POLICY BRIEF

Understanding
Nigeria's Fiscal
Challenges
Teniola T. Tayo
June 2023
ACKNOWLEDGMENT
This study was produced by the Office for Strategic
Preparedness and Resilience (OSPRE) — a national centre for
the coordination of early warning and response mechanisms
in Nigeria, established by Presidential Executive Order 123
and domiciled in the Office of the Vice President of the
Federal Republic of Nigeria.

OSPRE does not take institutional positions on public policy

issues. The views expressed in this report are those of the
author(s) and do not necessarily reflect the views of OSPRE,
its staff, or its board.

Our thanks to Teniola T. Tayo, for authoring this report. Teniola

Tayo is a policy advisor in the trade and investment space, the
Principal at Aloinett Advisors, and the Lead, Economic
Intelligence, at OSPRE. Her work spans across several think
tanks and international organisations, as well as with the
Nigerian government.

We also thank Chris Ngwodo (Director General, OSPRE), and

Chimdi Neliaku (Policy Analyst, OSPRE) for their invaluable
leadership and contribution to the editorial process. We also
gratefully acknowledge the external peer reviewers who
helped finalize the report.

We'd like to extend our appreciation to the wide range of

experts who granted us interviews and contributed their
insights to this report. Their contributions fed into the analysis
in this report.
TABLE OF
CONTENTS
EXECUTIVE SUMMARY 01

INTRODUCTION 03

PROBLEM DESCRIPTION 05

POTENTIAL IMPLICATIONS 07

POLICY OPTIONS 12

OPPORTUNITIES, CHALLENGES AND MITIGATION 18

CONCLUSION 19
EXECUTIVE SUMMARY

The Nigerian government's reliance on crude oil as its primary source of revenue has led to
economic instability and a challenged fiscal situation. 30% of the 2023 budget, or N6.56
trillion, is allocated to debt servicing, while projected revenue for the same year stands at
N11.05 trillion, leaving a deficit of N10.78 trillion to be financed through new debt. Nigeria's
public debt has grown tenfold in the last decade, with domestic debt being the main driver.
There is a debate on whether Nigeria is facing a revenue crisis or a debt crisis. The primary
sources of revenue are oil and non-oil taxes, but both face challenges such as declining oil
output and slow non-oil revenue growth.

Nigeria is facing multiple economic challenges that are affecting its ability to fund its
expenditure and implement needed reforms. The current fiscal crisis in Nigeria is driven by
external shocks such as the COVID-19 pandemic and the Russia-Ukraine war, as well as
internal issues such as oil theft, poor tax collection, and fiscal indiscipline. The revenue crisis,
low growth, distorted monetary policies, and increasing poverty, inequality and insecurity
are some of the major implications of the current fiscal situation in Nigeria.

The revenue crisis has resulted in reduced capital expenditure, high debt servicing,
and insufficient investment in public infrastructure, which is stifling growth. The IMF
predicts a growth plateau and slight decline.

Nigeria's monetary policies are also being affected as the Central Bank continuously
intervenes in financing budget deficits, leading to oversupply of naira in the market
and reduced investor confidence. This further worsens the country's economic
situation and increases the difficulty of implementing needed reforms.

Low public spending will not only affect growth, but will have a ripple effect on other
social indicators such as poverty, inequality and insecurity. The ability of the
government to provide social protection and improve welfare will be limited, making
it difficult for the country to tackle these issues.

