Nigeria Business & Finance Updates

2019 issues shaping 2020 economic potential

For decades, Nigeria’s economic outcome in each year has never failed projections and expectations that were based on the activities of the preceding year. Unfortunately, it has all been mostly for unpalatable events.

One of the worrisome antecedents is the nation’s debt sojourn. It has assumed a geometric rise year-after-year, while the revenue, predictably, has taken the opposite direction. Nigeria is in for it in 2020.

The Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, told The Guardian that there are expectations that the country’s debt profile will trend upwards by 2020, especially on approval of $3 billion credit facility from World Bank for power sector reforms.

He said it is also expected to rise with a possible ratification of $29.96 billion loan request for infrastructure development, currently pending at the National Assembly.

But mostly, the widening fiscal deficit, as passed in 2020 budget at N2.7 trillion, against N 2.1 trillion in 2019, is a sure bet for borrowing, coupled with increased appetite for government securities by institutional investors following their exclusion from Open Market Operations.

“The rising indebtedness of the economy calls for concern, as increased debt stock failed to stimulate neither growth nor infrastructure development. Given Nigeria’s revenue challenges, the country will continue to spend a large chunk of its earnings to service debt.

“The opportunity cost of high debt service commitment for the economy and citizens is very high.

“There is also the exchange rate risk inherent in the exposure to mounting foreign debt, which we need to worry about. As the currency depreciates, the burden of servicing foreign debt would intensify. This is a major problem with increasing the stock of foreign debt”, he said.

Indeed, Nigeria would be facing another round of fiscal headwinds in 2020 with the mix of $83 billion debt; rising recurrent expenditure; increased cost of debt servicing; sustained fall in revenue; and about $22 billion debt plan waiting for legislative approval.

It may be worse if the anticipated shocks from the global economy, like the Brexit, the United States-China trade war and interest rate policy of the Federal Reserve Bank go awry.

The nation’s debt stock, currently at $83billion, comes with huge debt service provision in excess of N2.1 trillion in 2019, but set to rise in 2020, with approved provision of about N2.7 trillion.

But the challenge is stemming from the country’s revenue crisis, which has remained unabating in the last five years, while the borrowings have persisted, an indication that the economy has been primed for recurring tough outcomes.

The newly appointed Chairman of the Federal Inland Revenue Service, Muhammad Nami, has reportedly lamented the revenue shortfall, particularly from the revenue agency, after several initiatives were put up to ramp up inflows.

“Despite the rise in the service’s workforce, the engagement of consultants, the rise in inflation and the exchange rates, the tax revenue collection continues to dwindle,” he said.

During the 2019 fiscal year, despite claims of improvements in revenue flows, Federal Government has recorded hundreds of billions in budgetary shortfalls in all the quarters, with November alone recording N218.05 billion.

The nation’s quarterly economic report, published by the Central Bank of Nigeria (CBN), showed that the revenue crisis is not getting any better, as the Federal Government recorded serial deficits in excess of N1trillion in the first 11 months of 2019.

Specifically, a retrospective analysis of the Federal Government’s 2018 budget performance, showed that the government spent a sum of N7.51 trillion based on a total revenue of N3.86 trillion, creating a deficit of N3.64 trillion, an indication that all is yet to be well.

The civic-tech organisation, BudgIT, noted that while government planned to earn N7.16 trillion in 2018, it was only able to reach N3.85 trillion, which represents 54 per cent revenue performance.

According to BudgIT’s findings, the government has always spent more on debt servicing at the same time that its debt profile is growing astronomically.

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Although the government recorded revenue of N3.86 trillion, it also spent N5.86 trillion on recurrent expenditure, meaning that N2 trillion was borrowed to fund recurrent expenses.

“In 2018, it spent N2.09 trillion on servicing public debts, a figure that grew from N1.63 trillion in 2017. As it is, FG is spending so much on servicing debts, while it plans to even borrow more.

“The government borrowed a total of N1.74 trillion in 2018, yet, the sources for additional deficit (borrowing) of N1.9 trillion was not stated in its report,” the Principal Lead at BudgIT, Gabriel Okeowo, said.

According to him, there is need for details of government’s expenditures for proper verification and public accountability.

“While we wonder why other financing sources are not explained by the government, it is clear that Nigeria has a huge revenue problem and the current pace of recurrent expenditure growth (mainly salaries and debt servicing) is not sustainable,” he said.

An economist, Ucha Wagbo, said the principal officers of this administration are wishing away the evil reality by just following the stereotypes, which the Minister of Finance, Zainab Ahmed and former Minister of Budget, Udo Udoma, scripted.

“The rhetoric that our total borrowing rate is just under 50 per cent of our Gross Domestic Product (GDP) and that the multilateral institutions projected a country like ours to borrow from 50 to 55 per cent of the GDP are lame excuses.

