Coals to Diamonds: A Guide to Reforming Public Sector Financing in Nigeria
This is the final of four articles excerpting our report Financing the Public Sector in Nigeria: Issues and Prospects. In the previous articles, we highlighted the positive and negative factors affecting the Nigerian public finances. We saw how the laudable goal of increasing non-oil revenues was marred by a heightened debt burden. We contrasted the images and performances of NNPC and NLNG, then turned to examine the health of public finances across the states and local governments of the Federation. In the process, we have asked some questions and made some critiques.
In this final commentary, we shall proffer our envisioned solutions to the problems we diagnosed. The management of our common wealth, the Res Publica of which Cicero wrote, requires the deliberate efforts of our governments.
Our challenges include deficient infrastructure, quantitative and qualitative hindrances to trade and investment, foreign exchange illiquidity, currency devaluation and the inconsistency that plagues monetary and fiscal policies. Those are Herculean obstacles that we must not underestimate. Yet all hope is not lost. A concerted all of society approach bridging the public and private sectors can overcome our macroeconomic challenges and revive our economy.
At the Danne Institute for Research, we hope to lead positive change by engaging the informed public and stakeholders with the findings of our relevant and rigorous research programmes. The suggested reforms that follow should be seen in that light. We hope for a safer and more prosperous Nigeria.
Budget to Win it
One weakness of our budgeting process is the instability of revenue. That is the result of the cyclical nature of crude oil, our revenue cornerstone. Furthermore, constrained government spending has effects on the real economy due to the importance of public sector spending for the broader economy. A secondary problem is that the budgetary process is vague, inconsistent and duplicated expenses are said to be pervasive. Nigeria is also saddled with the heavy burden of rising expenditure and dwindling revenue. For example, between 2015 and 2016, national expenses grew by 17.43% while Federal revenue slumped by 18.75%. Yet policymakers ignore the warning signs while they persist with deficit financing.
Expert fiscal and budgetary management are bulwarks of any well-managed economy since they ensure that economic objectives are met in a predictable fashion. Current budgets lack a coherent theme and clear objectives. Budget planners resort to vague themes to package their fiscal programme while lacking a genuine roadmap that ensures that government spending has the desired economic impact.
It would be ideal to return to the crafting of strategic development plans that span annual budget cycles—for example, four to eight years. The Ministry of Budget and Economic Planning in Lagos State under the leadership of Yemi Cardoso knew how to budget to win. His ministry functioned as the think tank of the administration–a think tank that carried out and sought relevant, rigorous research in the service of a strategic development plan. That foresightedness allowed annual budgets to draw from an overarching strategy. That contribution was legendary and even attracted other states of the Federation to learn from his Ministry.
The government, businesses, investors and the general public must understand the impact of past expenditure programmes. Budgeting to win involves gauging how well past expenditure programmes helped to raise millions out of poverty, reduce inequality, deliver better healthcare, improve access to education, as well as expand investment and employment opportunities. This requires transparency on the part of planners to facilitate discourse with the citizens whom they serve.
Improved data will be a boon to proper planning and budget implementation. Unless budget performance can be consistently assessed to discover areas for improvement or extra focus, the authorities will persist on a path that has brought limited benefits to the citizens.
What must be done?
As we stated clearly in the Report: “A well reformed public policy set up has the advantage of strengthening governance and accountability, reducing corruption and delivering public services more efficiently. Nigeria’s fiscal defect is basically a revenue and budget implementation challenge. As government’s expenditure commitments continue to bolster, revenue receipts are unable to correspondingly match with expenses and so, debt must be incurred. Government’s current inability to expand the revenue base of the country has continued to have a negative impact on the economy. There is also a lack of budget implementation and performance review protocol which should impose accountability on how expenditure outlays were disbursed and expended. There is also no performance rating for past budgets which should serve as basis for new budget planning.”
