Prof. Martin Ike Muonso
As the country prepares for the 2023 presidential elections, there have been several debates on the country’s financial situation. There are many expectations from the incoming president of Nigeria to take drastic actions and stop the country’s fiscal crisis.
Imagine being appointed the CEO of one of the world’s most promising failing companies. There is a partially idle workforce of about 120 million. The factory produces at around 30% capacity. Workers are kidnapped and sometimes killed in some parts of the company. Firm-wide discipline is woeful- some directors join supervisors and gatekeepers in pilfering goods. Monthly expenditure is greater than revenue, and the revenue itself is insufficient to service bank loans. The company is experiencing a severe and permanent financial crisis. Frustrated suppliers and customers stand at the gates, just like the firm’s workers, praying for new management to restructure the system.
There are no prizes for guessing that this company is in Nigeria. Our country today is at the bottom of the global class on every measure of an economy’s or government’s capacity to make citizens’ lives safe, fulfilling, and free from extreme deprivation. In the last quarter of 2020, 56% of Nigerians of working age were either unemployed or underemployed. That number would by now have risen to 60%.
Nigeria has the highest number of children out of school and the highest number of people living in extreme poverty, earning us the unfortunate sobriquet “the global poverty capital”. Even within Africa, Nigeria right now is one of the most unpromising places for a child to be born into. The mutually reinforcing high rates of completely uneducated young people and unemployment are key drivers of conflict and insecurity, deepening poverty.
Nigeria is full of crooked and damaged things to fix. To have any chance of succeeding, the next president of Nigeria must act like a CEO on a turnaround mission. He must start by taking drastic steps to improve the nation’s fiscal health, i.e. quickly take measures to boost revenue inflow and stop the massive leakage of revenues. Every CEO understands this- a company that is massively bleeding money and cannot pay for basic things except it borrows is a dead company.
Steps to resolving Nigeria’s financial crisis
The first step to Nigeria’s revival is taking the following bold steps to restore the nation’s fiscal health. Corporate restructuring experts would sequence the task thus: stop the bleeding, stabilise the firm and activate long-term growth. Medical doctors work according to a similar logic-the thing they always first try to do is stop the bleeding.
1. Decapitate the Nigerian Civil Service
The first sector the incoming president of Nigeria has to look into is the civil service. We all have our favourite stories about the bloated Nigerian civil service; the toilet in a ministry with 16 cleaners or the ministry car with 16 drivers. While these stories are true, the greatest waste is at the top, i.e. the vast overheads and perks (N90 million SUVs, estacodes, palatial offices in Abuja and other cities, etc.) of agencies that duplicate each other’s functions.
The March 2013 Steve Oronsaye Committee report recommended the reduction of 263 statutory agencies of government to 161 and the abolishment of 38 agencies. It also further recommended the merger of 52 agencies and the conversion of 14 into departments in ministries. Nothing has happened since 2013. Instead, the president has assented to at least 80 bills to establish more federal agencies and commissions between 2015 and 2019. This means nothing but more jobs and fat perks for friends and families of politicians. Unfortunately, the government is at the core of the country’s financial crisis.
The National Board for Arabic and Islamic Studies is an egregious example of Nigeria’s Financial sinkhole. Billions of naira are spent on office complexes, huge Toyota Land Cruisers, thousands of staff, etc., for agencies, commissions and parastatals to solve real or imaginary problems. The board seems to have started life as a private initiative founded by Sir Ahmadu Bello, the Sardauna of Sokoto, in 1960. It became part of Ahmadu Bello University in 1969 but, by 2017, had become an FGN-funded agency. Its remit is to regulate Arabic and Islamic Studies. It now has a budget of N7.9 billion for the salaries of its 5,963 staff!
Like many professional bodies funded by the FGN, the National Board for Arabic and Islamic Studies could fund its activities completely through a mix of charitable donations and charges for its services.
The next president of Nigeria could signal a commitment to investing scarce public resources in the welfare of ordinary Nigerians over luxuries for a few privileged citizens by completing the cull of the federal agencies that are surplus to our needs within six months of assuming office. A complimentary review would be the reduction of the excessive perquisites and allowances of public office holders, which their counterparts in the rich world can only dream about.
