By Bassey Udo
Nigeria’s overall fiscal deficits in the 2023 Federal Budget will exceed the six percent of gross domestic product (GDP) threshold and pushing total public debt to about 43 percent of GDP by 2027 if steps are not taken to generate more revenue, remove fuel subsidy and cut down on debt servicing, the International Monetary Fund (IMF) has said.
In its latest review of the Nigerian economy at the end of its staff mission, the IMF noted that the country’s public finance was under serious stress with elevated fiscal deficits, increasing debt servicing costs and increasing projected public debt in the medium term.
In 2022, total debt service cost was put at about N3.88 trillion, with a deficit component at about N6.39 trillion and N3.55 trillion for the payment of fuel subsidy.
In the 2023 Fiscal Appropriation, total budget deficit increased to N10.78 trillion, with debt service growing to about N6.56 trillion and provision for fuel subsidy payment to take about N3.3 trillion between January and June, 2023.
But the IMF’s projection showed that despite expected higher non-oil revenues relative to 2021 figures, the general government fiscal deficit in 2022 widened to 6.2 percent of GDP, mainly due to rising fuel subsidy costs.
“Notwithstanding higher (crude) oil prices, the economy is expanding at slightly above the population growth rate. The double-digit increases in Nigeria’s terms of trade and significant improvement in the trade balance created an opportunity to build fiscal space and foreign exchange (FX) reserves, but that opportunity was not harnessed.
“Inflation is elevated and fuel subsidies remain a formidable drain on fiscal revenues. Ensuring macroeconomic stability requires tightening across all policy levers, and stronger revenue mobilization and exchange rate reforms. In addition to consistent macroeconomic policies, a more robust growth trajectory would require measures to decisively tackle governance weaknesses and implement trade and agricultural reforms,” the IMF said.
Economic recovery, the Fund said, continues on the back of growth in the agriculture and services sectors, with overall output growth at 3.4 percent (year on year) in the second quarter of 2022 underlining the seventh consecutive quarter of growth driven by various services sectors, especially information technology, trade, and finance.
Amid declining crude oil production since mid-2020, as a result of low investment and significant leakages associated with poor maintenance and theft, the Fund said despite Nigeria’s limited direct exposures, the war in Ukraine has impacted higher domestic food prices with headline inflation reaching its 17-year high at 21.1 percent (year on years)in October 2022.
The high food insecurity in the country, the Fund said, was compounding the COVID-19 pandemic’s effects on the vulnerable.
Although Nigeria’s debt is still deemed sustainable, it is projected to gulp nearly 50 percent of general government revenues in interest payments, making the fiscal position highly vulnerable to real interest rate shocks.
The situation, the IMF noted, would leave little room for fiscal intervention through the provision of vital social spendings on education and health, where Nigeria fares poorly compared to peer countries in sub-Saharan Africa (SSA).
The IMF called for urgent revenue mobilization and reforms in fuel subsidy payments as critical to create the much needed fiscal space.
As part of comprehensive fiscal reforms supported by high-level political commitment, the IMF recommended some measures to help create fiscal savings of close to 6 percentage points of GDP during 2023-27 while also making room for higher social spending.
Apart from prioritizing the removal of fuel subsidies fully and permanently by mid-2023 as planned, the Fund called for action to address the growing incidence of crude oil theft and governance issues in the oil sector to restore production to pre-pandemic levels.
Also, the IMF said the government should step up the implementation of tax administration reforms in the country, saying the steady implementation of the tax automation system (TaxPro Max) was welcome.
Efforts, it said, should be stepped up to further expand coverage under a well-designed roadmap and strengthen taxpayer segmentation centering on the Large Taxpayer Offices (LTOs).
In the medium-term, the tax authorities should develop a compliance improvement programme and comprehensive customs modernization programme, improve the effectiveness of the State Internal Revenue Service’s administration of the Pay-As-You-Earn (PAYE) system, and strengthen inter-agency coordination and data sharing.
Besides, the Fund emphasized the adoption of tax policy reforms, by considering the adjustment of tax rates to levels comparable to the average in the Economic Community of West African States (ECOWAS) as compliance improves.
