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2021 Budget, Economic Recovery and Fiscal Sustainability

January 17, 2021

The early passage of 2021 Budget, which for the second consecutive year, effectively returns the country to the January-December budget cycle is a means to an end and not an end itself. The main challenge is how to catalyse economic recovery efforts, and budget execution to significantly contribute towards achieving fiscal sustainability as well as macro-fiscal and sectoral objectives. Ndubuisi Francis writes

It is an unassailable fact that Nigeria is buffeted by a deepening macroeconomic challenges, a worsening social and fiscal order. While the economic challenges grow in leaps and bounds, the resources to tackle them appear to be wearing thin. Nigeria’s second quarter 2020 gross domestic product (GDP) contracted by 6.1 per cent although it performed considerably betterthan expected in the third quarter, contracting only by 3.62 per cent, representing an improvement of 2.48 per cent points over the second quarter level.

However, as the federal government begins the implementation of the 2021 Budget to return an economy that is again in a recession amid a crippling COVID -19 pandemic, it believes that the early passage of the budget will significantly contribute towards achieving fiscal sustainability as well as macro-fiscal and sectoral objectives.

The nation’s economic minders expect significant improvement in macroeconomic performance by the second quarter of 2021 while implementing several measures to overcome very challenging fiscal constraints.

How the 2020 Budget Fared

The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, who made a virtual presentation of the 2021 Budget disclosed that as at year end 2020, N1.8 trillion had been released for capital expenditure, which represents about 89 per cent of total capital vote for the year.

Out of this, up to N118.37 billion was released for COVID-19 capital expenditure.

In the same vein, federal government’s retained revenue was N3.94 trillion or 73 per cent of target.

FGN’s share of oil revenues was N1.52 trillion (representing 157 per cent performance, over and above the prorated sum in the revised 2020 budget) while non-oil tax revenues totalled N1.28 trillion (79 per cent of revised target).

Ahmed disclosed that • Companies Income Tax (CIT) and Value Added Tax (VAT) collections were N673.22 billion and N192.66 billion, representing 82 per cent and 68 per cent respectively of the pro rata revised targets for the period.

Customs collections also stood at N410.21 billion (79 per cent of revised target).

Other revenues amounted to N993.73 billion, of which Independent revenues accounted for N519.36 billion.

On the expenditure side, N9.97 trillion was appropriated (excluding GOEs and project-tied loans), while N10.08 trillion (representing 101 per cent) was spent.

Of the expenditure, N3.27 trillion was for debt service, while N3.19 trillion went for personnel cost, including salaries and pensions.

The minister observed that relative to the revised 2020 budget parameters, the performance of key budget parameters reflected the effects of the COVID-19 pandemic.

While the revised budget was predicated on oil benchmark price of $28 per barrel (pb), actual average was $43pb, while 1.79 million barrels per day (mbpd) of the projected oil production 1.8 mbpd was recorded.

Exchange rate stood at N379 to a dollar as against budgeted N360/$ while inflation ended up at 14.89 per cent in contrast to the projected 14.13 per cent.

The minister noted that despite obvious challenges, budget performance was not disappointing.

The 2021 Budget

In 2021, oil GDP is projected to rise by 16.23 per cent year -on-year, resulting in about 1.1 percent cent increase in non-oil GDP. Based on this, real GDP is expected to rise

by 3.0 per cent in 2021, while nominal GDP is expected to rise from N139,517.5 billion in 2020 to N142,694.4 billion in 2021 and then up to N151,464.4 billion in 2023.

Crude oil price benchmark is at US$40 per barrel, $4 below the World Bank’s forecast of US$44pb average crude oil price in 2021 and

Energy Information Administration’s (EIA) projected $48.53 pb average

Brent crude oil price in 2021.

The minister said the budget was based on crude oil benchmark price of $40 per barrel, with crude oil production expected to increase from 1.8 million barrels in 2020 to 1.86 million barrels in 2021.

She observed that although Nigeria has the capacity to produce up to about 2.5 million barrels per day, current production would be limited to 1.7million barrels per day, including 300,000 barrels of condensate, in compliance with the Organisation of Petroleum Exporting Countries (OPEC) quota agreements.

Consumption expenditure in 2021 is projected to rise from N117.91 trillion in 2020 to N118.89 trillion in 2021, reflecting gradual economic recovery.

