President Buhari claims the 2020 budget will “accelerate the pace of economic recovery”; analysts and ratings agencies are not convinced.
Nigeria’s government on 5 December passed a spending bill of N10.59trn ($35bn) for 2020, a new record after the N8.83trn budget for 2019.
This new budget assumes a deficit of around N2.18trn, which the government expects to finance through foreign and domestic borrowing.
- Nigeria is therefore set to tap international markets during 2020.
- Its last Eurobond sale was in 2018, where it raised $2.86bn.
The need to raise money comes at a bad time; Moody’s has just cut its outlook on Nigeria from stable to negative.
- The ratings agency said that Nigeria’s “already weak government finances will likely weaken further given an extremely narrow revenue base and persistently sluggish growth that hinders fiscal consolidation”.
Domestic mobilisation – or tax in other words – will therefore be critical to the success of any borrowing.
Taxing more Nigerians
The budget is projected to be financed partly by new tax revenue expected to be generated through fiscal changes that are included in the bill.
- The Nigerian government is also looking to widen the fiscal net and collect taxes from Nigerians via online banking transactions – a formerly unexplored avenue for revenue generation in the country.
According to a section in the new finance bill, banks will be required to request a Tax Identification Number (TIN) as part of Know Your Customer (KYC) requirements for new and existing customers.
There are currently 30 million Bank Verification Numbers (BVN) connected to accounts.
On 14 October, when President Muhammadu Buhari presented the bill for legislative consideration, he listed five strategic objectives of the new bill:
- Promoting fiscal equity by mitigating instances of regressive taxation;
- Reforming domestic tax laws to align with global best practices;
- Introducing tax incentives for investments in infrastructure and capital markets;
- Supporting small businesses in line with the government’s ongoing Ease of Doing Business Reforms; and
- Raising required revenue for the government by various fiscal measures, including a proposed increase in the rate of Value Added Tax (VAT) from 5% to 7.5%.
The proposed VAT hike from 5% to 7.5% may drive up the prices of consumables as the additional tax will likely be passed by suppliers of goods and services to the final consumers or end-users. An increase in the VAT rate may also result in a corresponding rise in the cost of inputs used in the production of goods and services.
The Bill also seeks to delete personal income-tax reliefs currently being enjoyed by individuals in respect of their children and dependent adults.
The new budget proposal assumes the price of oil will be at $57 per barrel with oil production at 2.18 million barrels per day.
- The President said: “The 2020 budget is expected to accelerate the pace of our economic recovery, promote economic diversification, enhance competitiveness and ensure social inclusion,” at the presentation of the new spending bill.
On 29 November, President Buhari asked parliament to approve $22.72bn of foreign borrowing tied to infrastructure and other projects.
- Nigeria has been borrowing abroad to fund projects after a 2016 recession caused largely by low global oil prices, but debt service costs have been rising.
Some experts believe that the rate of government borrowing puts the country in a difficult position for the future.
- “The loans taken by the government are usually to patch up a faulty budget and not for capital projects that will look to improve quality of life or will be able to repay the loans in the future,” Iyinoluwa Owolaja, an economist in Lagos, says.
- “The country desperately needs to diversity because if any more shocks happen to the global price of oil, Nigeria will be headed to the recession it is just running from,” he concludes.
In 2016, Buhari asked the parliament to approve borrowing to the tune of $30bn to fund projects, but the request was turned down.
Unless it can massively improve revenue collection, Nigeria will remain in a weak position to go to global markets.