Thread by @alexottiofr

1/ Your Revenue is Not Too Low, Your Costs are Too High:

For several years now, our annual budgets have consistently not been fully implemented. The main reason for this is that our revenue projections have continued to exceed our actual revenue generation.

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2/ Even when the budgets are prepared based on realistic estimates, there would always be some unexpected events that throw the projections completely off. For instance, given our dependence on crude oil, the volatility in oil prices is such that projections based on the

3/ price ranges at the time of preparing the budgets, quickly become unrealistic. We witnessed this phenomenon in 2014 and 2015 and this was what got the economy spiraling into the crisis that eventually plunged it into a recession.

4/ The exceptions where even though revenue projections fail & the budget is fully implemented would be when the government decides to borrow or resort to ways & means to finance the budget. Suffice it to say that each of those courses of action has its undesirable repercussions.

5/ Where the government chooses to borrow, it would be left with the burden of paying back the loan some day with its attendant costs.

At the inception of the 3rd Republic in 1999, Nigeria had a huge debt overhang.

6/ With deft diplomacy and creative financial engineering, we got out of the debt chokehold. It was such a big achievement as it gave the economy the leeway to attract foreign direct investment and funding that were badly needed for infrastructure development.

7/Those good days seem like a century away, and sadly we seem to have arrived at the debt crossroad once again. In fact, the reality is that we seem to be in a bigger debacle this time around! According to latest figures released by the DMO, our national debt profile

8/ was put at about $81billion or close to N25trillion, as at the end of the first quarter of this year. As at 2018, we used 66% of our revenue to service debt, making it the worst year for the country in terms of debt service to revenue ratio since the advent of this regime.

9/ Our debt service obligation was 33% in 2015, increasing to 45% and 62% in 2016 and 2017 respectively.

If the government decides to use ways and means, a euphemism for printing money, the consequences are even graver.

10/ The economy may be subject to distortion & stress as inflation is sure to worsen. Again, the value of the local currency, relative to other currencies may weaken &/or come under ferocious attack. For those who doubt this scenario, please check with Robert Mugabe’s Zimbabwe.

11/ It is yet another budget presentation time. Last week, President Buhari submitted a budget of N10.33 trillion to the National Assembly. The revenue projection of N8.15 trillion has been questioned by many serious minded analysts.

12/ The prevailing argument is that, going by the performances of the last three budgets, where revenue targets were never met, it made no sense setting unattainable budget figures. The reality is that in each of the immediate past two years, we had been able to barely meet 50%

13/ of the revenue projections. This should mean that, in essence, only 50% of the budget provisions were implemented. Even at that, there is yet another more troubling reality: about 70% of those budget items were for recurrent expenditure.

14/ Since such activities are usually categorised as ‘uncontrollable’ in budgeting parlance, they somehow had to be funded. It therefore means that the expenditure head that is always at risk is the Capital Expenditure. For instance, looking at the 2018 budget,

15/ only about 50% of the Capital budget, meaning only half of the 30% allotted to capital expenditure, was implemented. This has serious implications for the infrastructural development of the economy.

16/ This, in my view, is the main reason why things don’t seem to be moving in the right direction in the economy. Until we realise that no country will develop on the foundation of decayed and inadequate infrastructure,

17/ until we agree that businesses would perform sub-optimally without the enabling environment, until we come to terms with the fact that investments can only flow to those locations in the world, that are most prepared to receive them, given the competition amongst geographies,

18/ we may continue to remain a weak and underperforming economy, with the inevitable consequences. Conventional wisdom says that given that there are two sides to a budget, namely, revenue and expenditure; the latter should naturally be dependent on the former.

19/ It should logically follow that a lot of attention should be paid to the revenue side of the budget, which should determine the expenditure level. The reality, however, is that when one pays more attention to expenses without adequate arrangements for funding,

20/ one is very likely to run into problems like, a debt crisis, inflation, unemployment and the resultant social ills. This is why we have centered our discourse around how to shore up national revenue.

21/ Our main traditional revenue source for about half a century now has been crude oil. Given the declining price and volume of oil, and more importantly, the replacement of oil with renewable energy sources, our attention has moved to non-oil sources and taxation.

22/ It must however be borne in mind that non-oil sources, particularly natural resources and agriculture, also face slightly similar problems experienced with oil. Besides, their prices are hardly within the control of producers.

23/There is always the prospect of overproduction & a glut inevitably brings down prices significantly. Replacement products or substitutes are also easy to come by given science & technology improvements. These realities will ultimately adversely affect demand & therefore price.

24/ The conspiracy theory by importers and consumers has gained currency in the recent times and could affect the revenue of exporting countries. The foregoing realities leave us with taxes as the major revenue source.

25/ In most countries of the world, taxes, form the foundation of state revenues. Again in Nigeria, there are the usual peculiarities and challenges. It can therefore be said that taxes have their limitations. Taxes are only collectible from a thriving economy.

26/ Having defined taxes, in a previous column, as government’s share of the prosperity it had created within the economy, it stands to reason that if the economy is not doing well, the moral right to collect taxes would be lost by government.

27/ Most poignantly, government cannot expect to collect taxes from ailing or dying businesses and people for as the saying goes, one cannot give what one does not have. From a macroeconomic perspective, when an economy is in a distress,

28/ like we are currently experiencing in Nigeria, the right policy to implement is to reduce taxes and put more money in the hands of the people to help jump start the economy. This is because with more money at the disposal of the consumers, it will encourage consumption and

29/ therefore production, which would in turn create jobs. Of course, this also holds true for other collections like tariffs, duties and levies.