Inflation is expected to remain above single digit in 2021, given structural issues impacting cost of doing business, including high food distribution cost.

The N13.5 trillion budget has an aggregate revenue of N7.99 trillion (36.9 per cent higher than the 2020 projection of N5.84 trillion).

In a bid to promote fiscal transparency, accountability and comprehensiveness, the budgets of 60 GOEs are integrated in the FGN’s 2021 Budget proposal.

In aggregate, 30 per cent of projected revenues is to come from oil-related sources while 70 per cent is to be earned from non-oil sources. Ahmed regretted that, overall, the size of the budget has been constrained by relatively low revenues.

An overview of the expenditure framework shows a projected aggregate expenditure (inclusive of GOEs and project-tied loans) of N13.59 trillion, which is 25.7 per cent higher than that of revised 2020 Budget of N10.8 trillion. Recurrent (non-debt) spending, estimated to amount to N5.99 trillion, is 44.1 per cent of total expenditure, and 13.3 per cent higher than the 2020 revised estimates (mainly reflecting increases in salaries and pensions).

The aggregate capital expenditure of N4.37 trillion is 32.2 per cent of total expenditure; and 62.9 per cent higher than the 2020 revised Budget (including the capital component of Statutory Transfers, GOEs capital and project-tied loans expenditures).

At N3.32 trillion, debt service is 24.5 per cent of total expenditure, and 12.6 per cent higher than 2020 revised Budget.

With GDP at N142.69 trillion, from N139.52 trillion in 2020, the minister said the deficit GDP, excluding GOEs and project-tied loans, was 3.43 per cent against 3.30 per cent in the previous year.

Deficit GDP, including GOEs and project-tied loans is about 3.93 per cent, compared to 3.57 percent last year.

Total revenue, including from GOEs, is about N7.99 trillion, about 36.9 percent higher than the 2020 projection of N5.84 trillion.

The minister said aggregate projected revenues would be 30 percent from oil-related sources while 70% would come from non-oil sources, in line with the government decision to de-emphasise reliance on oil. expected to be available.

Total federal government budget, excluding GOEs and project-tied loans was given as N11.53trillion, while total Federal Budget, including GOEs and project tied loans is about N13.59trillion;

Total amount available for the budget approved by the National Assembly, excluding GOEs revenues, stands at about N6.64 trillion

This amount comprises share of oil revenue (N2.01 trillion), share of dividend from the Nigeria LNG (N208.54 billion), Share of minerals and mining revenue (N2.65 billion).

Share of non-oil revenue of N1.49 trillion is made up of share of company income tax (N681.7 billion); VAT (N238.43 billion); Nigeria Customs Service (N508.37 billion); share of Federation Accounts levies (N60.51billion).

Revenue from government owned enterprises stands at about N2.17trillion, although there was a loss of about N825.02 billion report as a result of their inability to return to the government operating surplus from 80 percent captured in independent revenue.

During the year, Independent revenues is expected to be about N1.06 trillion; transfers from special levies account (N300 billion); signature bonus/renewals/early renewals oil companies operating in the country and new oil licenses to be issued during the year (N677.02 billion); domestic recoveries, assets, fines (N32.68 billion); Stamp duty (N500billion), and grants and donor funding (N354.9billion).

Financing the N5.6tn Budget Deficit

The total deficit in the 2021 Budget which stands at N5.6 trillion is to be financed mainly from domestic and foreign borrowings, loans and proceeds from the privatisation of public assets.

Giving the details of deficit financing windows, the Minister of Finance, Budget and National Planning, Zainab Ahmed, said the government is to borrow about N2.34 trillion apiece from domestic and foreign sources. Another N709.69 billion is expected from multilateral and bilateral loan drawdowns while N205.15 billion is to be sourced from privatisation proceeds.

According to Ahmed, the Government-owned Enterprises and project-tied loans, represent about 3.93 per cent of the nation’s gross domestic product (GDP).

Instructively, while the 3.93 per cent deficit in the 2021 Budget is in excess of the 3 per cent threshold prescribed by the Fiscal Responsibility Act (FRA), 2007, the minister said the law allows the government to overshoot the recommended level in difficult situations, like current pressures on the economy as a result of the impact of COVID-19.

Items in the budget with fiscal deficits, excluding government-owned enterprises (GOES and project-tied loans account for about N4.89trillion, from N4.61 trillion in the revised 2020 budget, while fiscal deficit, including GOEs and project-tied loans, stood at about N5.6trillion, from N4.98 trillion last year.

