Debt sustainability crisis likely
‘Businesses should key into N2.6tr package’
NIGERIA risks a return to recession — the second in four years — unless there is a strong third quarter economic performance, the Federal Government has warned.
It explained that another recession will come with grave consequences.
The government also warned that Nigeria faces significant medium-term fiscal challenges, especially in revenue generation, which if not immediately addressed, could snowball into a debt sustainability crisis.
Minister of State for Finance, Budget and National Planning, Clement Agba spoke yesterday at an interactive session organised by the House of Representatives Joint Committees on Finance, Appropriation, Budget and Economic Development as well as Loans and Debt Management.
Agba, who represented the Minister for Finance, Budget and National Planning Mrs. Zainab Ahmed, said Nigeria is exposed to spikes in risk in the global capital markets.
According to him, this situation puts further pressure on the foreign exchange market as a result of foreign portfolio investors exit from the Nigerian market.
Agba admitted that the Nigerian economy faced serious challenges in the first half of this year, with the microeconomic environment significantly disrupted by the COVID-19 pandemic.
According to the minister, crude oil prices declined sharply in the mild market, with Bonny Light crude oil price dropping from a peak of US$72 pb on January 7, 2020 to below US$20 in April. 2020 as a result of which the US$57 crude oil price benchmark on which the 2020 budget was based became unsustainable.
He said massive output cut by OPEC and its allies to stabilize the world oil market was another key development in the international crude oil market with Nigeria contributing about 300,000 bpd of production cuts.
The Minister explained that the Impact of these developments is about 65 per cent decline in projected net 2020 government revenues from the oil and gas sector, with adverse consequences for foreign exchange inûows into the economy.
He said in response to the developments affecting the supply of foreign exchange to the economy, the Central Bank of Nigeria (CBN) adjusted the ofûcial exchange rate to N360/USD1, and more recently to N379/USD.
The minister maintained that the disruptions in global trade and logistics would negatively affect Customs duty collections in 2020, while the COVID-19 containment measures have inhibited domestic economic activities, with consequential negative impact on taxation and other government revenues.
As a result of this, he said, the projections for Customs duty, Stamp Duty, Value Added Tax, and
Company Income Tax revenues were recently reviewed downwards in the revised 2020 budget, adding that in spite of the challenges, Customs revenue has generally performed close to target over the last few years, exceeding target in 2019 as well as some level of improvement in Company Income Tax and VAT remittances.
Agba said further that over the past five years, actual revenue performance averaged 61.4 per cent, adding that some government reforms are yielding positive results, with significant improvements between 2018 & 2019, saying “we believe we can do more to improve revenues, especially remittances from Government Owned Enterprises, possibly up to N1 trillion.
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He said the key parameters as well as other macroeconomic projections during the medium term revenue and expenditure framework have been revised by the government in line with the emergent realities.
The minister maintained that “oil GDP growth rate has a strong positive correlation with real GDP growth in Nigeria. Consequently, changes in the underlying drivers of oil GDP will significantly affect real GDP performance.”
He said although Nigeria‘s total production capacity stands at about 2.5 mbpd, current crude production stands at about 1.4mbpd in compliance with the OPEC production quota), and an additional 300,000bpd of condensates, totaling about 1.7mbpd.
He added that the World Bank has projected that crude oil prices will rise gradually from an average of US$42 pb in 2021 to $44.5 pb in 2022, and US$47 pb in 2023, while EIA expects Brent crude oil prices to average $41 pb during the second half of 2020 and $50 pb during 2021, reaching $53 pb by the end of 2021.
Agba said with oil price projected to remain low and volatile in 2020, and Nigeria’s compliancewith 0PEC cuts by reducing base production to between 1.412 mbpd and 1.579 mbpd from June to end of the year, growth in Oil GDP is expected to decline in 2020.
The Minister said the nominal GDP is expected to increase from N130,836.1 billion in 2020 to N132.1254 billion in 2021 and then up to N138,415.8 billion in 2023. Similarly, consumption expenditure ls projected to stay ûat at N118,735.2 billion in 2020 and N118,468 billion in 2021 and grew to N124,358iS billion by 2023, reûecting a gradual steadiness in the recovery.
He said inflation is expected to remain above single digit over the medium term, given the structural issues impacting on cost of doing business. He explained that fiscal measures are being instituted to improve government revenue and entrench a regime of prudence with emphasis on achieving value for money aimed at keeping the economy active through carefully calibrated regulatory/policy measures designed to boost domestic value addition, de—risk the enterprise environment, attract external investment and sources of funding, among others.
Agba said improving the tax administration framework to optimize government revenue has been a major thrust of the Administration’s Strategic Revenue Growth Initiative (SRGI), saying “we have included in the 2021 – 23 MTEF/FSP, a Tax Expenditure Statement (TES) overview which seeks to dimension the cost of tax waivers/concessions, and evaluate their policy effectiveness.
“To enhance Independent Revenue generation and collection, Government will optimize the potentials. operational and collection efûciency of GOEs with a view to generating igniûcantly higher revenues required to fund the FGN budget.
“Current revenue performance of GOEs will be addressed through the effective implementation of the enhanced Performance Management Framework. The key elements of the reform initiative include Performance Contracts for Chief Executive Ofûcers (CEOs) and key management staff, which will set ûnancial indicators and targets for each GOE
“The cost-to-revenue ratio of GOEs has by a Presidential directive been limited to a maximum of 60 per cent-70 per cent. While regular monitoring and reporting of revenue and expenditure performance of GOEs will be undertaken by both the Budget Office of the Federation and the Ofûce of the Accountant General of the Federation”
He said the Finance Bill 2020, which will accompany the 2021 Budget Proposal, will contain measures to advance the SRGI, saying “we shall also work closely with the National Assembly to amend relevant laws that need to be amended to help with the SRGL.
“We have revised the 2020 FGN budget and will accelerate implementation to maintain budget credibility, enhance GDP growth and promote social inclusion. The draft 2021 — 2023 MTEF/FSP has been prepared against the backdrop of a global recession and heightened global economic uncertainty.
“The draft 2021-2023 Medium Term Fiscal Framework shows that there are continuing global challenges due to the COVlD-19 pandemic. The medium-term outlook for Nigeria suggests that ûscal risks are somewhat elevated, largely due to Covid-19 related disruptions which have exacerbated structural weaknesses in the economy.