2. Fuel Subsidy. The madness should be stopped at the presidential inauguration on May 29, 2023
Mr. President must announce the cancellation of the fuel subsidy on May 29, 2023, during his inauguration. The next president of Nigeria must make Nigerians know that there is no hope of fixing Nigeria if Nigeria cannot ditch a fiscal policy that allocates half the country’s budget to waste and corruption. Nigeria now spends all it earns from exporting oil on subsidising fuel consumption.
The bill for the fuel subsidy is projected to climb to half of the 2023 N11 trillion naira budget. This is akin to a company devoting about 100% of sales of goods to subsidising transportation for its workers. (And transportation for workers of neighbouring firms as at least 30% of the fuel Nigeria subsidises is smuggled out of the country).
Ideally, the rationale for removing the subsidy and the plan to mitigate its impact on the poorest Nigerians should be a major plank of the presidential candidates’ campaign.
3. Tax Firms’ Profits, Not their Inputs or Operations
Nigeria desperately needs to fill its fiscal tank. The next president of Nigeria must consciously learn to forgo small changes and concentrate on big bucks. Virtually all government agencies relate with businesses and entrepreneurs as if their CAC registration is a certificate to print naira. Nigeria urgently has to create economic opportunities for millions of despondent citizens, a goal we can achieve only through boosting investment and stimulating entrepreneurship. We must prioritise improving the ease of doing business (including the likelihood of deciding to invest and staying to do business in Nigeria) over extracting revenue from businesses. The next president must pay strategic attention to the Nigerian Customs Service and the Nigerian Ports Authority, reorientating them from revenue expansion objectives to service delivery imperatives. High tariffs and poorly equipped and inefficient ports are significant trade inhibitors that cripple Nigeria’s entrepreneurial and manufacturing competitiveness. A June 2022 report ranked Nigeria’s major ports as the 358th out of 370 ports assessed globally, noting that our ports’ poor performance contributes to “inflation, slower growth, unemployment and high international trading costs”.
There are linkages between these fiscal reforms. Pruning naira-gulping agencies in Abuja may invest more in import tariffs to improve infrastructure and thus boost efficiency at the ports. This objective would increase investment in manufacturing, create jobs and expand exports. Suppose Nigeria lowers taxes, fees, cost of licenses, etc., for businesses and invests more in things that help businesses operate efficiently. In that case, more businesses will invest in Nigeria, create jobs, and reduce poverty. The government would reap the fruits of this strategic patience in the form of a bumper harvest of corporate (and personal) income taxes.
4. Put Government’s Vast Real Estate Assets Under Commercial Management
The Federal Government of Nigeria is the major culprit in disfiguring the prime urban landscape. It is not unusual to find dilapidated police barracks occupying three hectares of land next to much smaller plots that leading corporations or multinationals have paid billions of naira to build on. Sometimes, the unsightly barracks are dotted at the edges by even more hideous lock-up shops.
Government agencies are occupying and wasting vast tracts of the most valuable land in cities like Lagos, Port Harcourt, Abuja, etc. This act reflects our (public) culture of waste. Several more office spaces, lands, and buildings would become redundant when the Steve Oransanye committee is implemented, i.e. the FGN scraps many agencies and parastatals. The government could rake in millions from selling this prime real estate. But a better option could be to grant 20-year leases through competitive auctions, thus avoiding rigged fire sales and handing over a mountain of cash to a single government in one fell swoop.
5. Increase VAT on Carefully-Defined Luxury Consumption
In February 2022, Nigeria’s Vice President, Professor Yemi Osinbajo, said Nigeria has the lowest tax-to-GDP ratio in the world. In 2019, taxes were only 6% of revenue despite the tax revenue media campaign that the Buhari administration initiated in February 2017. Even countries plagued for decades by military conflict and political instability, like Chad and the Democratic Republic of Congo, seem to have superior capacities to collect taxes, respectively recording tax-to-GDP ratios of 81.% and 7.5 % in 2019.
