Addressing Nigeria’s Fiscal Challenges: A Comprehensive Approach

Auwal Ibrahim Musa (Rafsanjani), Executive Director of CISLAC

Nigeria is currently confronting a severe fiscal crisis marked by a consistent decline in federal government revenue over the past half-decade. Central to this concern is the government’s overreliance on unsustainable debts which is perpetuated by unrealistic/over bloated budgets, weak revenue mobilization efforts, misplaced spending priorities and a lack of transparency and accountability in public finance management.

This alarming trend is evidenced by substantial shortfalls in revenue, with deficits ranging from 31% to as high as 50% in the years spanning 2018 to 2023. Concurrently, Nigeria’s overall debt burden has skyrocketed, reaching a staggering N97.34 trillion in the fourth quarter of 2023 from N87.9 trillion ($114.3 billion) as of June 2023. While Nigeria’s debt profile continues to grow, and it allocates most of its budget revenue to debt servicing at the expense of investing in more critical social sectors and infrastructural development, there has been a wide consensus around:

Firstly, the reasonability/sincerity of purpose behind external borrowings, in November 2023, the Government signed a $2.8 billion supplementary budget that included funding for new bulletproof cars for the President and First Lady, a Presidential yacht, and renovations of the President’s residential quarters amid a nation-wide cost-of-living crisis. This coincided with a Presidential request to the Senate for the approval of an external loan facility of $7.86 billion and 100 million euros. The Government has also mortgaged its crude oil reserves in Debt for future crude arrangements- Project Eagle in 2020 and the recent Afrexim “pre-export finance facility” worth $3.3 billion at an 11.85% per annum interest rate.

Secondly, increasing role of private creditors in Nigeria’s debt crisis and its human costs, 37% of Nigeria’s total external debt figure is owed to private creditors and the government will spend six times more on servicing debts than on building new schools and hospitals in 2024.

Thirdly, non-objective assessment of debt sustainability using Debt-to-GDP ratio (which puts us at a moderate risk of debt distress at 41.15% despite being above the DMO’s self-imposed threshold of 40%) as against Debt-to-revenue ratio (which stands at 73.5% and still above the DMO’s 50% self-imposed threshold for 2023).

Fourthly, lack of accountability mechanism in utilization of loans for the purpose for which they were granted/taken. The 2020 annual audit report published by the Auditor-General of the Federation revealed there was no document to show the movement and spending of the $3.4 billion COVID-19 emergency financing package loaned to Nigeria in April 2020 by the International Monetary Fund (IMF).

Compounding Nigeria’s fiscal woes are significant revenue losses attributed to tax expenditures, encompassing incentives, exemptions, credits, and waivers. According to the 2021 Tax Expenditure Statement (TES), revenue foregone due to tax expenditures accounted for approximately 4% of GDP, equating to N6.8 trillion. This substantial leakage of revenue underscores the urgency of addressing tax expenditure and debt management issues with utmost priority.

In response to these multifaceted challenges, the Civil Society Legislative Advocacy Centre and the Tax Justice and Governance Platform with support from Christian Aid Nigeria through an ongoing Debt Justice campaign, have undertaken several sensitization engagements with civil society and media as well as policy engagements with relevant state actors, most of which have been informed by our research on tax expenditures and its implications on debt management and sustainability in Nigeria. We believe that governments at all levels need to acknowledge the critical importance of formulating, implementing and monitoring fiscal policies that are technically sound, widely acceptable and administratively feasible.

With a focus on tax expenditures, debt management, revenue mobilization reforms, and the prioritization of spending, the government should be committed to enacting measures that promote fiscal transparency, accountability, and sustainability.

Tax Expenditures

While tax incentives can be valuable tools for stimulating investment and economic activity, unchecked tax expenditures can strain public finances and hinder revenue generation. There is a pressing need for a comprehensive review of existing tax incentives to ensure their effectiveness, efficiency, and alignment with national development priorities.