Similarly, capital and project-tied loans expenditures stand at about N3.32 trillion; debt service 24.5 per cent of total expenditure, and 12.6 per cent higher than the 2020 revised budget.

Ahmed noted that the N200 billion provision to retire maturing bonds to local contractors/suppliers is 1.68 per cent of total expenditure, reflecting FGN’s continuing commitment to offset accumulated arrears of contractual obligations dating back over 10 years.

The Finance Act 2020

The federal government is making a heavy capital of the Finance Act 2020 signed into law on the December 31, 2020 by President Muhammadu Buhari. The Act supports the ‘2021 Budget of Economic Recovery and Resilience’, and came into effect, with the 2021 Appropriation Act, on the January 1, 2021. The finance minister reckons that the key guiding principle of the Act is to ensure that there is a balance between broader macroeconomic strategies to attract investment, grow the economy, create jobs as well as providing immediate fiscal strategies for accelerated domestic revenue mobilisation, in response to the COVID-19 pandemic and the domestic / global economic downturn. According to her, the Act adopts counter-cyclical fiscal policies in response to the COVID-19 pandemic by providing fiscal relief for taxpayers.

With 14 reforms under the Act, the Minister observed that specifically, the law adopts fiscal policies to counter the negative impact COVID-19 pandemic by providing fiscal relief for taxpayers as well as ensure closer coordination of monetary, trade and fiscal policies.

The Act consists of over 80 reforms in more than 14 laws, including Capital Gains Tax Act, Cap. C1; Companies Income Tax Act, Cap C21; Personnel Income Tax, Cap C49; Value Added Tax Act, Cap. VI; Nigeria Export Processing Zone Act, Cap N107; the Oil and Gas Export Free Zone Act, Cap 05, and Industrial Development (Income Tax Relief) Act, Cap. 177. Others are the Stamp Duties Act, Cap S3; Tertiary Education Trust Fund (Establishment) Act No.16, 2011; Federal Inland Revenue Service (Establishment) Act No 13, 2007; Fiscal Responsibility Act No. 31, 2007; Public Procurement Act No.14, 2007; Companies and Allied Matters Act No. 3, 2020 and the Establishment of the Crisis Intervention Fund & Unclaimed Fund Trust Fund.

Incentives

The Finance Act 2020 provides for compensation to companies for Capital Gains Tax losses of up to N10 million, while donations to any pandemic or natural disaster relief fund by the federal or any state government are tax deductible subject to a maximum of 10 per cent of assessment profit after deduction of other allowable donations.

The Act also allows 50 per cent reduction in minimum tax, from 0.5 percent to 0.25 per cent of gross turnover less investment income, for companies in respect of returns for years of assessments due to a period of two years (between January 1, 2020 and December 31, 2021.

Another notable provision is the exemption from Personal Income Tax to all low income earners of minimum wage or less. It also exempts all micro and small companies earning N25 million or less as annual turnover are from Tertiary Education Tax, same as commercial airline tickets, commercial aircraft spare parts and components.

Anyone or group interested in land and buildings; animal feed and hire, rental or lease of agriculture equipment for agricultural purposes is exempt from 7.5 per cent Value Added Tax at 7.5 (VAT).

In addition, any small or medium sized company engaged in primary agricultural production may be granted pioneer status (tax relief) for an initial period of 4 years and an additional two years.

For companies operating in the Free Trade Zones, exemption from taxes is subject to compliance with tax filing and returns obligation to the Federal Inland Revenue Service (FIRS) under section 55(1) of the Companies and Income Tax Act. The law equally provided for a reduction from 35 to 5 per cent of import duty on tractors, while mass transit vehicles for transport of more than 10 persons and trucks are to attract a cut from 35 to 10 per cent, while import levy on cars declined from 30 to 5 per cent.

Other incentives include the expansion of goods liable to excise duties to include services in the future as may be prescribed in the law or an order by the President.

A new 50 percent Cost-to-Revenue Ratio has been introduced for State-Owned and Government-Owned Enterprise, with the balance of operating surplus paid to the Consolidated Revenue Fund (CRF) of the Federation on a quarterly basis.

