Public finance

By Obadiah Mailafia

THE sole purpose of government, since Aristotle and Kautilya, is to ensure the peace, security and welfare of the citizenry. The ancient Greek Athenians termed it Eudaimonia or “flourishing”. Entire nations and civilisations have risen and fallen on the basis of the foundations on which their public finances were built.

If they are built on prudence and parsimonious discipline and accountability, the society will flourish. If, on the other hand, they are inspired by folly and wanton profligacy, they will sooner or later come to grief. 

The Ministry of Finance, Planning and Budget recently released the details for the Medium-Term Expenditure Framework and the Fiscal Strategy Paper, MTEF/FSP, for 2022 to 2024. The document projects a staggering expenditure of N14.6 trillion for debt-servicing during the period – N3.6 trillion in 2022; N4.9 trillion in 2023; and N6.1 trillion in 2024.

The minister revealed that in 2022 the government was projecting a revenue stream of N6.54 trillion accruable to the Federation Account and an additional N2.62 trillion in VAT, bringing total expected revenues for the coming year as N10.16 trillion. The budget deficit is forecast to be N5.62 trillion, which is a marginal increase from the 2021 figure of N5.60 trillion. For 2023, total revenue receipts are projected to rise to N13.98.

The key macro assumptions are based on a crude oil benchmark price of 57 dollars per barrel for 2022, a production level of of 1.88 million barrels per day, and an exchange rate of 410 to the US dollar, an inflation rate of 10 per cent and a nominal GDP of N149.369 trillion. I find some of these to be rather optimistic. We have never achieved single digit targets for inflation since 2015.

It is high unlikely that we can bring it down to the projected 10 per cent in an electioneering season in 2022. The recent decision to move forex sales from BDCs to the commercial banks led to a marginal fall in the naira vis-à-vis the dollar. With all the geopolitical tensions and uncertainties, I do not envisage the naira stabilising any time soon.

These are not easy times for the managers of an economy like ours. Inflation and unemployment are spiralling out of control, in the context of slow growth, geopolitical tensions and widespread insecurity. Economists describe our current economic as “stagflation”. 

Two Americans scholars, Robert Rotberg and John Campbell have designated our country as a “failed state” in an article they recently wrote in the influential journal, Foreign Affairs. In line with your introductory remarks, the international ratings agency, Fitch, has recently made a forecast to the effect that, by year’s end 2022, we shall be needing more than 300 per cent of our revenues to service our debt obligations.

To better appreciate the challenges we face, some trend analysis is useful. As of March 31 of this year, Nigeria’s total stock of debt stands at at N33.107 trillion (US$87.239 billion in dollar terms). The external component of the total national debt stock stands at US$32.86 billion (N12.4 trillion). Nigeria’s current debt to GDP ratio is estimated to be 31.94 percent. It has almost doubled from a low of 17.4 per cent in 2014.  And as we speak, the National Assembly has approved yet another binge of borrowing worth an additional billions of dollars. You and I know that you do not use GDP to repay your debt; you use government revenue receipts to service debts.

In 2014, before the current APC-led administration came to power, the erstwhile Goodluck Jonathan administration paid N500 billions for debt-servicing. This amounted to a mere 10 per cent of total government revenue. We were in a relatively comfortable position. In the following year of 2015, coinciding with a global recession and precipitate fall in world oil prices, debt repayment bill tripled to the figure of N1.5 trillion, amounting to 30 per cent of public revenue earnings. By 2017, the figure galloped to N3 trillion, which amounted to 61.6 per cent of government revenue.

In 2020, government made a total of N3.25 trillion in revenue while spending N2.34 trillion in debt-servicing. This amounted to 72 per cent of revenue going into servicing our loans for that year. It is instructive that during the same year government spent only N1.7 trillion on capital expenditure. 

A recent budget implementation report indicates that FGN spent N1.8 trillion in debt servicing in the first five months of this year alone, representing 98 per cent of total revenue earned during that period. From January to May, the government earned a total of N1.84 trillion in total revenue, a massive shortfall of the projected figure of N3.32 trillion. This obviously indicates that if the same trend is repeated for the rest of the year, we would be spending 98 per cent of all revenue on debt-servicing.

Interestingly, the 2021 budget allocation for capital expenditure stands at N3.4 trillion, which is 29 per cent of the total annual budget. A situation where debt-servicing obligations outstrip capex allocation would be a rather worrisome one. All the above suggests that there is an accelerating trend in the rise of both the quantum of debt and in percentage of revenue that is devoted to servicing our repayment obligations. Judging by the laws of statistical probability, the change in percentage of revenue on debt-servicing is likely to rise very substantially in the coming year.

As strenuous as the economic conditions are, we do have some options. The late John Magufuli, former President of Tanzania, decided to reduce the level of borrowing to the barest minimum, with extraordinary results. He had been offered a $10 billion loan by the Chinese.

When he saw that in the fine little print, they wanted to collateralise the port of Dar es Salaam for 99 years, he turned down the offer. He, instead, concentrated on boosting domestic revenue, drastically reducing foreign travels and rigorously implementing infrastructure projects. The results were outstanding. Tanzania was enjoying one of the fastest growth rates in the world without going through the binge of external borrowing.

We Nigerians have a lot to learn from this. As far as I am concerned, if we must borrow at all, let it strictly be for projects with guaranteed returns on investments. We should also cut back on the cost of government while plugging some of the loopholes that haemorrhage our foreign exchange.

We can make government work while living within our means. We must also keep a leash on the cost of governance. Government should also engage with our creditors with a view to restructuring our loans to ensure the fiscal space that will enable us to continue to grow while expanding the possibility frontiers of collective welfare.

The worst government can do, under our circumstances, is succumb to the penchant of raising taxes and tariffs.  This would amount to consummate folly in a time of economic doldrums. There is the phenomenon of the Laffer Curve, associated with the American economist Arthur Laffer. It shows that there is an optimal level where government can impose taxes.

When you exceed that optimal level, you would, in fact, experience a disproportionate fall in tax revenue. This is more likely to be case during a time of recession. The great economist John Maynard Keynes taught that in times of economic troughs, the managers of the economy should ensure that more money is placed in the hands of households, firms and businesses in order to boost aggregate demand. Therefore, expanding the tax net is the way to go.

Many countries collect taxes through lifestyle audits. When a man keeps a dozen exotic cars in the garage of his mansion and hires private jets for his travels, the authorities have a duty to do a lifestyle audit on him or her to ensure that their tax payments reflect their high lifestyle.

 I would also insist on a more rigorous system of accountability for the revenue-generating agencies – Customs, FIRS, NNPC and others. We hear gory tales of trillions being withheld, sometimes in private bank accounts.

Boosting revenue in our circumstances would require also ensuring a sound macroeconomic environment and an attractive business eco-system that enables businesses to flourish. The current operating cost of government is way too high. There are many lacunas and gaps that facilitate financial leakages and haemorrhages. These must rigorously be plugged.


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