“This includes further increasing the VAT rate to 15 percent by 2027 in steps while streamlining numerous VAT exemptions based on systemic reviews, increasing excise rates on alcoholic and tobacco products, while broadening the base, and rationalizing tax incentives by streamlining tax expenditures based on comprehensive periodic reviews,” it said.
In addition, the IMF proposed an increase in well-targeted social assistance, to mitigate food insecurity and cushion the impact of high inflation and fuel subsidy removal on the poor, by increasing social spending by up to 1.7 percentage points of GDP during 2023-27 in well-targeted programmes in coordination with the World Bank and other development partners.
Despite recent improvements, the IMF said some gaps remained, requiring fiscal transparency for a sound fiscal policy.
Although the state-owned Nigerian National Petroleum Company (NNPC) has been publishing its annual financial reports since 2019, the IMF said uncertainties still existed regarding the nature of tax write-offs and fuel consumption volumes.
The NNPC has been getting foreign exchange from the Central Bank of Nigeria (CBN) at the official rate for the importation of petroleum products, while the 65 million litres national fuel consumption figure declared by the Nigerian Midstream-Downstream Petroleum Regulatory Agency (NMDPRA) has remained contentious against the 33 million litres figure those familiar with issue say the country consumes.
The IMF has therefore called for a closer look at the nature of NNPC’s financial commitments to the government and the costing details of the fuel subsidy, including through a financial audit.
“Stronger cash management and better coordination among key public institutions is needed to increase the realism of budgetary forecasts and reduce reliance on central bank overdrafts,” it said.
On monetary policy, the IMF welcomed measures by the CBN to tighten liquidity and curb inflationary pressures by increasing the monetary policy rate (MPR) by a cumulative 400 basis points and raising the cash reserve ratio (CRR).
Nigeria’s lending rate, popularly called the monetary policy rate, is currently at 15.5 percent, after the CBN raised it twice from 13 percent in July to 14 percent, while CRR, which represents the cash the commercial banks have with the CBN, was also raised from 27.5 percent to 32.5 percent within the same period.
Noting that the current MPR was still below the inflation rate, which currently stands at 21.09 percent in October, and financing provided to the budget as well as the CBN’s directed lending schemes continue to drive strong monetary expansion.
“Decisive and effective monetary policy tightening is a priority to prevent risks of de-anchoring of inflation expectations,” the IMF said.
The IMF recommended the policy to tighten the monetary policy stance by fully sterilizing the impact of CBN’s financing of fiscal deficits on money supply; readiness to further increase the MPR to send a tightening signal, and continuous phasing out CBN’s credit intervention programmes, which expanded rapidly during the COVID-19 pandemic to support the economy.
While welcoming the CBN’s decision to securitize the existing stock of overdrafts to the government through Ways and Means, the IMF urged the government to speedily finalize the process.
Going forward, the Fund stressed the need to limit reliance on CBN overdrafts for fiscal financing to the statutory limit of 5 percent of previous year’s revenues by pursuing fiscal consolidation, better budgetary planning and resorting to supplementary budgets in case of financing shortfalls.
Reiterating its recommendation for modernizing the 2007 CBN Act to establish price stability as its primary objective, the IMF called for enhanced transparency through the timely publishing of audited financial statements.
On exchange rate management, the IMF said a unified and market-clearing exchange rate remained critical to efforts to enhance confidence, pointing out that continued FX shortages, a stabilized exchange rate regime, rising inflation, limited debt servicing capacity, and administrative restrictions on current transactions fuel devaluation speculations were hindering capital inflows, encouraging outflows and constraining private sector investment.
To achieve a unified and market-clearing exchange rate, the IMF asked the CBN to dismantle the various exchange rate windows and provide clarity on exchange rate policy and supportive fiscal and monetary policies.
In the medium term, the Fund said the CBN should step back from its role as the main FX intermediator, by limiting interventions to smoothing market volatility and allowing banks to freely determine FX buy-sell rates.