Given the above, it is crucial for Nigeria to address the revenue crisis and implement
reforms that can improve its fiscal and monetary policies. Failure to do so can escalate the
situation to a debt distress situation, affecting the country's ability to access new loans and
further stifle growth. The following policy recommendations have been put forward:

POLICY BRIEF 01
 CUT AND REALLOCATE Reduce dependence on the Central Bank's
SPENDING overdraft facility

Consider the reduction of personnel costs

through a public sector reform program that
will provide exit options for public servants

Capital projects need to be selected and

prioritized more carefully in order to ensure
maximum mid to long term returns on the
investments
Efficiently reallocate resources previously
spent on petrol subsidies, while protecting
vulnerable groups that will be
disproportionately affected
Identify public projects for investment that
are likely to yield revenue returns in the
medium term

Address oil theft and boost oil output from

INCREASE existing fields
EARNINGS
Increase tax base and tax collection by
simplifying filing processes and increasing
transparency

Increase non-oil exports by providing trade

facilitation measures and addressing the
challenges faced by exporters in sourcing for
inputs

Explore opportunities in gas exports by

sourcing for the requisite investment for
harnessing gas resources
Invest in economic productivity by removing
barriers to business growth and encouraging
the manufacturing of goods

Nigeria's fiscal space has seen some positive developments, including a 56% growth in tax
revenues and 39.91% growth in non-oil exports, according to the Nigerian Export
Promotion Council.
To improve the government's fiscal position and meet debt and public spending
obligations, Nigeria must undergo a slow and painful transformation towards more
efficient revenue generation through improved tax collection and coverage, tighter fiscal
discipline, and the efficient reallocation of resources from the petrol subsidy. . Although
these reforms will have costs, they are essential for a positive growth outlook and
prosperity for Nigeria.

POLICY BRIEF 02
INTRODUCTION

Following the commencement of commercial production of crude oil in the 1970s, the
Nigerian government's public finances evolved to become largely dependent on the direct
and indirect revenues from its exportation. Over-reliance on crude oil led to economic
booms and busts in line with volatile global terms of trade. However, rising population and
changing macro- and micro economic environments have resulted in a situation where the
crude oil “boom” cycle is no longer sufficient to finance the Nigerian government.

Fig 1: Federal government revenue and oil prices (NGN)

Source: Macrobond, Fitch Solutions

A combination of oil theft (and the resulting decline

in oil output) and growing subsidy receipts (and the
resulting increase in spending) created a situation
where high oil prices started to hurt, rather than
help, the Nigerian government's public finances.
T h e fa i l u re of c r u d e o i l s h o c k a b s o r pt i o n
mechanisms such as the Excess Crude Account to
adequately cover terms of trade losses contributed
to the revenue challenge. These three issues were
layered on the longer-term mismatch between the
growth of Nigeria's population and the growth of its
economy and government revenue.

Nigeria's federal government's budget for 2023

comes up to N21.83 trillion. Of this amount, N6.56
trillion, or 30% of the total budget, will be allocated
to debt servicing. This surpasses the N5.97 trillion
that has been allocated to capital spending. The
projected revenue for the same year is N11.05
trillion, a target that is considered unrealistic, given
that the estimated revenues for 2022 stand at N7
trillion. This leaves a deficit of N10.78 trillion to be
financed through new debt. This deficit comes to 5%
of Nigeria's GDP, higher than the 3% benchmark
prescribed by the Fiscal Responsibility Act.

POLICY BRIEF 03
Nigeria's public debt has grown tenfold in the last ten years. According to the Debt
Management Office (DMO), Nigeria's total public debt stock in June 2013 was US$50.91
billion or N7.93 trillion. The DMO estimates that this figure will reach N77 trillion by May
2023. During this period, external debt has grown from US$6.92 billion to US$39.66
billion, a 473% increase. Domestic debt grew from N1.08 trillion to a projected N77 trillion, a
7029% increase. It's clear that the main driver of Nigeria's growing debt stock is domestic
debt, and the mechanism that the federal government has employed for this is taking loans
from the Central Bank, through what is described as Ways and Means financing. The
growth of ways and means financing can be directly linked to unrealistic budget revenue
estimates which mean that official deficit financing approved by the national assembly falls
short of what is required, with the balance financed by the central bank. It is estimated that
the federal government will have accessed up to N23.72 trillion through these loans by
June 2023.

