Nigeria’s need to spend more and better

Abuja, November 21, 2022 - To promote economic development, Nigeria needs to increase its spending from its current very low levels. Despite its vast development needs, Nigeria spends only $220 per Nigerian per year, and at merely 12% of GDP, this is one of the lowest levels of spending in the world. Unfortunately, low public spending translates into poor development outcomes. The country is among the eight economies with the lowest human capital in the world, ranked 167^th out of 174 countries on the World Bank’s Human Capital Index. As a result, a child born in Nigeria today will only be 36% as productive when he grows up as he could be if he had access to effective education and health services. In addition, infrastructure needs also remain extremely high: to provide all the infrastructure the economy needs to maximize its potential, the country would need to invest $ 3 trillion by 2050.  

Not only is spending low, but social sectors receive very little - less than a quarter of the national budget allocation. Compared with similar countries, Nigeria’s spending on social sectors – education, health, and social protection – is very low. In 2021, and at a time when the country was battling the COVID-19 pandemic, the average Nigerian received about $15 worth of public health services a year, compared to $55 per person in Indonesia. Low social spending limits the quantity and undermines the quality of health and education services that Nigerians can expect to receive. In turn, this reduces their chances of becoming productive workers and constrains private investment outside of the oil sector.

FIGURE 1: Social sectors receive less than one-quarter of the national budget allocation in 2021

General government (federal and state) budget allocations across government functions (percent of total national budget) 2021

Similarly, infrastructure needs to continue to grow as public investment allocations are residual - receiving whatever resources are left over after other priorities have been met. Whether it is a school or a road, the Federal Government or State Governments can invest only when they have the funds to do so.  With 60% of the low levels of overall spending being absorbed by public sector salaries and pensions, and growing interest payments, fiscal space for implementing projects, especially multi-year projects, remains highly constrained. At the present level of public investment allocations, and even before considering mounting climate change adaptation costs, it would take Nigeria 300 years to provide the minimum infrastructure that the country needs.

Poor outcomes are not only a result of a low level of spending, but also inefficient spending. Nigeria continues to finance regressive and inefficient petrol, electricity, and exchange rate subsidies. Government’s net oil revenues could be 52% higher if it did not subsidize petrol — a product that is largely consumed by wealthier households: the poorest 40% of the population only consume 3%. Similarly, while electricity subsidies have been reduced thanks to the Government’s recent reform efforts, they still represented almost 9 percent of the Federal Government’s non-oil revenues in 2021. Finally, implicit exchange rate subsidies are a consequence of the multiple exchange rate windows managed by the Central Bank of Nigeria, with the Federal Government subsidizing the Central Bank through the differences between the official and IEFX windows rates. Overall, all these untargeted and distortive subsidies incur large costs and take away resources from spending on social services and infrastructure.

The key to raising public spending lies in urgently raising more revenue. At 7% of GDP in 2021, Nigeria’s revenue to GDP ratio is among the five lowest in the world. To boost revenues, the government has initiated important revenue-enhancing reforms over the last two years. A few of these measures include increasing the VAT rates (from 5 to 7.5% in 2020), starting the process of limiting tax expenditures in certain sectors (2021), operationalizing the Electronic Money Transfer Levy, and introducing excise taxes on certain “sin” goods (2022). Despite these reforms, actual revenues collected are still far below their potential. In fact, Nigeria’s non-oil revenue potential is estimated to be twice the current collection rate. The key challenges that continue to undermine Nigeria’s ability to raise more revenues are low tax rates, tax administration inefficiencies, high tax expenditures, low tax morale, and an opaque and complex governance of the oil sector. 

FIGURE ES1: Nigeria’s fiscal challenges leading to suboptimal outcomes for its citizens

Putting Nigeria on a sustainable fiscal path with improved service delivery requires a multi-pronged approach anchored around three interlinked and mutually reinforcing pillars. First, there is an urgent need to significantly increase the level of fiscal revenues, to fund the public spending needed to deliver critical public services. Second, it would be important to allocate spending more efficiently – including by phasing out the fuel, electricity, and exchange rate subsidies – to make room for human and physical capital investments. Third, it would be critical to strengthen fiscal management institutions. Adopting these pathways is a choice that Nigeria needs to make. These reforms require policy consistency, a will to shift away from the present “business-as-usual” approach, and a political consensus among elites. These reforms are critical in strengthening the foundations of Nigeria’s public finances and building trust between the citizens and the state.