How Realistic is Proposed 2019 Budget?

Udoma Udo Udoma

About four months ago, President, Muhammadu Buhari presented a total of N8.83 trillion as the proposed budget for the fiscal year 2019 to a joint session of the National Assembly. Close to N7trillion of that figure, representing 79 per cent of the total, is expected to be financed by government from different revenue resources major of which is oil. Judging by the opinion of

experts, Bamidele Famoofo reports that achieving the budgetary target remains a herculean task for the government

The federal government proposes to spend a total of N8.83 trillion, a figure lower than the current fiscal year’s budget by N300 billion to run the economy in the year 2019. In 2018, N9.12 trillion was signed into law as budget, which was a 6 percent (N508 billion) increase from the N8.61 trillion proposed to lawmakers in 2017.

In the spirit of cutting down on spending due to scarcity of funds, the amount allocated for statutory authorities including the National Assembly was put at N492.36 billion, which is lower than the N530 billion figure set aside in 2018. The figure earmarked for the sinking funds component of the proposed budget was set as N120 billion; a figure which according to the president will be used in retiring maturing bonds to local contractors.

The government is proposing to spend N2.14 trillion or 24 percent of the budget for debt servicing with 80 percent of this amount set aside for servicing its domestic debt component which overall accounts for about 70 percent of its total debt portfolio.

The proposed federal government budget is predicated upon revenue projections of N6.97 trillion for the 2019 fiscal year. From the oil sector, the federal government is expecting revenue of about N3.73 trillion, while N710 billion will come from the proceeds of government equity in joint ventures.

As part of the government’s non-oil revenue push, it anticipates to receive about N799.52 billion from businesses as part of its own share of company income tax receipt. Also, the federal government’s share of revenue from customs duties and value added tax(VAT) are estimated to come to a region of N302.5 billion and N229.34 billion respectively.

Furthermore, the independent revenue of the government is expected to contribute about N624.58 billion to the overall revenue projections for the 2019 fiscal year.

The federal government’s proposed total expenditure for 2019 is projected to be close to N8.83 trillion. The recurrent component of the proposed budget is projected to be about N6.18trillion while N2.03 trillion has been earmarked for capital expenditure and projects.

Oil Revenue

Government’s projection is that   about N3.73 trillion or 42 percent of funding will come from the sales of oil. This figure was derived from assumptions of oil price benchmark of  $60 per barrel and an oil production of 2.3 million barrels per day. Daily crude oil production estimate of 2.3 million barrels per day is the same amount as budgeted for the 2018 fiscal year.

However, Nigeria currently produces about 1.8million barrels per day, which according to some experts in the oil sector, is believed to be a more realistic production estimate.

The contribution of oil to government revenues has slipped from its peak in the early 2000’s to the low price since 2014. This significantly weakened Nigeria’s revenue position.  Meanwhile, oil’s contribution is expected to increase as Q3 2018 figure shows that oil revenues contributed 50 per cent to the federation account. Financial experts at BudgIT are of the opinion that the huge reliance on the oil sector as the main revenue source will, on the long run, place a huge strain on economy due to fluctuating international oil prices and the gradual move away from fossil fuels by Europe and the rest of the world. As such, efforts should be made to shift Nigeria’s economy from its over-reliance on oil revenues.

Non-oil Revenue

Nigeria’s non-oil revenue is mainly divided into value added tax, Corporate Income Tax, customs duties and levies. FG receives 14 percent of the VAT, while other taxes are paid into the Federation Account, which FG is entitled to 48.5 per cent. Nigeria’s non-oil r e v e n u e ( e x c l u d e s independent revenues from agencies by classification) has usually followed the GDP growth and the economic health of the country.

VAT

CEO of BudgIT, Oluseun Onigbinde, noted that as oil price and production swings had been critical to Nigeria’s economic growth, foreign reserves and currency stability, non-oil revenue growth has also been strongly influenced by oil.

“It is evident that when oil revenue declined in 2016 due to the oil price slump, the growth of non-oil revenue marginally reversed. We see this in the change in Company Income Tax revenue—N1.2 trillion in 2014, N1.0 trillion in 2015, N0.9 trillion in 2016, and back to N1.2 trillion in 2017.”

A total VAT uptake of around N229.34 billion was proposed by government for 2019. This amount is higher than about N207.51 billion in 2018. In 2014 and 2015, the federal government’s share of VAT was N106.74 billion and N104.66billion respectively. For the 2017 fiscal year, the federal government’s share of VAT came to about N130.05 billion.

A Globalist article states that, “Nigeria doesn’t fare much better with value-added tax and corporate tax. A paltry 9 percent of Nigerian companies pay corporate tax, while only12 percent of registered businesses comply with VAT obligations. With some estimates finding as many as 99 percent of small businesses are unregistered, those percentages are even lower in reality.”

Company Income Tax

For the 2019 fiscal year, the federal government projects a CIT uptake of N799.51 billion, which is an increase from the approved N658.55 billion for the 2018 fiscal year. FG’s share of CIT rose from the 2015 level of N473.32 billion to an estimated N543.34 billion in 2017.