While public debt is often an integral part of economic development as it facilitates the
financing of public goods, Nigeria's peculiar situation raises the question of the
sustainability of its debt levels and the distortions its current approach has inflicted on its
macroeconomic fundamentals.

POLICY BRIEF 04
PROBLEM DESCRIPTION

There's an ongoing debate on whether Nigeria is currently facing a revenue crisis, or a debt
crisis. A revenue crisis may be regarded as a kind of fiscal crisis. The term fiscal crisis can be
used to describe a period of heightened budgetary distress, where countries are forced to
take exceptional measures.1 At 9%, Nigeria's revenue to GDP ratio is one of the lowest in
Africa. Its public expenditure to GDP ratio is around 14%, and the gap between both figures
is financed by debt. However, recent figures imply that its debt levels may be growing
unsustainably, particularly in the context of low revenue generation.

The Nigerian government's revenue is categorised into two main sources - oil and non-oil.
Taxes on the oil sector were the dominant source of government revenue since the 1970s,
until a crash in oil prices allowed non-oil taxes to take the lead in 2016.2 It's important to
note that this was not as a result of a disproportionate increase in non-oil taxes, but more
because of the decrease in taxes from the oil sector. Oil prices made a modest recovery but
crashed again in 2020 due to collapsed demand as a result of the COVID-19 pandemic and
the oil price wars that took place between Russia and Saudi Arabia. There was a resulting
decline in total exports out of Nigeria, given that petroleum products make up around 90%
of the country's export basket. Exports declined by 62% from US$53.6 billion in 2019 to
US$33.4 billion in 2020.3 They however experienced some recovery in 2021 and grew to
US$47.6 billion.4

Oil prices began to recover again in 2021 and rose above $100 per barrel in 2022, due to
the war between Russia and Ukraine. However, rather than the higher oil prices providing
relief for the government's finances, they resulted in ballooning oil subsidy payments that
placed even more pressure on the federation accounts. This was exacerbated by the
challenge of reduced oil output due to oil theft and divestment from the sector by large oil
companies. Analysis by Fitch Solutions suggests that Nigeria has already experienced peak
oil and will not be expected to reach previous levels of oil revenue. This is also happening
against the background of a predicted long-term slowdown of global oil demand.

Fig 2: Oil production - Volumes and Values

Source: Bloomberg, Fitch Solutions

1
Medas, P., Poghosyan, T., Xu, Y., Farah-Yacoub, J., & Gerling, Kerstin. (2018). Fiscal crises. Journal of International Money and Finance, 88, pp 191-
207
2
Burns, S. & Owens, O. (2019). Nigeria: No longer an oil state? Oxford Martin School Working Paper. Available at:
https://www.oxfordmartin.ox.ac.uk/downloads/academic/Nigeria_Oil_WP_final_130819.pdf
3
TradeMap
4
Ibid.

POLICY BRIEF 05
On the other hand, challenges such as low economic activity, inadequate tax collection
capacity, and high informality have prevented the non-oil revenue component from
experiencing sufficient growth to match the country's spending needs.

The reason why the current situation may be regarded as a crisis is because of the short to
medium term prospects of fiscal relief. The Nigerian government and economy is no longer
buoyed by rents from the oil sector, but growing the non-oil component of government
revenue will require more time and effort from government institutions that have grown
accustomed to depending on the oil sector. Even if reforms are implemented immediately,
results will take a bit of time to manifest. The extent to which the current situation can
amount to a sustained crisis depends on the level of appetite to carry out necessary
reforms, and the fiscal space that will be available to implement these reforms. The current
approach to bridging fiscal deficits could also be contributing to other problems such as the
wide gap between the official and market exchange rates, high inflation, and the general
deterioration of the business environment. These implications will be analysed further in
the next section.

POLICY BRIEF 06
POTENTIAL IMPLICATIONS

Nigeria's revenue situation has far-reaching implications for different aspects of its public
and private life.

