Federal Govt expresses difficulty in debt servicing

Barely 24 hours after the International Monetary Fund advised Nigeria to increase tax to raise more revenue, the Federal Government on Thursday said its low revenue was affecting its ability to service debts and fund day-to-day recurrent expenditure.

The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed,  during an interview with journalists on the sidelines of the World Bank/International Monetary Fund meetings  in Washington DC, United States, noted that although Nigeria did not have a debt problem, she said, “underperformance of our revenue is causing a significant strain in our ability to service debt.”

She also justified the $3bn loan the country was seeking from the World Bank, saying the money would be used to finance the power sector. A quarter (N2.5trn)of N10.3trn budget President Muhammadu Buhari presented to the National Assembly on October 8 would be spent on debt servicing.

While the Federal Government voted N4.88trn for non-debt recurrent expenditure, only N2.14trn was allocated to capital projects in spite of the huge infrastructural deficit in the country.

Why we are borrowing fresh $3bn from World Bank – Ahmed

The finance minister, Ahmed, however, said the fresh $3bn loan Nigeria was seeking from the World Bank would be spent on reforms in the power sector. The Debt Management Office had said that the nation’s total public debt rose by N3.32tn in one year to N25.7tn as of the end of June 2019.

The Federal Government owed N20.42tn as of June 30, 2019 while the 36 states and the Federal Capital Territory had a total debt portfolio of N5.28tn. In 2017, the revenue target was N5.08tn out of which N2.7tn was realised. The Federal Government’s revenue projection for 2018 was N7.16tn out of which only N3.96tn was achieved. In 2019, the Federal Government’s projected revenue was put at N6.98tn. As of June this year, about N2.04tn had been realised. The Deputy Chief, Monetary and Capital Markets Department, Evan Papageorgiou, had at a press conference during the meeting in the United States on Wednesday said, “While Nigeria has a large exposure to domestic debt, it is important to effectively manage those risks associated with debts incurred in local currency.

He said, “Local currency borrowing could be preferred in some cases but it is not a panacea. The guiding principle is prudent debt management. Local currency flows have been more volatile ad Nigeria was not an exception to that. Nigeria has a large exposure to domestic debt particularly from Central Bank bills.

“And then as we understand the Central Bank bills, there are a lot of higher redemption and more roll-overs going forward. So managing those risks, particularly with respect to local currency debt managing debts and behaviour of non-resident debt is very important.”

Also at the press conference, the Assistant Director, Fiscal Affairs Department, IMF, Mrs Cathy Pattillo, had said Nigeria needed a comprehensive reform to increase non-oil tax so as to get funds to build infrastructure and human development. Justifying the $3bn loan from the World Bank, Ahmed who is leading the Federal Government’s delegation to the meeting said she would be holding further discussions with the management of the bank to present how the fund would be disbursed for the power project.

The World Bank had in September disclosed that the Federal Government of Nigeria was seeking a loan in the region of $2.5bn. The Vice President for Africa, Hafez Ghanem, disclosed this in an interview with Bloomberg in Abuja. He added that in the past year, Nigeria received $2.4 bn. On Thursday, the minister said based on the plan of the Federal Government for the power sector, the loan would be used for the development of transmission and distribution networks to enhance delivery of electricity.

Ahmed also said the loan would be used in addressing some of the challenges that the country was facing in the power sector. She said, “There is a proposed $2.5bn to $3bn facility for the power sector development programme in Nigeria and this will include development of the transmission networks and the distribution networks as well as removing the challenges that we currently have in the electricity sector.

“We are going to have a full meeting to discuss the power sector recovery programme and back home we have been working a great deal with the World Bank to design how this programme will be implemented. “So we have an opportunity now to have a direct meeting with the leadership of the bank and to tell them the plan we have and how much we need from one to five years.”

The finance minister explained that the government would be pushing that the $3bn facility be disbursed in two tranches of $1.5bn each.

We have revenue problem, not debt challenge – FG

When asked to comment on concerns being raised by the IMF about Nigeria’s debt which stands at N25.7tn, the finance minister insisted that Nigeria did not have a debt problem. She said what the government needed to do was to increase its revenue generating capacity in order to boost the revenue to about 50 per cent of Gross Domestic Product.

She said with Nigeria’s current revenue to the  GDP ratio standing at just 19 per cent, its underperformance is significantly straining government’s ability to service its debt obligation. The minister said, “Nigeria does not have a debt problem. What we have is a revenue problem. Our revenue to the GDP is still one of the lowest among countries that are comparable to us.  It is about 19 per cent of the GDP and what the World Bank and the IMF recommend is about 50 per cent of GDP for countries that are our size. We are not there yet. What we have is a revenue problem.

FG says revenue underperformance straining debt servicing

“The underperformance of our revenue is causing a significant strain in our ability to service debt and to service government day-to-day recurrent expenditure and that is why all the work we are doing at the ministry of finance is concentrating on driving the increase in revenue.” When asked why the Federal Government decided to increase the revenue projection in the 2020 budget to N8.9tn at a time when government revenue performance was less than 60 per cent, she said a lot of measures were being put in place to correct the problem.

For instance, in expanding the revenue base, Ahmed said VAT increase had been proposed, adding that other streams of revenue such as excise duties on carbonated drinks were being introduced. The minister said, “The fact that our revenue is underperforming is not an excuse to bring down our revenue that is required to fund the national budget.

“In 2018, our revenue performed at the level of 58 per cent. Half year 2019, our performance moved up slightly to 58 per cent. But that is not an excuse to reduce the revenue. Because it means we are all sanctioning underperformance.

