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Improving Fiscal Position: Converting Losses to Sustainable Revenues

Macroeconomics and all its attendant jargon are not the métier of most and so we can perhaps be forgiven occasionally for overlooking glaring red flags. As a consequence, we do not notice causes of great concern and as such government’s shortcomings and illogical decisions. In this article, we will avoid esoteric terminology and focus on some of the key issues, be they logical or not, behind decisions of government that affect all of us.

The Federal Government of Nigeria (FGN) is on a borrowing spree, ostensibly to fund a budget resolved in very different times. Essentially, the budget has been adjusted by removing capital expenditure and the new borrowing requirement is estimated at over N4 trillion. Out of this, N1.94 trillion will be sourced externally (US$3.4billion from IMF, US$1.5billion from World Bank, and US$500million from Africa Development Bank). The balance of N2.06 trillion will be raised in the domestic market. The FGN has already sought and received approval from NASS to convert the N850 billion foreign borrowing in the 2020 Approved Budget into domestic borrowing.

N4 trillion amounts to about US$11.4 billion.

Based on findings by the World Bank, Nigeria loses about US$10 billion in revenue annually because of inefficiencies in the agriculture sector. Moreover, the Nigerian Electricity Supply Industry (NESI) losses significant sums on an annual basis as a result of so-called system losses. The power plants produce electricity but the revenues collected by the distribution companies cover only a fraction of the cost of the electricity produced, which is why the FGN regularly has to bail the sector out by way of monetary releases. In 2017, N213 billion was given to the industry, and as of 2019, N500 billion was approved for the sector.

The question all these numbers beg is: Why borrow to fund recurrent expenditure and increase the nation’s debt burden (and thus annual long-term debt-servicing bill), instead of plugging these leakages that cut across various sectors of our economy and saving much more in the process?

If we juxtapose these losses to FG’s voracious appetite for borrowing, in the present climate exclusively to fund non-capital expenditures (salaries, government cars, etc.), the absurdity becomes clear. If borrowing were dedicated specifically to fixing sectors of the economy where avoidable losses in tens of billions of dollars are incurred then it could be justified. In fact, we could even find it laudable owing to the fact that these sectors, if addressed and properly administered, have the potential to generate considerable revenue for government while diversifying the economy and driving economic growth sustainably.

The Nigerian landscape is littered with such losses and such potentials, but let us focus simply on the two sectors mentioned above, namely, agriculture and NESI. As stated, the agriculture sector in Nigeria loses US$10 billion annually as a result of “wastage”. This wastage is a direct consequence of inadequate transport and energy infrastructure to convey agriculture produce post-harvest to markets, to store them and to convert them into higher-value goods. It goes without saying that were government to invest strategically in this sector, addressing the challenges holistically, creating and implementing policies to support this sector, then agriculture would grow and thrive, contributing substantially more to GDP and generating revenues by way of taxes.

Agriculture as a sector is perhaps the most baffling as it has huge potentials but continues to underperform, despite the FGN reportedly ‘throwing money at it’. If properly harnessed, Nigeria’s agriculture has the potential to become a force to be reckoned with in the global food supply chain. In fact, in addition to the above losses due to wastage, there’s another major negative: only 48 percent of arable land is being cultivated. According to the World Bank, “The value of agriculture in Nigeria is projected to grow to US$256 billion by 2030. The growth is expected to come from yield expansion (about 44 percent), area expansion (about 33 percent) and diversification into high value crops (about 23 percent)”. However, this will not be achieved if the wastage is not first addressed, which in turn requires losses in the power sector and the significant shortfall in transportation infrastructure serving agriculture to be fixed. 

The power sector consistently records high system losses, which are comprised of both technical and non-technical losses. The former are line losses, which are inevitable but can be minimised, whereas the latter, also known as ‘commercial losses’ refers to theft, billing irregularities and non-payment of electricity consumed. Total system losses run at as much as 50%. In other words, the country is simply tolerating half the power generated either not being used or not being paid for. Socio-economic development is impossible without electricity as it is a significant input for various other sectors.

If the issues and challenges in these two sectors are addressed, then we could expect a surge in economic growth. Multiplier and spill-over effects would heighten the positive outcomes. In power for instance, the more losses that are eliminated, the more electricity there would be to extend those poorly served and the greater the number of paying customers the lower the resulting cost of service and lower prices all around, which would make NESI more competitive – and the industries using the power. In agriculture, the higher the quantity of food available in the market, the lower the cost would be and the faster we can attain food security. All of this would spur higher economic growth and generate government revenue that could then be devoted to areas such as rural healthcare, education and development, which would in turn spark further growth, and so on…

In light of the above, surely it would make sense for the FGN to focus on taking up loans to address the losses in the above two sectors – with a view to garnering the revenue that can be derived from them. This way it would address the perennial losses and ensure that the gains from reversing the losses contribute to debt defeasance. It of course goes without saying that were wastage to be addressed, the US$10 billion would not accrue to the FGN. What will flow to government would be revenue by way of taxes, interest and other statutory charges. For the sake of this argument we shall assume it would not exceed 10 percent which amounts to US$1 billion a year – more than enough to service the loans required. To put things in context, a billion dollars every year for the past four decades since government has been spending on the agriculture and power sectors would be in the excess of US$40 billion and that is from agriculture alone. It stands to reason that this money would have gone a long way in addressing all the infrastructure deficits that continue to cause wastage and revenue losses.

It is pertinent to note only two sectors were highlighted in this discourse, if one were to take cognisance of losses in other sectors across board such as gas flaring in oil exploration and petroleum product subsidies, the potential would be much more higher and encouraging.

Precisely in times when revenues are tight, it would be logical for the FGN to devise policies, strategies, and programmes that prioritize eliminating losses. The country can simply not afford to ignore such potential revenues and borrow at significant cost to the economy and the next generation without addressing one aspect of the problem that got us into the situation in the first place. The current situation is simply not sustainable.

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