FG revenues forecast to rise 22.9% on subsidy removal
President Muhammadu Buhari

FG revenues forecast to rise 22.9% on subsidy removal

With weak macroeconomic indicators, the need to diversified government revenues has again comes into the forefront.

Now, Afrinvest estimates a 22.9% expansion in revenues over 2018 level if Federal Government removes subsidy and allow market reflective foreign exchange rate.

At MarketForces analysts’ forum at the weekend, discussants said it is not clear if government of the day appreciates the direction of the economy and the need to strengthen the nation’s faltering macroeconomic indicators and the gross domestic products growth.

FG revenues forecast to rise 22.9% on subsidy removal
President Muhammadu Buhari

In the last six years, government has spent about N12 trillion on subsidies, just as the central bank resolved to supporting the Naira has cost the nation huge foreign exchange.

These measures have reduced effectiveness of the invincible hands in allocating resources, analysts said.

Total debt profile hit N24.9 trillion in the first half of the year. This is as a result of the inability of government to increase revenues in short to medium term.

The investment banking firm reckoned that improving the FG’s fiscal position would be tougher than expected.

Analysts at the firm however stated that the outlook is not entirely gloomy as they see quick wins. Government spending on energy subsidies continues to be steep, denying the FG and States of much needed resources.

“We estimate a 22.9% expansion in FG’s revenues over 2018 levels with the removal of petrol subsidies and the adoption of a market reflective exchange rate alone”, the firm stated in its report.

The firm hinted that the direction of Nigeria’s fiscal policy over the medium-term still hangs on a balance as ministers are yet to resume.

It however stated that while delay is costly, a more pressing concern would be seeing the FG sustaining the policies of the past four years.

“Since the collapse in the prices of crude oil in mid-2014, the FG’s revenue has fallen sharply to 3.1% of GDP in 2018 compared with the record high of 5% to GDP in 2013.

“With expenditure outpacing revenues at 5.4% of GDP, the FG has accumulated N3.9 trillion in debt from the domestic and external debt markets to partly plug its fiscal deficit of N8.2 trillion between 2016 and 2018.

“In addition, the FG received N5.6 trillion in monetary financing from the CBN, which is more than half the FG’s total deficit”, Afrinvest revealed.

It stated that this support has breached the constitutional threshold of 5% of the prior year’s revenues by N5.2 trillion. With the cost of servicing debt and recurrent expenditure at 60.8% and 146.9% of revenues respectively, this strategy is unsustainable.

“The FG needs strong revenues boost and cost containment strategies to improve its finances and enhance its contribution to economic growth”, Afrinvest position.

As it recalled, the strategies to boost revenues in the first term of President Buhari fell short of expectations.

“This includes a whistle-blower policy which helped in recovering looted funds and the Voluntary Asset and Income Declaration Scheme (VAIDs) that supported a broader tax net and N30 billion in receipts despite a target of N305  billion.

“Accordingly, FG’s revenue to GDP only improved to 3.1% in 2018 from a low of 2.3% in 2017. To achieve revenue targets, we believe there is a need for comprehensive fiscal reform”, Afrinvest stated.

It stated that this would include action plans to improve the tax system and administration in a bid to drive efficiency by reducing costs and boosting collection.

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“In addition, more transparency and accountability would be required by the citizens to encourage tax payments. The VAT increase being mulled given Nigeria’s lower VAT rate of 5% when compared to peers represents a quick fix”, the firm added.

However, this would not be a silver bullet as total VAT receipts for the entire country is weak at 0.8% of GDP in 2018.

Similarly, as two cities – Lagos and Abuja – account for 75% of the VAT receipts, the FG should work on bringing more businesses into the VAT net rather than imposing more taxes on current taxpayers.

In Lagos, for instance, consumers already pay twice the national rate of 5% as consumption taxes.

Increasing VAT collection would require lower taxes and costs in the formal economy as well as providing conditions that enable faster business growth.

In our view, this would take time; hence revenues are likely to remain weak for an extended time.

Reining in spending will also not come easy as the FG’s wage bill is likely to increase significantly over the next two years due to the implementation of the new minimum wage which is 67.0% higher at N30,000.00/month.

The bigger challenge is that public sector wages often rise almost evenly across the board once a new minimum wage takes effect. For context, the wage bill more than doubled between 2010 and 2012 after the last revision to minimum wage.

Afrinvest said it expects the increase in wages to be less aggressive upon implementation; but added that it would still put considerable pressure on FG’s fragile finances.

The FG is negotiating a moderate increase of 5% and 9.5% for grade levels 7-14 and 15-17 respectively while the Trade Union Congress (TUC) is angling for 25% and 30%.

“We believe the FG needs to rein in overhead costs, which are more discretionary, to partly offset the new wage increase”.

“Ultimately, the passing of the PIB and the review of petrol and electricity prices are necessary to drive improvements in the energy sectors as well as to support an improved fiscal position for governments”, Afrinvest remarked.

FG revenues forecast to rise 22.9% on subsidy removal

VIAJulius Alagbe, Economic/Financial Analyst
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