Reforms on Procurement

Perhaps, to block leakages in the legislature and the judiciary, the Finance Act 2020 extended the application of the Public Procurement Act to the National Assembly as well as the Judiciary. This is in addition to the provision for electronic and virtual procurement processes,

the mobilisation fee thresholds also increased from 15 to 30 per cent, while the timelines for procurement has been reduced to accelerate the procurement process.

The Act also establishes a N500 billion Crisis Intervention Fund, funding by Special Accounts and other sources approved by the National Assembly.

The Fund also comprises unclaimed dividends in a listed company and unutilised amounts in a dormant bank account outstanding for six years or more.

The unclaimed dividends and bank balances are subject to a Perpetual Trust under management by the Debt Management Office (DMO) until the owner or beneficiaries emerge with evidence.

Can the Budget Deliver on Target?

A major target of the federal government is to enhance economic recovery efforts, and budget execution. It believes that the early passage of the 2021 Budget for implementation from January 1 will significantly contribute towards achieving fiscal sustainability as well as government macro-fiscal and sectoral objectives. According to the finance minister, “We expect significant improvement in macroeconomic performance by the second quarter of 2021, as the federal government is already implementing several measures to overcome our fiscal constraints.

“In addition to the Strategic Revenue Growth Initiatives (SRGI), we are leveraging technology and automation, plugging fiscal drainers and ensuring more effective Independent revenue monitoring.”

While it looks at revenue generation as the most critical fiscal issue over the medium term in a bid to achieve a significant improvement in macroeconomic performance by the second quarter of 2021, what safeguards are in place to tame the spiraling core inflation that currently stands at 15.75 per cent with food inflation hitting 19.56 per cent?

Analysts’ Views

The President of the Capital Market Academics of Nigeria and former finance commissioner in Imo State, Prof. Uche Uwaleke, said while other parameters underpinning the budget are realistic, those of the exchange rate and GDP are not.

In an interview with THISDAY, he said: “Regarding the 2021 budget, I think the assumptions and budget parameters are realistic except for the exchange rate of N379 to the dollar that may not hold due to the on-going process of unifying exchange rates across all forex windows by the CBN, consistent with the IMF prescription.

“I also think the real GDP growth rate projected at 3% is a little ambitious in view of the impact of COVID-19 on the economy expected to linger for some time especially against the backdrop of a second wave. This is why the recent World Bank report on Nigeria projects a GDP growth rate of 1.1% while Fitch projected 1.3% for the country in 2021.

“If estimates by global energy agencies are anything to go by, crude oil price will stay above the budget reference price on the average in 2021. So, $40 per barrel appears realistic.

“I wish to note that this year’s budget seems to have set the right priorities with the bulk of capital spending going to works and housing, power and transport and agriculture. For the first time in many years, the capital allocation to education and health are above that of defense.

“All things being equal, the timely unveiling of the 2021 budget will facilitate its implementation in the interest of economic recovery.”

In the same vein, an economist and founder/ presidential candidate of Abundant Nigeria Renewal Party (ANRP), Mr. Tope Fasua, said the 2021 Budget has no marked departure from the previous ones.

He said the fiscal document does not in any way advance the nation’s economic prospects for obvious reasons because it is just a continuation of what the country has always had.

He said: “It’s still an envelope budgeting system, meaning that the MDAs are asked to generally think about what they need, meaning that the MDAs are asked to generally think about what they want and work within an envelope and spend whatever that is given to them. The MDAs, of course, find ways around it and at the end of the day, most of their spending is not particularly targeted at improving the lives of the people. So the best budget that talks about benefit for people who work in government might not necessary be for the larger Nigeria people.

“N13.5trillion or thereabout is not particularly much given that we devalued the naira by 20 per cent in the last year or more. What that means is that if you look at it in terms of real value (dollar terms), it is probably smaller than what we had last year. So, it’s not particularly going to advance economic prospect because of what is going on–COVID and the rest.

“The best the country wants is to try and achieve stability and generally continue to push the entire economic vehicle along so that we don’t have a major crash. Already, we are in a recession officially. The idea is to ensure it doesn’t become a depression….Though if u ask me, we have every indication that what we are in, is an economic depression.

“So I suggest a more radical approach to our budget. I will suggest that a larger amount be budgeted and always allocated for that..And also given that this one we are seeing almost 40 per cent (about N5.6 trillion) is going to be borrowed.

”Aside from that, revenue is about N7 trillion out of N13 trillion is going to be revenue generated and the rest is going to be borrowed. So it is a big problem.”

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