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Nigeria After Oil: Revenue Challenges and Economic Growth

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Presentation by Yue Man Lee at the second annual Nigerian Tax Research Network meeting which took place in Abuja on 24th and 25th November 2018.

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Nigeria After Oil: Revenue Challenges and Economic Growth

  1. 1. Nigeria after oil: revenue challenges and economic growth NTRN Workshop and Meeting 2018 Abuja, October 2018 Yue Man Lee, Senior Economist, World Bank
  2. 2. Nigeria’s government is very small relative to its economy Nigeria has among the smallest government relative to the size of the economy… Nigeria’s total public expenditures declined from 14% of GDP in 2012 to 10% GDP in 2016, the lowest among regional, aspirational and structural peers 2 Notes: (1) General government consists of central, state and, government and federally allocated extra budgetary funds. The central government does budget does not fully incorporate all MDAs revenues and spending. (2) The sample of chosen countries consists of middle-income economies (World Bank definition); and includes 3 low-income regional comparators (Ethiopia, Uganda, and Tanzania) (3) There are 50 countries in the 2012 and 2016 sample (4) Horizontal axis: GDP per capita in respective years are in constant 2010 USD, then converted into logarithmic (log) form Source: IMF Fiscal Monitor (April 2017) for fiscal data, World Bank fiscal database data for Nigeria data, WB COFIS Database for IDN expenditure data, and World Development Indicators for GDP per capita data
  3. 3. The low and declining public expenditure decline is disconcerting given already low capital stock... 3 Source: IMF Investment and Capital Stock Dataset, 2017; World Bank Staff Calculations.
  4. 4. … and poor social outcomes
  5. 5. Nigeria’s public expenditure levels are due to having one of the lowest revenue-to-GDP globally Even during the commodity boom, Nigeria had one of the lowest (General) government revenues among its structural, aspirational, and regional peers After the oil shocks, Nigeria’s revenues collapsed to 5.9% of GDP in 2016, the lowest ratio among regional, aspirational and structural peers 5 Notes: (1) General government consists of central, state and, government and federally allocated extra budgetary funds. The central government does budget does not fully incorporate all MDAs revenues and spending. (2) The sample of chosen countries consists of middle-income economies (World Bank definition); and includes 3 low-income regional comparators (Ethiopia, Uganda, and Tanzania) (3) There are 50 countries in the 2012 and 2016 sample (4) Horizontal axis: GDP per capita in respective years are in constant 2010 USD, then converted into logarithmic (log) form Source: IMF Fiscal Monitor (April 2017) for fiscal data, World Bank fiscal database data for Nigeria data, WB COFIS Database for IDN expenditure data, and World Development Indicators for GDP per capita data
  6. 6. While debt remains low, it is rising and debt servicing is increasingly crowding out spending due to low revenues Public debt/GDP remains relatively low… Mainly contracted by FGN, and increasing With increasing external (commercial) component for FGN and domestic expenditure arrears for States But increasingly costly to service due to low revenues 6
  7. 7. Nigeria’s revenues are low (1): due to contracting oil revenues and stagnating non-oil revenues… 7
  8. 8. Oil Revenues: It’s not only the price – but production (and deductions…) that matter Oil revenues fluctuate with oil price…. …but also with production… So the conservative budget price assumption… …is ‘negated’ by overestimated oil production…. 8
  9. 9. Step back: Oil sector is small…but affects the rest of economy through FX and fiscal spillovers. Oil has not been the key direct driver of real economy …but it’s the key export and source of forex… …and a dominant single source of fiscal revenues…. …so that consumption and imports contract in line. 9
  10. 10. Nigeria’s revenues are low (2): the non-oil revenues are stagnating due to lack of tax policy reforms and weak tax administration 10 - VAT is not growing above inflation - Corporate tax collection is yet to see significant impact from VAIDS - Customs revenues constraint by import-substitution policies despite devaluation - FGN Independent revenues is a complex issue - States IGR have been limited but are growing
  11. 11. Current trajectory: the baseline medium-term scenario assumes no significant improvement in revenue collection, leading to declining total public spending, continuous accumulation of debt and shrinking fiscal space for development spending. Analyses Questions Key Findings Future: Baseline Scenario What is the baseline medium-term fiscal projections and the implications for debt sustainability and fiscal space • The baseline scenario with no significant tax policy reforms and government respecting fiscal (deficit) rules further limits fiscal space for development expenditures. • The lack of tax policy reform leads to stagnating and then declining total resource envelope. • Combined with increasing interest bill, this further contracts the space for capital and other development spending at all tiers of government. 11
  12. 12. Reform scenario: where could Nigeria be heading to? Analyses Questions Key Findings Future: Medium-term fiscal framework and fiscal reforms What is a more desirable medium- term fiscal framework? What fiscal reforms are needed? • The government in Nigeria cannot deliver on its social and development agenda without increasing total public spending. To come close to even the lowest comparator countries in terms of public expenditures (as a share of GDP), Nigeria would need to at least double its total (general government) expenditures • As the fiscal deficits are already close to the fiscal rule limits, the only mechanism to enable the increase in government expenditure in a sustainable way is through significant (non-oil) tax policy and administration reforms to increase non-oil revenues. 12 Assumptions • Expenditure to double in 5 years and then primary deficit stabilizes • ..allowing for current and capex increases • Oil revenues face slow decline, as in the baseline • Non-oil revenue reforms take place and non-oil revenues grow by 2 p.p. GDP a year for 6 years • …and deficits are maxed out • As primary deficits are closed, debt stabilizes at under 30 % GDP.

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