Managing Nigeria’s revenue brick wall

I ran into my friend Mr Nigeria last week Friday. He was not looking good. He had grown more grey hairs than I remember he had when I saw him two years ago. His clothes were looking worn out. One side of the soles of the shoes he wore was bent, evidence that he has been trekking more than he should.

I was a bit taken aback to see my friend Mr Nigeria looking worse than I saw him two years ago. Mr Nigeria is really not a poor man, though you can’t say he is rich either. He inherited a lot of wealth from his parents. He has had good education too. But somehow, he seems not to have been able to come to grips with managing that wealth he inherited very well or planning adequately to take care of his future.

He is married with five kids but that was three years ago. On Friday, he told me he now has seven kids and the wife is even pregnant with the eighth. He still works at his old job where they pay him N100,000 monthly. Basically, his family income has dropped from an average of N14,286 per head to N11,111 per head in the last three years and is set to drop further with another kid on the way.

In a bid to cope with the higher number of mouths in his family, he said he has been borrowing heavily from family members and friends and even from strangers. He said that he is able to borrow easily because he can pledge some of the assets he inherited. However, his biggest concern is that he is having less of those assets to pledge and the money he has been borrowing is being spent on feeding his fast expanding family than buying new assets or even sending his children to school. He is now afraid that if he does not find a way to increase his income, reduce his borrowing and invest in his children’s education, they are likely to have a very bleak future.

Nigeria is in a similar challenge faced by my friend Mr Nigeria. A two-year analysis of Nigeria’s revenues indicates that the country has hit a revenue brick wall. Revenues remain stagnant despite the country’s increasing population, which is now expected to surpass that of the US in 2020, making the country the third most populous in the world after China and India by the end of the century.

Gross revenues accruing into the federation account in 2012 have declined marginally from the 2011 levels, data compiled from the Central Bank of Nigeria (CBN) monthly economic report shows. Gross oil revenues accruing to the federation account stood at N8.89 trillion in 2011, but declined 8.6 percent to N8.12 trillion in 2012. A significant 22.17 percent decline in crude oil sales was largely responsible for the drop in oil revenues coming into the federation account. Considering that crude oil prices remained high during the period, the ready explanation for this trend is crude oil theft which has become an endemic challenge in the crude oil industry going by the constant complaints from the oil majors.

Non-oil revenues compensated for the decline in crude oil revenues, rising 24.3 percent from N2.144 trillion in 2011 to N2.66 trillion in 2012 with significant increase in revenues from corporate income tax and value added tax. The decline in crude oil revenues and the rise in non-oil revenues mean that the share of non-oil revenues in the federation account moved up from 19.45 percent in 2011 to 24.72 percent of total revenues in 2012. Thus, though oil revenues declined, it still essentially funds structures of governance in the country.

Between 2011 and 2012, the country was thus able to grow total revenues by a marginal 2.24 percent from N10.78 trillion to N11.02 trillion. This has significant implications for the capacity of government to fund the country’s infrastructure needs considering inflation rate remains at high single digits. This simply means that the government revenues are not growing as fast as the cost of goods and services. If this trend continues, the government gets poorer by the day.

Options open to the government include to increase borrowing to meet with the cost of governance, which is the easier option, or increase tax, which is the more difficult option since it has political implications. The government has obviously chosen the less politically volatile option, that of borrowing which has deferred cost to Nigerians. The government borrows now, Nigerians pay later and because the payments are sometime in the future, there is little or no protest from the citizens. There is no harm in borrowing as long as borrowed funds are invested in projects that generate income to meet future payments. The challenge in Nigeria is if that will happen.