“So we have to push the agencies. We have to push ourselves to meet those targets. Those targets are not designed by the Ministry of Finance, Budget and National Planning, the agencies proposed those targets. “But we sit down with them and interrogate them. For example, the NNPC has a production capacity of 2.5 million barrels per day.

“In 2019, they wanted a target of 2.5 million barrels per day but we insisted to be prudent and scaled it down to 2.3 million. And the performance is 1.98 million effectively including 100,000 per day that is used to settle cash call earnings but the capacity is there. She added, “So why should we not be looking at what do we have to do to make sure the capacity utilisation is attained.

“Why do we want to reduce it because we are underperforming? We are lucky that crude oil in 2018, out-performed the budget because we budgeted $60 per barrel and we ended up with an average of $67 per barrel. “Otherwise, if we had lower prices, the 55 per cent performance wouldn’t have been achieved.”

She said going forward, what the government would do was to make sure the agencies that have responsibility to generate revenue actually generated the revenues. On the issue of border closure, she said the action was taken because the Federal Government was not getting the right cooperation with neigbouring countries. She said going by the fact the Nigeria had signed onto the African Continental Free Trade Agreement, there was the need for government to ensure that those bilateral agreements with other countries were respected.

She added, “We have over the years committed to some alliances and bilateral agreements but our neigbours are not respecting those bilateral agreements and at this time when the President has signed Nigeria up to the African Continental Free Trade Agreement.

“It becomes more importantly for us to make sure everybody complies with the commitments that are made.” She said over the years, the practice where goods were smuggled into Nigeria from neigbouring countries had done lots of damage to the Nigerian economy.

FG will implement bold reforms to raise revenue – Ahmed: Also in Washington, the minister said the Federal Government would be implementing what she described as a “bold and audacious” reform to increase revenue to finance developmental programmes. Ahmed, who spoke on the topic “Strengthening domestic revenue mobilization,” explained that with numerous complex issues at hand, Nigeria must do things differently “which requires robust, tough, well-coordinated and multi-faceted reforms.” She said Nigeria when compared with its peers was lagging behind on most revenue streams including VAT and excise revenues.

The minister said the country did not only have one of the lowest VAT rates in the world but weak collection method. She added that there were a lot of incentives and deductions that further constrained the fiscal space and reduced the hope of stimulating growth of industries.

She said, “The key question is why we keep performing poorly? And what can we do differently this time to effectively turn around without any relapse even in successive governments?

“Simply put, we have very low effective tax rates, archaic tax laws that are not evolving at commensurate pace with businesses, leakages in our revenue collection systems, low tax compliance rates and poor tax morale to mention a few.

…plans review of strategic revenue initiative “With numerous complex issues at hand, Nigeria must do things differently which requires robust, tough, well-coordinated and multi-faceted reforms.”

Speaking on some of the reforms that would be implemented to grow revenue, she said the Strategic Revenue Growth Initiative which was launched last year would be reviewed

Low revenue: Ministers, others face sanction On what would be different this time with the SRGI, she said, “This time round, there are performance targets with consequences for non-performance including the members of the cabinet.

“For example, I have signed to deliver the 15 per cent revenue to the GDP in a performance contract and this will be cascaded down to heads of revenue generating entities to align them with our mission of turning around revenues. We are in the process of developing a second version of the SRGI.”

“The SRGI 2.0 will be informed by data so we are able to better allocate resources and focus on the high impact initiatives as revealed by analysis. “In tune with the fourth industrial revolution, we want a technological led reform. For example, in a bid to leverage available big data in our public sector domain, Project Light House is driven centrally at the Ministry of Finance to provide intelligence to the FIRS, state tax authorities and other revenue collecting agencies.”

FG to develop national single window for customs

“On the customs front, we are in the process of developing our national single window.” On tax laws, she said the Federal Government had submitted a finance bill alongside the 2020 budget proposal to the National Assembly for consideration and passage into law. The finance bill, according to her, will promote fiscal equity by mitigating instances of regressive taxation; reform domestic tax laws to align with global best practices; and introduce tax incentives for investments in infrastructure and capital markets.

She added, “The draft Finance Bill proposes an increase of the VAT rate from five per cent to 7.5 per cent. As such, the 2020 Appropriation Bill is based on this new VAT rate. The additional revenues will be used to fund health, education and infrastructure programmes.

“As the states and local governments are allocated 85 per cent of all VAT revenues, we expect to see greater quality and efficiency in their spending in these areas as well. “Additionally, our proposals also raise the threshold for VAT registration to N25m in turnover per annum, such that the revenue authorities can focus their compliance efforts on larger businesses thereby bringing relief for our Micro, Small and Medium-sized businesses.

“The VAT reform is meant to improve Nigeria’s VAT as a share of the GDP in Nigeria which has declined from one per cent in 2010-2013 to 0.8 per cent in the last four years (2015 – 2018).”

She put the country’s efficiency of VAT collection, at 0.2 per cent adding that this was well below the African regional average of 0.33 per cent.

The inefficiency in VAT collection, the finance minister stated was partly due to challenges in tax administration system.

She also said this reflected the high level of items currently exempted from VAT, including the consumption of basic food, pharmaceuticals and educational items.

FG considering excise duties tax for carbonated drinks She also said, “Our objective is to be able to harness the existing revenue streams that we have by ensuring that enforcement is effective to expand the tax base and also to identify new revenue streams that we can add to expand the revenue base,” she said.

“So in expanding the revenue base, we have proposed the increase of VAT but there are also other revenue streams that we are looking at and some of them include the introduction of excise duties on carbonated drinks but there is a process to doing these things.” Punch

Pix: Zainab Ahmed , Ngeria’s Finance Minister