A DEBT DISTRESS

Closely linked to Nigeria's revenue situation is the question of the sustainability of its public
debt, as previously mentioned. However, debt on its own is not a bad thing and is often
needed for public investment in infrastructure. A challenge is only presented when a
country is not able to service its debts, as a result of low revenue. This can lead to a debt
default. Since 2020, Nigeria's revenue to debt servicing ratio rose to concerning levels, and
the Q1 2022 numbers appear to show a worsening situation.

Fig 3: Total Public Debt, External Debt, and Domestic Debt

Source: Debt Management Office

Although the graph in Fig X appears to show steady and comparable increases in both
external and domestic debt, this was not actually the case as the lending from the Central
Bank of Nigeria (CBN) was not being recorded. The jump in total debt in 2023 is expected to
come from the bulk inclusion of N23.72 trillion Ways and Means Advances. According to
data compiled by BudgIt, interest paid on these advances grew from N9.71 billion in 2017, to
N1.22 trillion in 2021. The debt will also add N2.5 trillion to Nigeria's current debt servicing
burden, following the proposed securitisation. In May 2023, Nigeria's National Assembly
approved the securitisation of N22.7 trillion of these overdraft funds, converting them into
40-year government bonds with a 9% interest rate per annum. The 2023 budget already
allocates nearly 60% of projected (and often overestimated) revenue to debt servicing,
while intending to finance its 49% deficit with new debt from domestic and foreign markets.

Fig 4: Nigeria's debt servicing and revenue

Source: Nairametrics

POLICY BRIEF 07
Therefore, it is not impossible that the current revenue situation can worsen into a debt
crisis, affecting Nigeria's ability to access new loans. With the anticipated adjustments,
around 65.76% of Nigeria's total debt will be domestic lending. External debt consists
primarily of multilateral loans and commercial loans. Domestic debt consists primarily of
government bonds and treasury bills. Any challenges that arise with servicing current debt
will have a ripple effect on the country's internal and external credit environment. In
January 2023, Moody's, a ratings agency, downgraded Nigeria's sovereign rating from B3
to Caa1, alluding to the high credit risk of its bonds. This was following an earlier downgrade
from B2 to B3 in October 2022. Similarly, in November 2022, Fitch Ratings downgraded
Nigeria's long-term foreign currency issuer default rating from B to B-. These downgrades
are on the basis of the anticipated deterioration of Nigeria's fiscal and debt position and
have now included a number of Nigerian banks due to their level of exposure to sovereign
bonds.

ZAINAB AHMED
A comment by the Finance Minister, Zainab Ahmed, in October
2022 about potentially “restructuring and negotiating [debt] to
stretch out the repayments to longer periods” triggered some
unease, causing her and the DMO to walk back the comment.

The DMO published an analysis of Nigeria's debt sustainability in June 2021 and concluded
that current debt levels were sustainable, given that they were still below 40% of GDP.
Other analysts such as Bismarck Rewane of Financial Derivatives, posit that debt
restructuring is inevitable given the other economic fundamentals. Although it is not
impossible for these options to be explored, they may come with serious reputational risks
that may affect future borrowing. Nigeria has been able to negotiate both outcomes in the
past, and may be losing credibility as it pertains to fiscal discipline.

Given the above, a failure to begin to address the revenue crisis can allow it to escalate to a
debt distress situation. This potential distress situation has two levels - domestic debt
distress and external debt distress. As Nigeria has higher exposure to domestic debt, there
is a higher risk of this, which has broader socio-economic implications.

This challenge also has a subnational dimension, where many Nigerian states are
experiencing varying levels of debt distress. Their challenges with growing their internally
generated revenue to levels that are more proportionate to their spending puts additional
strain on federal spending as around 50% of federal revenue is allocated to states.

