COVID-19 has wreaked havoc on Nigeria’s economy. Official statistics show that growth declined by 1.9% in 2020, but the fallouts will be far-reaching. Nigeria has significant underlying challenges that will make recovery difficult. It is the seventh most populous country in the world, with 70% of the population under the age of 30. It also has one of the highest youth unemployment rates in Africa — two out of three young Nigerians (aged 15-24) are unemployed. Moreover, over 80 million people live below the extreme poverty line.
Globally, Nigeria has one of the lowest revenue levels as a share of GDP, and the government mostly relies on proceeds from oil exports to finance its expenditure. The pandemic has further highlighted the need for the country to diversify its economy and revenue streams. The government is generating significantly smaller revenue vis-à-vis expenditure, driving fiscal deficit higher – fiscal deficit/revenue ratio was 180% in Q3 2020, compared to 35% in 2017. Despite this, most of Nigeria’s revenue is spent on servicing its outstanding debt – 74% of revenue earned in the same period.
Ineffective tax policies are also robbing the economy of much needed revenue. In 2019 alone, the government exempted some companies from paying taxes on their annual income (known as Company Income Tax waivers) up to 1.2 trillion Naira ($3 billion), with 94% going to banks and financial institutions. This is almost double the amount allocated for education in the same year.
Nigeria’s investments in key sectors such as education, health, agriculture, and social protection are currently too low, making it difficult to alleviate poverty. Only about 12% of people living in poverty are estimated to have received cash transfer as COVID-19 palliative. As Nigerians deal with insufficient social protection and poor infrastructure, prices of goods and services are rising. Inflation rate has risen to 18.1% in April 2021, the highest in four years, while food prices have gone up to 22.7%.
How has the Nigerian government responded to impacts of the pandemic?
Since the pandemic started, the Nigerian government has rolled out some programmes to provide relief to the citizens, including:
- Tax policy measures to mitigate the impact of the pandemic, such as exemption for small businesses from certain tax obligations, exemption for people making minimum wage or less from personal income tax, among others.
- Social protection programmes, such as public works employment, cash transfer, grants, and payroll support for micro, small, and medium enterprises.
Additionally, the government implemented some initiatives to improve the fiscal space:
- Publishing tax statements to measure the cost of tax waivers and evaluate the effectiveness of the government’s tax policy.
- A new performance management framework to address sub-optimal revenue performance in government-owned enterprises.
- Partial removal of oil subsidy and a cost-reflective tariff for electricity.
- Cost optimization exercises, including a payroll review and the Integrated Personnel Payroll Information System, which has saved over 230 billion Naira over three years.
While these are all welcome developments and a step in the right direction, they are insufficient to turnaround the economy. The government must do more to address Nigeria’s socio-economic challenges.
1. Prioritize structural reforms that will drive economic diversification, enhance trade, and create employment opportunities. This includes making targeted investments in labour-intensive sectors (such as the ICT/digital sector, agriculture, and manufacturing), providing good quality physical infrastructure and resolving bottleneck challenges that will allow the private sector to grow and attract new private investments.
2. Strong investments in social protection are urgently needed. The government should redirect the fuel subsidy funds or cut back on expenditures that do not produce real value to the economy, such as non-essential recurring expenses, elimination of ghost workers to reduce personnel costs in the public sector, which took up 85% of government revenue in the first three quarters of 2020.
3. Do away with ineffective policies that crowd out the fiscal space. While the publication of the annual tax expenditure statement is a right step, the executive and legislative arms of government should step up by drastically reducing the numbers of tax relief programs provided and ensure they are targeted at value-creating sectors like agriculture, manufacturing, and ICT/digital. Another ineffective policy is the use of multiple exchange rates where different exchange rates are applied to different transactions such as converting oil earnings at the official rate rather than the market-determined rate; the latter would increase oil revenue available to the government.
4. Ensure transparency and accountability in public finance. This includes critical review of annual budgets by the legislative arm to eliminate project duplication and suspicious items. Despite the dire fiscal position, 316 projects were identified to be duplicated in the 2021 budget. There have also been reports of non-remittance of revenue by ministries, departments, and agencies to the federation account. The legislative arm of government must work with civil societies and rise up to its responsibility of holding heads of ministries, departments, and agencies accountable.
This pandemic offers the Nigerian government an opportunity to build back better by taking actions that address existing challenges, bring about structural transformation, and restore the economy to the path of sustainable development.