As at the third quarter of 2018, actual CIT uptake was at N500.37 billion, a N92.78 billion increase from the actual of N407.59 billion in 2017, for a corresponding period. Considering the trends of the past five years, it will be overly optimistic to believe that the federal government will meet its 2019 CIT revenue projections.

“At 30 percent, Nigeria’s CIT rate is higher than the average CIT rate in Africa which is at 28.53 per cent. In the European Union and Asia, CIT rates lie between 18.88 percent and 20.14 percent respectively. With serial reforms to boost corporate taxes which include Voluntary Assets and Income Declaration Scheme (VAIDS), that failed to significantly boost taxes revenues, it is evident that Nigeria lacks the formal private sector depth to deliver huge corporate taxes.”, BudgIT disclosed in its recent report on the budget.

BudgIT believes the recent approach of using bank as agent of tax collection has been heavily resisted, but has a potential of increasing the number. “Another N799billion target by FIRS is commendable, but we do not expect magic in FIRS CIT collection which might reach N1.3trillion in 2019, raising FG’s share (48.5 per cent after cost of collection) to around N650billion,” it said.

Customs and Excise Duties

Tariffs and customs duties revenue projections expected by the federal government for the 2019 fiscal year is pegged at N302.55 billion, down from the 2018 budget figures of N324.86 billion.

In 2012, 2013 and 2014, FG’s share of customs and excise duties revenue projections was N323.25 billion, N412.42billion and N453.24 billion respectively while actual collection in these periods came to about N214.21 billion, N195.11 billion and N255.40 billion respectively.

While the Nigerian Customs Services (NCS) announces the collection of trillions in its press report, there is wide divergence when compared to what it remits to the Federation Account.  According to the Budget Office, Nigerian Customs Service’s payments to the federation account stood at N579billion in 2017, a wide mark off the N1.37trillion announced in the papers.

Revenue Comments Comment

Nigeria’s revenue is too low for the status and size of its GDP. BudgIT analysis shows that Nigeria’s tax to GDP is less than 5per cent, way below average sub-Saharan Africa tax to GDP of 15 percent. Boosting Nigeria’s revenues will require investment in growth enabling sectors, formalisation of tax systems, deepening trust through accountability, easing the tax systems and also reviewing Nigeria’s exemption list.

The  federal government has profited from the modest rise in oil prices after the 2016 slump. It cannot achieve sustainable development by depending on the swings of oil prices; this has remained an existential issue for Nigeria, especially how it links the structure of its economic activity (GDP) to taxes and also reduces the heavy influence of oil in its public revenues.

Expenditure Analysis

The federal government has proposed to spend a total of N8.83 trillion on its expenditure obligations for the 2019 fiscal year, which includes grants and donor funds in the region of N209.92 billion subject to the National Assembly’s review and approval. Of this total figure for expenditure, 77 percent has been designated for recurrent expenditure while 23 percent has been earmarked for capital expenditures/projects (excluding capital projects in statutory transfers).

The total expenditure figure for 2019 at N8.83 trillion represents a 3.17percent decrease from the approved total expenditure of N9.12 trillion for 2018 fiscal year.

Actual spending of the federal government in 2015, 2016 and 2017 was N4.76trillion, N4.4trillion and N6.46trillion respectively.

In 2019, the federal government projects that its debt servicing costs will come to about N2.14 trillion which is expected to take up a huge chunk of the projected revenue for the fiscal year. To meet up with its debt servicing obligation(s), Nigeria will need to improve its overall revenue uptake especially from its non-oil sectors.

The cost of servicing debt is increasingly a challenge for Nigeria. A total of N1.64 trillion was spent in 2017 on servicing debt, against the N1.06 trillion spent in 2015. Buhari’s recent haste in boosting infrastructure is leading to rapid expansion in debt, but it is expected that there will be a more conservative signature approach to debt in its second term.

Nigeria’s recurrent expenditure is made up of debt recurrent (mainly used in servicing debts) and non-debt recurrent expenditure (personnel costs, overheads, pensions, etc.) The amount set out for the federal government’s non-debt recurrent activity is about N4.04 trillion, which shows a significant increase from the 2018 fiscal year figure of N3.51 trillion. Recurrent expenditure from 2016 up till 2018 has been on an upward trajectory, and with the recent approved minimum wage, it will see a sharp rise. While the current government has greatly expanded the budget size, the recurrent expenditure has also been on the rise in nominal terms.

Recurrent expenditure vis-a-vis the federal government’s total spend has been on an upward trajectory, which means that the bulk of the government’s spending is fed into recurrent items. In 2016, spending on recurrent items relative to the federal government’s total spending was as high as 96.06 per cent. However, this percentage reduced to 71 percent in 2017 due to the huge capital expenditure boost in the fiscal year.

This continuous hike of its recurrent obligations may further push the country into a debt trap since the federal government may have to borrow more funds to fulfill its recurrent obligations. To prevent this, the federal government would have to reduce its recurrent expenditure and associated costs, so it can mirror the reality of its revenue.