POLICY BRIEF 08
 B SLOW GROWTH

A far-reaching implication of Nigeria's current fiscal situation is the stifling effect it can
have on growth. Reduced capital expenditure as a result of low revenues, high debt
servicing and high non-capital expenditure means insufficient investment in soft and hard
public infrastructure needed for growth. These include investment in education and
healthcare for human capital development; as well as investment in communication and
transport infrastructure for private sector development. Low investment in soft and hard
infrastructure can also further reduce the country's attractiveness for foreign direct
investment (FDI), which is already at low levels. The fiscal indiscipline and current monetary
policies are argued to be contributing to the decline in FDI as the high inflation coupled with
the distorted forex markets reduces the attractiveness of Nigeria's investment case.

Fig 5: Foreign direct investment

Source: National Bureau of Statistics, Fitch Solutions

All of the above can trap Nigeria in a slow growth loop that prevents it from sufficiently
increasing economic activity to levels that can fund the government's expenditure. The IMF
predicts a growth plateau and slight decline, while Fitch Solutions predicts an even steeper
decline.

Fig 6: Nigeria's GDP growth - historical and forecasts

Source: Bloomberg, Fitch Solutions

POLICY BRIEF 09
 C MONETARY POLICIES

This has already been alluded to in other sections, but Nigeria's fiscal situation is also
affecting its monetary policies, as the Central Bank continually intervenes in financing
budget deficits. Although the ways and means advances for bridging budget deficits is not
uncommon, the CBN's Act puts a limit on such interventions. Section 38 of the Act
stipulated that the advances should not exceed 5% of the previous year's actual revenue
generated, and should be repaid by the end of the fiscal year. The Act prevents the CBN
from making future advances if a previous one has not been repaid. The provisions of the
Act have been clearly flouted with the current overdraft balance at N22.7 trillion, with an
additional N1 trillion already approved.

Fig 7: Federal government's stock of CBN overdrafts or “ways and means” (NGN trillion)

Source: Business Day, Central Bank of Nigeria

The major consequence of this is the effect it has on other aspects of the economy,
including inflation rates. The Central Bank's attempt to fight inflation means limiting the
growth of money supply in practice. However, the financing that has been extended to the
government is somewhat equivalent to a growth in money supply which makes the core
objective of the CBN much harder.

High levels of inflation affect the majority of Nigerians, especially poor Nigerians as it
reduces their spending power and disposable income. It however also affects the financial
sector as it reduces the quality and value of assets. As one example, the disruption of the
quality of the assets held by the pension funds may eventually have an impact on the
retirement funds of individuals.

Some analysts have also observed a correlation between the growth in the CBN's
overdraft to the federal government and the growing spread between the official and
parallel market naira exchange rates. One possible mechanism for this may be an
oversupply of naira in the market vis-à-vis an undersupply of forex. This then extends to
declining FDI, due to reduced investor confidence.

Distorted monetary policies driven by Nigeria's fiscal situation further worsen the
country's economic situation and increase the difficulty of implementing needed reforms.
The current plan to mop up the excess naira in circulation through the redesign of the
larger denominations of the currency and reduced limits on weekly withdrawals is a policy
response to challenges that the CBN's excessive overdraft provision may have contributed
to. The CBN explained in a press release that currency circulation had more than doubled
since 2015, from N1.46 trillion in December 2015 to N3.23 trillion in September 2022.

POLICY BRIEF 10
 D POVERTY, INEQUALITY & INSECURITY

Low public spending will not only affect growth, but will have a ripple effect on other social
indicators. Nigeria's government is already regarded as spending too little, considering the
size of its economy. Further contractions in public spending limits the welfare state, and the
ability of the government to provide social protection. Low investment in public
infrastructure that can support private sector growth and attract FDI can also limit job
creation, and potentially increase unemployment. High unemployment and low social
protection can increase poverty and spatial inequality in Nigeria, which are already at high
levels. According to the World Bank, there were 89 million poor people in Nigeria in 2020
and this number was expected to increase to 95.1 million in 2022.5 Asides the poor, the
unsuitable economic environment is contributing to a wave of emigration by primarily
middle class Nigerians. If worsened, this can contribute to a skilled labour market crisis.
Nigeria is also already experiencing high and growing insecurity driven by violent
extremism, identity conflict, and organised criminality. A revenue crunch will limit the
government's ability to address the socio-economic drivers of insecurity such as relative
deprivation, scarce resources and inadequate public services. It will also limit the fiscal
space for financing the security infrastructure tasked with responding to and curbing
violent events.