“Are the multilateral institutions not the ones telling us now to mind how we borrow? Will the 50 per cent borrowing pay our debts if the proceeds are wasted on frivolities?

“What does he understand as debt crisis? Is it when the country cannot pay at all? If you service your debt with a quarter of your total budget or use more than 60% of your income to service debt, are you better off? The truth is that Nigeria has debt problem and 2020 will be challenging,” he said.

Similarly, government’s recurrent expenditure, which has been on the rise in the last four years, will distort government’s economic projections further in 2020, as the new minimum wage adds to huge costs associated with governance.

While the recurrent expenditure shot up to N5.39 trillion in 2018, representing N800 billion growth in one year without new minimum wage implementation, just in November 2019, the Federal Government spent 95.9 per cent of its resources on statutory transfers (7.2 per cent) and recurrent expenditure (88.7 per cent), leaving only 4.1 per cent for capital projects.

Federal Government’s personnel costs rose from N1.8 trillion in 2017 to N2.1 trillion in 2018, without the full implementation of the new minimum wage plan.

A fiscal governance campaigner, Eze Onyekpere, said this administration has unresolved contradictions between between its mantra of cutting down waste, improving efficiencies and removing ghost workers from the payroll and the rising recurrent non-debt expenditure.

“Actual recurrent non-debt expenditure was N2.51 trillion in 2016; N2.76 trillion in 2017; and N3.103 trillion in 2018. For the half year in 2019, it has reached N2.05 trillion, which is 21 per cent more than the pro-rated value of recurrent non-debt expenditure in the 2019 budget.

“This increment to N4.88 trillion in 2020 cannot be the sign of a system that is taking steps to remove waste and inefficiencies. Even though a new minimum wage is kicking in, efforts should be made to reduce the cost of governance through the implementation of fit and good practices,” he said.

Raising concerns on the country’s debt sojourn, he said the rising debt service is crowding out expenditure in critical infrastructure and human development.

“If there is a shortfall in revenue, salaries and overheads will be drawn down, debts will be serviced, but capital projects will suffer. How will Nigeria be better like this? What is the basis for hope in 2020?” he queried.

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Inflation brouhaha
Inflation started trending downwards in the first quarter (Q1) and Q2 of 2019, but assumed a reversal mode in Q3, as CBN’s restriction on food-related imports started putting pressure on local food prices and other manufacturing inputs.

Worse still, the closure of land borders, as a foil to smuggling and heightened insecurity in the country, stoked panic buying, as well as supply shortage.

According Proshare analysis, inflation, which started 2019 at +11.37 per cent in January fell to +11.22 per cent at the end of Q2 2019, and by July, the aggregate price level growth had slowed to +11.02 per cent, raised optimism that CBN would by Q2 of 2020, be within its target band of between six per cent and nine per cent.

“Unfortunately, the CBN’s move to tighten the noose on importers of food and related-products by denying them access to the official foreign exchange market added to the rise in the price of food.

“Food inflation grew faster than the general headline inflation rate throughout 2019. Food inflation rose from +13.51 per cent in January 2019 to +13.56 per cent at the end of Q2 2019 and fell slightly by +0.05 per cent to +13.51 per cent at the end of Q3 2019. At the end of 2019, food inflation worsened and rose to +14.48 per cent in November.

Payment system landscape
Perhaps, one of the brightest points in 2020, will be the evolving payment system landscape, which just took off with price slashes in the cost of banking and financial services. But initial skepticism is still high over the strict compliance by banks and payment system service providers.

Since January 1, 2020, a graduated fee scale for electronic transfers to replace the current flat fee of N50 began, as transfers below N10,000 now attract a maximum charge of N10; transfer from N5001 – N50,000, N25; and transfers above N50,000, N50

Card maintenance fee on the current account has been removed as the accounts already attract maintenance fees. Savings accounts now attract a card maintenance fee of N50 per quarter (three months) from N50 per month. Yearly card maintenance fee on foreign currency denominated cards is reduced to $10 from $20.

Remote-on-Us, that is, Automated Teller Machine (ATM) charges after third withdrawal from other banks’ machines within a month are reduced to N35 from N65. The charge for hardware token will be on a cost-recovery basis subject to a maximum of N2,500 from previous maximum charge of N3,500, while the fee for SMS mandatory alert will be on cost recovery from previous maximum charge of N4. Bill payment via e-channels will attract a maximum charge of N500 from 0.75 per cent of the transaction value subject to a maximum of N1,200.

Meanwhile, some banks are already sending messages to their customers as readiness for the commencement of the new charges, which cut nearly all applicable fees by the lenders significantly.

The apex bank said the revision of the Guide to Charges and strengthening of the Consumer Protection Regulation was necessitated by continued evolution in the financial industry over the past few years, which has spurred innovation and the introduction of new products, channels and/or participants.

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