For incoming administration: Urgent fiscal, monetary, trade policy actions, says think tank
May 1, 2023135 views0 comments
BY BEN EGUZOZIE
Reforms must be predicated on inclusion, transparency, accountability
As Nigeria prepares to usher in a new administration, with the exit of the Muhammadu Buhari administration on May 29, there are crucial tasks awaiting it, and therefore a requirement before the new government: urgent policy actions on fiscal, monetary and trade fronts, analysts in a policy memo in the Agora Policy Report have stated.
According to Babajide Fowowe, a professor, and Mohammed Shuaibu (PhD), both university dons, the state of the nation’s economy is a key point of interest, owing largely to the myriad of economic challenges the country faces; hence, a critical issue the incoming administration has to grapple with, is “how to revamp the economy, and quickly”.
“The key macroeconomic statistics do not paint a rosy picture. Inflation rate rose to 22.04% in March 2023. Real GDP growth rate fell from 3.40% in 2021 to 3.1% in 2022. The latest statistics show that 40.1% of Nigerians are poor, while unemployment is 33.28%. Despite favourable global oil market conditions, domestic oil production shocks have dampened oil revenue inflows and have drastically increased the cost of the petrol subsidy, thereby widening Federal Government’s fiscal deficit. This has led to crowding-out of critical spending on social services and infrastructure,” Fowowe and Shuaibu said in their memo.
Carefully, the memo focuses on three key policy actions at the federal level: fiscal, monetary and trade policies, stressing that the incoming administration needs to undertake fast, coordinated macroeconomic policy reforms on these three fronts. And the required policy actions or economic reforms must be predicated on inclusion, transparency and accountability.
The Agora Policy Report observing the state of affairs of the nation’s economy, said the country is vulnerable to oil price and production shocks, adding that fiscal risks are magnified by revenue volatility while fiscal indicators are in dire straits.
It stated that though Nigeria has maintained an upward trend in spending since 2010, however, when compared to other countries, the quantity and quality of spending is low. Providing an example, the report noted that the average share of monthly recurrent spending in 2021 was about 79 percent compared with 21 percent for capital expenditure, adding that between January and September 2022, average recurrent expenditure was about 84 percent while capital expenditure was 16 percent.
Nigeria has one of the lowest spending as a share of the GDP in the world. With peer countries like Angola, Ghana, Egypt, doing pretty better.
It warned of mounting the country’s public debt stock, noting that on the external side, the combined outstanding debts of the federal government and state governments increased from N8.3 trillion in Q2 2019 to N11.3 trillion in Q2 2020 and that by Q2 2021, the outstanding external debt stock increased further to N13.7 trillion and rose further to an all-time high of N16.6 trillion in Q2 2022.
Other areas the Agora Policy Report flagged red are: Central Bank of Nigeria’s (CBN’s) Ways and Means financing which has risen astronomically; with subsidy financing amplifying the country’s fiscal risks.
Boost oil revenue with decisive action
Areas requiring immediate fiscal reforms, according to Agora Policy Report include, boosting oil revenue. “The government needs to take decisive action to address these two critical issues,” it advised. Ending oil theft requires drastic, urgent action. “This would require strong determination from the government and crucially, cooperation from host communities and the security agencies. The government needs to review the security architecture in the oil producing areas and give clear instructions about ending oil theft. In addition, both the Nigeria Upstream Petroleum Regulatory Commission (NUPRC) and Nigeria National Petroleum Corporation (NNPC) Limited should be given clear oil production and exporting targets, and be held accountable when these are not met,” the report counselled.
Petrol subsidy removal
On removal of the petrol subsidy, the report said, the use of a strategic communication team to engage the public and other critical stakeholders on the benefits and costs of removing the subsidy would be required for the public to buy into this policy measure. At the same time, detailed plans of how funds are saved from subsidy removal need to be extensively discussed and disseminated to the general public to increase trust as a social capital. It further advised that savings from the fuel subsidy could be used to scale up short-term direct cash transfers to the poorest and most vulnerable groups in the country; whereas prices of petroleum products should be market-determined rather than regulated by the government.
Tax reforms to increase tax net
To boost non-oil revenue, the Agora Policy memo said there is a need to address the nation’s dismal tax revenue to GDP ratio. It said though the FIRS has done well in recent times by increasing revenue generated from N6.4 trillion in 2021 to N10.1 trillion in 2022, crossing N10 trillion mark in revenue for the first time, however, for the size of the economy, government revenue and expenditure are grossly inadequate to effectively drive policy, enhance economic growth, lower poverty, and achieve the Sustainable Development Goals (SDGs).
It advised that this would require two critical actions on boosting non-oil revenue: tax reforms and domestic revenue mobilisation such as urgent broadening of the tax net to capture the formal and informal sectors not in the existing tax net. For the formal sector, a first step would be to properly capture and tax high networth individuals and large corporations. Also, FIRS needs to work closely with the National Bureau of Statistics (NBS) to identify small and medium-scale enterprises (SMEs) and ensure they pay taxes appropriately. It called for some simple incentives and an amnesty period, following which appropriate sanctions should be meted out.
“It would be crucial to continuously communicate the issue of tax reforms to the citizens to gain public confidence in the system. In addition, leakages from taxes collected by non-state actors need to be eliminated,” the policy advisory said.
FRA amended for strict compliance
Realising the problem of violation of the Fiscal Responsibility Act (FRA) orchestrated by poor or outright non-remittance of collected gross non-oil revenue to the consolidated revenue fund (CRF) by many revenue-collecting agencies, which deprives the federal government of the much-needed revenue, Agora Policy report wants the new administration to ensure full compliance with FRA as there are many revenue-generating agencies that either fail to remit any revenue or remit a very small fraction to the government. Equally, it asks that the FRA be amended to set strict penalties for agencies that fail to remit their stipulated operating surpluses. Also, there is the need to stop funding revenue-generating agencies from the federal budget, it advocated.
Improved budgetary framework