Fig 8: Budgetary allocation to the Nigerian Army, Navy and Air Force (2015-2022)

Source: Dataphyte, Budget Office

Facing threats from multiple Boko Haram factions, “bandits”, violent secessionists and
other criminals, Nigeria's military spending has ballooned since 2015. Low revenues can
therefore worsen the capacity of the Nigerian government to secure the lives and
livelihoods of its citizens.

5
Oyedeji, O. (2022). Number of Poor Persons in Nigeria to Rise to 95.1 Million in 2022. Dataphyte. Available at: https://www.dataphyte.com/latest-
reports/number-of-poor-persons-in-nigeria-to-rise-to-95-1-million-in-
2022/#:~:text=Number%20of%20Poor%20Persons%20in%20Nigeria%20to%20Rise%20to%2095.1%20Million%20in%202022,-
by%20Olanrewaju%20Oyedeji&text=A%20World%20Bank%20report%20has,be%2095.1%20million%20in%202022.

POLICY BRIEF 11
POLICY OPTIONS

A number of policy options have been proposed by different actors to address the current
fiscal crisis. The IMF, in its Article IV Mission report, published after its visit to Nigeria
recommended that the federal government should reduce its dependence on the CBN's
overdraft facility

These options can be broadly categorised into two:

a. Reallocate spending, and b. Increase earnings.

A REALLOCATE SPENDING

The federal government's budget for 2023 is the highest on record and as earlier
explained, represents a deficit that contradicts the Fiscal Responsibility Act. Unfortunately,
only 27.3% of the planned expenditure will be allocated to capital projects.

Fig 9: Nigeria's federal government budget 2023

Source: Budget Office

Debt servicing will be taking up fiscal space that

could have been allocated to capital expenditure,
however it will be one of the more difficult
components to reduce. Of the N6.56 trillion
allocated to debt servicing, N4.5 trillion will be
used to service domestic debt, including the ways
and means advances (N1.2 trillion). This
represents 68.6% of the total debt servicing and
around 20% of the total budget. The
controversial move to securitize the CBN's
overdrafts into a 40-year bond at 9% interest
rate was in an effort to reduce the cost of interest
payments on the ways and means advances. The
only way to reduce external debt servicing costs
will be to negotiate debt forgiveness or debt
restructuring.

POLICY BRIEF 12
One disadvantage of a potential debt crisis and restructuring is the impact it may have on
future borrowing. Nigeria's revenue generation levels are still far from being able to cover
its annual spending, and revenue generation can only grow over a period. Undisciplined
domestic borrowing cannot always be the solution due to the wider effects it is having on
the economy. IMF-led restructuring programs are sometimes in exchange for
conditionalities such as monetary and fiscal policy reforms. Although these conditionalities
are usually economically expedient, they come with social and political costs.
There are proposals to reduce personnel costs by laying off public servants in line with
stipulated criteria. Although the public service is inarguably bloated, inefficient, and in need
of reform, the utility of mass layoffs in the current microeconomic situation is debatable.
There is no option of cutting down capital expenditure, given that it's already at a very low
level, compared to the size of Nigeria's economy. However, capital projects need to be
selected and prioritised more carefully, with focus on investments that can yield quicker
results in the short to medium term. The situation with the recent investment in transport
infrastructure, with some of the recent rail lines non-operational, others sometimes
grounded due to insecurity, and others operating well below capacity due to high running
costs provides a note of caution.