Given the above scenario and in the light of the challenges facing the country, what should we then be doing?

30/ The first thing is to get real and tell ourselves some home truths. Ours is a very small and fragile economy. Look at it this way, Nigeria has arguably 200m people. Our GDP is, circa, $445b, keeping us as the largest country in Africa by absolute GDP size.

31/But then absolute numbers are useless for purposes of analysis. Relating our GDP to our population, we have a GDP per Capita of about $2,300. Compare us with South Africa who with a smaller GDP size of about $370b & population of 58m people has a GDP per Capita of over $6,300.

32/ In this same Africa, we have very tiny countries like Mauritius with a GDP size of $15b and a population of 1.3m and GDP per Capita of $11,700. Also, Botswana, with a population of 2.3m people with GDP of $20b, ends up with a GDP per capita of $8,300.

33/ The point being made here is that our size does not lie in the absolute GDP figures but in how much each of us gets, were we to share the GDP equally.

This factor above also applies to the national budget.

34/ The proposed budget size of N10.33 trillion which translates to about $34b, means that the share that accrues to an average Nigerian, is just about $170 or N52,000 for next year. Compare this with South Africa’s 2019 budget of $125b with per Capita budget of $2155.

35/ This is a humbling realisation! So next time you are comparing yourself with other countries, you should be comparing apples with apples and not with things that look like apples. It is clear that we are a small economy and should stop deceiving ourselves into thinking that

36/ we can grow revenue overnight. On the other hand, we have the population, but the population is not as productive & therefore ends up sharing from a very small pot, leaving everyone with a tiny portion. It’s no use pretending to be a big man, when you are in fact, a pauper.

37/ Since growing revenue is obviously not feasible in the short run and since we seem to have hit unsustainable and persistently high levels in terms of debt, the only viable short term option would be to move our attention from the revenue to the cost side.

38/ If one cannot grow revenue, one must look at how to plug the leakages. This time around we shall be addressing cost containment and management. A major problem we had earlier identified is that we spend about 70% of our budget on recurrent expenditure, namely, salaries and

39/ allowances and other consumables. We can decide that we shall work that number down to no more than 30% in the next couple of years. To achieve that, the quickest and lowest hanging fruit is that we must deliberately reduce the cost of governance.

40/The budget is normally full of excess fat, which we can trim to make it leaner and fitter. The first area that contains unwanted fat is Personnel cost. In the proposed 2020 budget, the estimate for Personnel expenditure is N3.6 trillion. This is about 35% of the entire budget.

41/ By the time we drill down, we may find out that we can reduce that significantly without even firing people. Then we go into the budget of the executive arm of government and honestly question everything listed there. The same goes with the legislature and the judiciary.

42/ The next item should be lumped under the heading of ‘avoidable expenses’. The 2019 budget provided for N305b for subsidy on petroleum. We are aware that the figure is more like double this amount.

43/ According to the NNPC, we spent over N650b in the one year from April 2018 to March 2019 under what the corporation refers to as “under recovery” which means unappropriated subsidy payments. Some analysts have argued that the number is closer to N1trillion.

44/ Whatever the correct figure is, it is instructive that we can save the entire funds spent yearly on fuel subsidy. Nigeria is spending an unsustainable proportion of her revenues on unwarranted and unnecessary subsidies.

45/ The next area where we can cut cost in the area of subsidy is foreign currency. Anytime we sell dollars at rates below the market rates, we are subsidising the Naira, or more factually, some undeserving agents and entities in the society.

46/ Restructuring the entire polity will help us save cost in the medium to long term. We may voluntarily do this or wait to be forced by economic forces to do it. The latter is the Malthusian way, which has very adverse consequences for everyone.

47/ We had consistently argued in this column that our democracy, as presently packaged and practised, is unsustainable. We had said it before and we shall continue to say so: that we do not need the size of the government we are struggling with presently.

48/ We should have a weak centre and even the strengthened component parts should also reduce in size. For instance, we had suggested a much smaller executive with a President and Vice President, and with few ministers.

49/ These could be of critical functions, say those of Defence, Finance, and Information. Then we need to reduce the number of States to about six, in tandem with the current six geo political zones of the country, that everyone is already used to.

50/ On the legislature, we should also reduce the number drastically. We had argued in this column in 2017 that we do not need more than 60 people from the six regions in a unicameral National Assembly who would earn sitting allowances only.

51/ Our economy cannot afford full time legislators in the number and cost that we are currently carrying. These same functions can be efficiently handled by accomplished and experienced people who wish to serve the country rather than the present practice where people see the

52/ National Assembly as a place where they will retire into and live a lazy life with undeserved privileges. The members should serve on a part time basis. I believe that a lot of savings would come from this action. The same would apply to the State Houses of Assembly.

53/ Presently, we have close to 1,000 members of the legislature in the different houses across the states along with their thousands of aides and assistants. We would reduce the houses to just six with the attendant savings.

54/ The states & the regions would be made to compete with each other just like it was in the 1963 constitution which worked very well. The states would therefore be required to pay taxes or royalties to the centre, given that powers would have been effectively devolved to them.

55/ By the time we have done this, we would have created the enabling environment for productivity for our people and we would begin to see more people engaged and more businesses spring up to now increase the revenue generating potential of the economy.

The end.