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By Olumuyiwa S. Adedeji
For the macroeconomic landscape,, there’s a paradox in an oil-producing country struggling with macroeconomic performance at a time when oil prices are generally high. In Nigeria, this paradox largely reflects lower oil production, higher fuel subsidies, and underlying macro-structural challenges. Real GDP growth was 2.3 percent during the third quarter of 2022, and year-on-year inflation reached 21.5 percent in November, with food inflation at 24.1 percent. About 63 percent of Nigeria’s population is multi-dimensionally poor, and Nigeria’s debt service-to-revenue ratio at the federal government level reached 83 percent during the first eight months of 2022. International rating agencies have downgraded Nigeria’s sovereign rating, citing ongoing fiscal and external weakening in the context of higher crude oil prices.
Nigeria’s macroeconomic stability is in jeopardy given its current policy trajectory. The government’s unfettered access to central bank financing and the extensive use of quasi-fiscal activities have delayed much-needed fiscal consolidation, allowing fiscal vulnerabilities to build up, with current and future adverse macroeconomic consequences. Despite the fragility of real GDP growth in Nigeria, higher interest rates in advanced economies would continue to result in increased domestic interest rates and the cost of servicing public sector debt will increase. To build resilience and absorb the cost of a higher interest bill, the new administration that will come to office by May 2023 needs to imbibe fiscal prudence.
The link between the current and incoming administration is the 2023 federal budget. The budget focuses on maintaining fiscal viability and ensuring smooth transition to the incoming administration. The proposed 2023 federal government budget implies a general government fiscal deficit of about 6 percent in 2023 compared to estimated 6 percent in 2022. A general government deficit of this magnitude would entail additional central bank financing in view of the difficult external environment and the need to limit crowding out of the private sector. Macroeconomic trade-offs imply that when inflationary pressures are high as is the case in Nigeria, fiscal policy should protect the most vulnerable while pursuing a tightening stance to avoid overburdening monetary policy in the fight against inflation. Tightening fiscal policy requires prioritizing spending among competing needs and mobilizing revenues in a growth-friendly way.
A framework for moving fiscal policy forward. The new administration should put in place a comprehensive framework for moving the fiscal policy agenda forward, with attention to the following areas: Revenue: Georgia’s experience offers key policy lessons for the incoming new administration. First, political commitment at the highest level and broad buy-in from stakeholders are crucial to improving revenue collection. Second, countries that implement revenue administration measures in conjunction with tax policy reforms tend to experience larger revenue gains.
Tax policy: redesigning tax incentives toward growth-enhancing activities and assessing the effectiveness of existing fiscal incentives would be useful. Efforts to design more progressive tax systems and boost tax collection—particularly, property and/or land taxes—will surely help. This will have to be combined with increasing the VAT rate, streamlining existing VAT exemptions, and increasing existing excise rates on alcoholic and tobacco products.
Expenditure: the following expenditure-related issues need to be at the heart of fiscal policy design and implementation: (i) enhancing the quality of public investment by further improving the procurement process and establishing a public investment management unit; (ii) removing fuel subsidy combined with building consensus; (iii) implementing cost-reflective electricity tariffs; (iv) enhancing coverage and efficiency of social assistance programs; and (v) undertaking civil service reform.
The quality and strength of policy institutions matter in navigating a country through economic challenges. These important foundations must be adequate and robust for the proposed fiscal measures to work and produce the desired results. Nigeria has in place a number of fiscal rules as stipulated in the Fiscal Responsibility Act (2007). The Central Bank of Nigeria Act (2007) limits the size of monetary financing of fiscal deficit as well as the size of its direct intervention. The main reason behind these rules is to anchor the conduct of fiscal and monetary policy and ensure macroeconomic stability.
If these rules are not respected on a consistent basis, it will be extremely difficult to achieve and maintain macroeconomic stability, as policy credibility wanes. Respecting or implementing existing legislation pertaining to monetary and fiscal policies will signal policy commitment and bring about credibility. Moving forward, the new administration could introduce a fiscal and monetary policy coordination council. There are countries that already have such a structure in place (the Coordinating Council in Egypt; and the Monetary and Fiscal Policies Coordination Board in Pakistan). Nigeria could also benefit from such an arrangement.
• Adedeji is the founder and Chief
Executive Officer, 4MNT (Economic Policy & Management Consulting, Washington Metropolitan Area, US) Non-Resident
Fellow, Center for Global Development, Washington D.C., US [email protected]