POLICY BRIEF 13
On the other hand, there was near consensus among international development
institutions and some national economists that Nigeria had to end its payment of petrol
subsidies. The subsidies were argued to disproportionately benefit the rich, while putting
immense pressure on the federation accounts. It has been estimated that Nigeria spent
N4.39 trillion on the petrol subsidy in 2022 and potentially around N6.7 trillion in 2023,
before the payments were announced to have ended by President Tinubu during his
inauguration speech on May 29 2023 .6 Subsidy payments were usually subtracted
directly by the Nigerian National Petroleum Corporation (NNPC) and reduced the net oil
revenue remitted by NNPC to the federal government, even in the context of higher gross
revenues. The recently passed Petroleum Industry Act required the petrol subsidy to be
phased out, although the associated political risks prevented this from happening in 2022.7
The announcement of the end of the regime resulted in the increase of petrol pump prices
from an average of N189 per litre in major cities to as high as N557 per litre, signifying
nearly 200% increase. As expected, transportation prices have also increased. The petrol
subsidy was however highly unsustainable and was regarded as an inefficient use of scarce
resources.

Fig 10: Petrol subsidy and government revenue

Source: World Bank, Fitch Solutions

A proposal by the IMF, as analysed by Fitch

Solutions, suggested that eliminating the
petrol subsidy could create enough fiscal
space to finance more targeted subsidies
for the poor, while still improving the
country's fiscal position. This may however
take some time to play out given the
pressures the subsidy placed on the
finances of the NNPC. There is still
uncertainty about how the commencement
of operations of the Dangote refinery might
affect the market prices of petrol. The
refinery was launched in May 2023 but is yet
to produce output.

6
Ojekunle, A. (2022). FG projects N6.7trn for petrol subsidy spending in 2023. The Cable Newspaper. Available at: https://www.thecable.ng/just-in-
fg-projects-n6-7trn-for-petrol-subsidy-spending-in-
2023#:~:text=The%20federal%20government%20has%20projected,)%2C%20better%20known%20as%20petrol.
7
Tayo, T. (2022). Nigeria's petrol subsidy is a climate issue. ISS Africa. Available at: https://issafrica.org/iss-today/nigerias-petrol-subsidy-is-a-
climate-issue

POLICY BRIEF 14
Fig 11: IMF Fiscal adjustment proposal, pp of GDP

Source: IMF, Fitch Solutions

Overall, the Nigerian government's budget is a lot lower than is required for its population
and economy. Although there are ways to increase the efficiency of its current spending,
the bigger problem will be increasing its earnings. More efficient public spending will also
need to happen on the subnational level, with Nigerian state and local governments.

B INCREASE EARNINGS

Most governments around the world finance their activities through the taxes they collect
from individuals and businesses in their economies. At 8%, Nigeria's tax-to-GDP ratio is
said to be one of the lowest in the world.8 However, Nigeria's Federal Inland Revenue
Service (FIRS) announced a 56% increase in tax collection between 2021 and 2022. At N10
trillion, this is the highest tax collection on record with over 50% generated from non-oil tax
sources. The federal government's revenue generation report for January to June 2022
showed that out of the N2.94 trillion that was retained, N496.75 billion was from oil
revenues, and N2.44 trillion was from non-oil revenues.9 Non-oil revenues had much better
performance than oil revenues (83.1% vs 16.9%) and consisted of Company Income Tax
(CIT), Value Added Tax (VAT) and Customs collections, and other levies.

8
Jimoh, A. (2022). Nigeria's Tax To GDP Ratio Lowest Globally – Osinbajo. Daily Trust. Available at: https://dailytrust.com/nigerias-tax-to-gdp-ratio-
lowest-globally-osinbajo
9
Budget Office

POLICY BRIEF 15
Fig 12: Nigeria's federal government retained revenue - January to June 2022 (N billion)

Source: Budget Office

It is instructive that oil now plays an even smaller role in Nigeria's revenue mix. This is not a
new development, and is a trend that can be traced back to 2015, following the crash in
global oil prices.