To this end, we appeal for the:

• Conduct of thorough assessments of existing tax incentives to identify areas of inefficiency, duplication, or inequity.
• Engagement of stakeholders, including government agencies, private sector representatives, and civil society organizations, to solicit input and expertise in the reformulation of tax policies.
• Promotion of transparency and accountability in the administration of tax expenditures, including regular reporting and evaluation mechanisms to assess the impact of revenue generating organizations and their economic outcomes.

Debt Management

Prudent debt management is essential for safeguarding fiscal sustainability and mitigating risks to macroeconomic stability. Nigeria faces significant challenges in managing its debt burden amidst competing demands for scarce resources. The government should recognize the urgency of adopting a holistic approach to debt management that balances the need for borrowing with the imperative of debt sustainability.

In pursuit of responsible debt management, commitments and actions should be taken towards:

• Investigating the movement and spending of loans received by the Federal Government in the past and present administrations, including but not limited to the $3.4 billion loan obtained from the International Monetary Fund (IMF) as reported in the 2020 annual audited report published last week by the Auditor-General of the Federation.
• Revising legal and institutional frameworks related to debt management, emphasizing transparency and accountability. This includes empowering bodies like the Fiscal Responsibility Commission and the Debt Management Office to enforce laws and regulations.
• Enhancing oversight of government borrowing activities to ensure transparency, accountability, and adherence to fiscal discipline.
• Strengthening debt sustainability assessments to assess the affordability and risks associated with new borrowing initiatives.
• Exploring innovative financing mechanisms and debt restructuring options to alleviate debt pressures and create fiscal space for priority investments in infrastructure, human capital, and social services.

Revenue Mobilization (Tax) Reforms

Towards enhancing revenue mobilization through tax reforms is crucial for Nigeria’s fiscal sustainability the government should prioritize measures aimed at:

• Reviewing and updating tax laws to improve efficiency, equity, and revenue generation.
• Closing loopholes and addressing tax evasion and avoidance through robust enforcement mechanisms.
• Promoting investment-friendly tax policies that stimulate economic growth and job creation.

Prioritization of Spending

In effectively prioritizing spending to ensure efficient allocation of resources and maximize developmental impact, the National Assembly should:

• Scrutinize budget proposals to ensure alignment with national priorities and fiscal sustainability.
• Push for increased investment in critical sectors such as infrastructure, education, healthcare, and social welfare.
• Propose community-driven development (such as health insurance coverage, health care centres, public schools etc.) targeted at the local government levels, as opposed to individual cash transfers.
• Strengthen oversight mechanisms to monitor expenditure implementation and prevent mismanagement or corruption.

 Legislative Engagement

Effective legislative engagement is paramount to achieving meaningful reforms in tax expenditure and debt management. The National Assembly reaffirms its role as a catalyst for change, committed to fostering constructive dialogue, consensus-building, and evidence-based policymaking in collaboration with relevant stakeholders.

In pursuit of this, the National Assembly should:

• Ensure loan approvals undergo rigorous legislative scrutiny, with public involvement and transparent disclosure of terms and conditions
• Convene public hearings, workshops, and consultations to solicit diverse perspectives and expertise on tax expenditure and debt management issues.
• Collaborate with executive agencies, fiscal authorities, and international partners to leverage technical assistance and best practices in fiscal governance and management.
• Champion legislative initiatives that promote fiscal transparency, accountability, and sustainability in line with Nigeria’s long-term development objectives.

Recommendations

There must be sincere demonstrations in the government’s commitment to addressing Nigeria’s pressing fiscal challenges, encompassing tax expenditure, debt management, revenue mobilization, and the prioritization of spending. By harnessing the collective expertise and insights of all relevant stakeholders, we are confident that we will navigate the complexities of Nigeria’s fiscal landscape and chart a course towards sustainable economic growth and development with transparency, accountability, and fiscal prudence as guiding principles.

Auwal Ibrahim Musa (Rafsanjani), the Executive Director of CISLAC on addressing Nigeria’s Fiscal Challenges: A Comprehensive Approach, Delivered at a Media Presentation in Lagos on the 4th of April, 2024.