Tunisia’s tax-to-GDP ratio is 34.3%, the highest in Africa, while average performers like Burkina Faso, Kenya, and Mali, have tax-to-GDP ratios of 17.6, 17.3, and 16.8, respectively. (The average for Africa is 16.6 %). Nigeria needs to boost tax collection massively, but the reality is that Nigeria’s revenue extraction capacity is frail and cannot be quickly transformed. A quick fix will be to have high rates of VAT, e.g. 15%, on goods and services consumed by the wealthiest Nigerians.
If we are to face facts, such a high VAT rate is justified not because many rich Nigerians manage to evade taxes but also because a lot of income squandered on luxury goods doesn’t come from legitimate taxable sources. Yet, a lot of care has to be taken not to burden businesses with higher costs; a 20% VAT is ok on first-class or business-class holiday tickets but not on business-class domestic tickets to Abuja or Port Harcourt. Higher VAT is appropriate for I-phones, Ipads and laptops sold for over N500,000 but not N300,000 Dell laptops.
Higher rates of property taxes, from which empty mansions in Maitama should not be excluded, are fine on N300 million houses but not for “entry-level” N120 million semi-detached duplexes for senior professionals (who are in formal employment and can’t dodge taxes). Of course, the ultimate goal should be to enhance the state’s capacity to levy and collect rational tax rates.
6. Negotiate a Big IMF Package and Restructure Commercial Debt
Without any doubt, the next president of Nigeria has a lot of economic and financial crisis to look into upon election. Our national debt is currently N41.6 trillion. Nigeria now devotes more than 100% of its income to paying interest on debt, the highest debt service-to-revenue ratio in the world. (South Africa, another country with rotten governance and a troubled economy, uses only 20% of its revenue to service debt). The world’s official poverty capital should not be spending all its revenue on servicing debt, unable to invest in education, healthcare, infrastructure, etc., without pilling on even more expensive debt.
Explicit recognition of how we got here is essential to finding a way out. Under President Buhari, Nigeria completely abandoned the reforms that promote a steady rise in economic output and wealth in favour of policies that promote unsustainable investment, consumption, and waste. Our government refused IMF loans with a 1% interest rate so that we could avoid conditions that would have prevented Nigeria from spending more on fuel subsidies than on healthcare and education combined. Yet, it maintained multiple exchange rates in favour of people with privileged access to forex reserves and wasting billions of naira every year on government agencies that do nothing for Nigerians, etc. We instead took 8% conditions-free loans from global investment banks\.
Nigeria needs to ask these investment banks to restructure these cynical loans; this will be at a considerable cost to our creditworthiness and ability to access commercial debt in the future. Maybe we do not need and are not fit for commercial debt, which only enables us to avoid reforms and keep spending our own on things that will never make us more productive. Negotiating an IMF loan would inject much-needed foreign exchange into the Nigerian economy. But the most significant benefit would be the big economic reforms, e.g. eradicating the fuel subsidy, which we would have to initiate as a condition for an IMF package.
Taking steps towards wise and economical use of our resources would restore confidence in our economy, more than compensating for the loss of credibility involved in restructuring reckless commercial debt.
These are the “fiscal basics” of pulling Nigeria back from the brink. Much more needs to be done to make Nigeria a viable political and economic entity and improve the lives of our 200 million citizens. Root and branch restructuring of the country’s security architecture is critical to reducing high crime levels, eliminating terrorism and crude oil theft.
Behaving like a CEO could work wonders in these more complicated reforms: the incoming president of Nigeria should set clear goals for security chiefs and fire them when they don’t meet them. Nothing under the sun is new; ideas and innovations on how other countries have resolved the problem of oil theft, e.g. by leveraging technology, should be actively adopted. Our problem is often the lack of political will to do anything.
Boldly tackling Nigeria’s fiscal crisis in the first six months, during which the new president and his government will concentrate on stopping Nigeria’s financial hemorrhage, could whet the appetite and develop the capacity for reforms.