Fig 13: Revenue generation, 1970 to 201610

Source: Burns, S. & Owens, O. (2019)

The implication of this is that key to Nigeria's revenue growth will be its capacity to widen its
tax base and increase tax collection. Although Nigerians pay multiple - and mostly informal
- taxes and levies, a significant proportion of these do not make it to the federation account.
Collected taxes are sometimes withheld by public and private organisations and not
remitted to the federal government. Majority of Nigerians are not tax compliant, and the
difficult tax processes do not encourage compliance. Streamlining the multiple informal
taxes into clear and fewer categories can ease the process of navigating the tax system for
Nigerians. In many cases, Nigerians may end up paying less net taxes, while the
government collects more revenues.

10
Burns, S. & Owens, O. (2019). Nigeria: No longer an oil state? Oxford Martin School Working Paper. Available at:
https://www.oxfordmartin.ox.ac.uk/downloads/academic/Nigeria_Oil_WP_final_130819.pdf

POLICY BRIEF 16
Global best practices dictate that members of a population living at or a below the poverty
line should be excluded from personal income taxes. If this is adopted, then an increase in
direct tax collection will not put further pressure on poor Nigerians, but will target middle
class and elite tax evaders. High informality of economic activities in the country will be a
challenge that needs to be navigated, as actors in this sector will need to be incentivised to
properly file their earnings and pay taxes. Remote workers living in Nigeria and employed in
service jobs across the world are a growing demographic that also need clear tax guidance.
Linked to this is the need for the government to remove barriers to private sector
development, as business success can mean a wider tax base for the government. A
prospering economy can generate more government revenue.

POLICY BRIEF 17
OPPORTUNITIES, CHALLENGES & MITIGATION

There have been some positive developments in Nigeria's fiscal space. The aforementioned
growth in tax revenues by 56% between 2020 and 2021 was also driven by a growth in
exports. Although official data has not yet been made available, the Nigerian Export
Promotion Council has shared that non-oil exports grew by 39.91% in 2022 to N4.82 billion.
Continued export growth and improved tax collections will be key to growing Nigeria's
revenue generation sustainably.

Oil exports still play an important role in government revenue but oil theft will need to be
addressed in order to recover output levels. There are clearly vested interests in the lack of
transparency of the oil sector and these will need to be dismantled in order for the country
to improve the gains from this sector. The vested interests present a challenge for political
will, but this should not be insurmountable.

The aftermath of the removal of the petrol subsidy needs to be managed carefully. The
government has enjoyed more public support in the context of this removal compared to
the January 2012 situation that led to the Occupy Nigeria protests. Constant clear
communication is required to keep Nigerians updated with developments concerning the
reallocation of resources previously spent on the subsidy, and the government's efforts to
reduce waste and increase the efficiency of the public service.

POLICY BRIEF 18
CONCLUSION

Although the current fiscal crisis facing Nigeria is partly driven by external shocks such as
the COVID-19 pandemic and the Russia-Ukraine war, there has been a clear movement of
its economy and finances away from oil dependence to a more diverse base. Internal issues
such as oil theft, poor tax collection and fiscal indiscipline have similarly played a significant
role in exacerbating the situation. There is a need for quicker policy responses to avert a
worsening of the government's fiscal position or inability to meet its debt or public spending
obligations. Nigeria must now go through the slow and painful transformation of its
government and affiliated institutions towards more efficient revenue generation through
improved tax collection and coverage. This will have to be implemented alongside tighter
fiscal discipline, and more efficient reallocation of resources that were spent on the fuel
subsidy. Although these reforms will not be without cost, they are essential for a more
positive growth outlook for the Nigerian economy and prosperity for Nigerians.

POLICY BRIEF 19
 Office for Strategic Preparedness & Resilience
(National Early Warning Centre of Nigeria)

www.ospre.gov.ng