thank you.
Dr. Okiti is the Chief Executive Officer, Time Economics, an Abuja-based economic consulting firm