Our proposed reforms should be seen as building on earlier achievements such as the Government Integrated Financial Management Information System (GIFMIS) under the Economic Reform and Governance (ERG) Project in 2004, the Integrated Payroll and Personnel Information System (IPPIS) in 2006, the Fiscal Responsibility Act of 2007, the Public Procurement Act of 2007, the introduction of the Treasury Single Account (TSA) in 2011, and the establishment of the Efficiency Unit under the Ministry of Finance in 2015. Our goal is to improve the health of the public finances.
Encouraging output and revenue optimisation is the first item on our agenda. We believe that the State must cede those SOEs it acquired over the years. The government should conceive of its role as enabler, facilitator and regulator that ensures a level playing field for all players. The liberalization of the telecommunications sector is one of the great examples of the benefits of a massive liberalization and privatization.
In a previous article, we examined the different performance trajectories of NNPC, a state monopoly, compared to NLNG, a commercial operation. The latter was an immensely profitable business contributing as much as 1% of GDP. The NNPC, it must be noted, is one of the worst performing SOEs. The nation cannot continue to endure the burden of the abysmal performance of SOEs at the expense of public revenue. Gains from privatization are not limited to savings from grants and allocations to these enterprises but government revenues from taxes, royalties, licenses, etc.
Second on our agenda is the importance of revenue diversification. We believe that the monopoly over national minerals held by the Federal government discourages economic and revenue diversification. It leaves all the tiers of government essentially reliant on crude oil receipts rather than improving the exploitation of their local resources.
A constitutional review may be needed to re-structure the roles of the tiers of government so that the centre focuses on economic coordination and wealth redistribution while the subnational units work on revenue generation and economic expansion through close cooperation with private sector actors.
Our third item, in the spirit of the above-proposed restructuring, is encouraging fiscal decentralisation. Consider that in 2017, Lagos state was responsible for 55% of the VAT generated in the Federation, yet they had to subsidise less productive states. The current policy is a losing proposition for all involved. Lagos State lost internally generated revenue which it needed to provide infrastructure and services to its growing citizenry. On the other hand, the cosseted states do not feel the pressure to assist wealth-generating entrepreneurs capable of employing workers and building industries that pay taxes. Taxes like the VAT should be an incentive for states and as such should not be claimed by the Federal government.
We shall conclude on the subject of increased taxation. Governments must see taxes as part of the social contract. Taxpayers deserve to know the state of their contributions to the public purse. All tiers of government must publish quarterly assessments of their revenue and expenditure while highlighting the impact of public expenditure on specific economic sectors. That public information will increase the confidence of taxpayers.
The government should also take steps to formalise the informal sector. That requires outreach campaigns to encourage business registration. Informal business owners may also be incentivised if that outreach is coupled with a tax registration holiday.
Finally, government should do its utmost to improve the macroeconomic environment. This will bolster the income-earning potential of citizens and increase the tax pool. Informal taxation must also be eliminated. Harmonising the fiscal structure across all tiers of government will reduce the tax burden on Nigerians. That, in turn, will leave them more amenable to formalisation and being included in the tax net.
As we stated in the Report, properly managed public finance is critical to ensuring that economic objectives of the country are met in a timely and predictable manner. It is essential to building the new Nigeria. With better policies and choices, we can get Nigeria off the brink and working again. This is the spirit that motivated our report, Financing the Public Sector in Nigeria: Issues and Prospects. We strongly believe that policy propositions should not gather dust on the shelves of policy makers. That is the goal that drove this series of articles.
As candidates campaign for office and the electorate decides on which party or persons to vote for, it is imperative that reforms to public sector finances be front and centre on the agenda for reform. This is our humble contribution to that endeavour. We hope this series sparks a conversation that brightens the path towards the Nigeria of our dreams: one that works for all.
Danne Institute for Research. ‘Financing the Public Sector in Nigeria: Issues and Prospects’. Lagos, Nigeria: Danne Institute for Research, June 2022.
 Danne Institute for Research, ‘Financing the Public Sector in Nigeria: Issues and Prospects’ (Lagos, Nigeria: Danne Institute for Research, June 2022), 62.
 Danne Institute for Research, 68.
 Danne Institute for Research, 70.