Abstract
Selected Issues
Creating Fiscal Space During the Covid-19 Pandemic in Nigeria1
A. Background
1. The COVID-19 pandemic has intensified health and social spending pressures, especially given pre-existing weaknesses of the public health system and social safety nets. Nigeria’s score in the index used to measure health SDG performance falls below the median for low-income economics. Total health spending is relatively low, with government spending in health being one of the lowest in the world, amounting to $US10 per capita or just 0.5 percent of GDP in 2017 (latest available statistics). The Global Health Security Index 2019 in its comprehensive assessment of global health security capabilities, ranked Nigeria 96 out of 195 countries with particularly low capacities to prevent and respond to pandemics. While several social and employment programs exist in Nigeria, their implementation at the federal and state level is impeded by limited coverage, undefined eligibility criteria, and lack of monitoring (World Bank, 2016). These challenges imply that to adequately address both the public health and socio-economic challenges of the COVID-19 pandemic, significant additional spending would be needed to fight the pandemic and lend support to those most severely affected by it.
Social Safety Nets in Nigeria
A number of social and employment programs exist in Nigeria but their implementation at the federal and state level is impeded by limited coverage, undefined eligibility criteria, and lack of monitoring (World Bank 2016).
A few other conditional and unconditional cash transfers have been or are being implemented primarily at the state level but have low overall reach. For example, the effectiveness of the ‘In Care of the People’ (COPE) is constrained by low coverage (22,000 beneficiary households), low benefit levels, and weak incentives for state involvement.
The Youth Employment and Social Support Operation (YESSO) program aims, supported by the World Bank, to reach more than 500,000 youth to receive re orientation and life skills training and 1.5 million youth through public workfare.
A number of programs are implemented by the National Directorate for Employment, including training on skills acquisition (e.g. Basic National Open Apprenticeship Scheme. B-NOAS) and entrepreneurship (e.g. women employment program).
Performance in the Health SDG, in Income-Group and Regional Comparison
Citation: IMF Staff Country Reports 2021, 034; 10.5089/9781513568461.002.A003
Source: IMF Staff estimates.2. Nigeria’s fiscal space is at risk. With the uncertain recovery of the world economy and a second wave of the pandemic already happening in some parts of the world, fiscal pressures are likely to persist well into 2021 and possibly beyond. Oil and non-oil revenues are expected to be lower than pre-COVID-19 projections resulting in higher fiscal deficits. Public debt is expected to jump from 29 percent of GDP in 2019 to 34 percent of GDP by the end of this year. Interest payment is expected to absorb more than 90 percent of revenue of the Federal Government (34 percent of GG revenue) in 2020.
Fiscal Financing Needs and Sources
(Billions of Naira)
Citation: IMF Staff Country Reports 2021, 034; 10.5089/9781513568461.002.A003
Sources: IMF staff estimates.3. In light of sovereign downgrades2 earlier this year and heightened investor nervousness, access to international capital market may stay limited in the short run. The gross financing needs are expected to remain elevated in 2021. The large financing needs in 2021, even if partly filled by more borrowing from IFIs and external capital markets, will need to rely heavily on domestic sources, including CBN overdraft, potentially crowding out private sector credit growth and further complicating the conduct of monetary policy.
Fiscal Financing Needs and Costs
Citation: IMF Staff Country Reports 2021, 034; 10.5089/9781513568461.002.A003
Sources: IMF staff estimates and Bloomberg.B. Nigeria’s COVID-19 Response
4. Nigerian authorities have taken a number of fiscal measures to mitigate the public health and economic impact of the pandemic. The revised budget of the federal government (FGN) set up a N500bn COVID-19 crisis intervention fund in order to help cover the costs of much needed health equipment, medicine, and facility upgrades, as well as shore up support for the economy through public works programs and social transfers. A temporary fiscal support package, though not fully costed, is expected to provide relief for taxpayers and incentivize employers to retain and recruit staff during the downturn, through measures such as income tax relief equal to a 50 percent rebate on payroll tax for their employees. Tax policy measures—such as import duty waivers for medicine and medical goods —were also implemented. Conditional cash transfer was provided to households on the social register, which is expanded from 2.6 million to 3.6 million households. In line with lower international oil prices, regulated fuel prices have been reduced, and fuel subsidies have been eliminated. Electricity tariff increases – originally planned for April 2020 – were postponed to September.
5. The size of Nigeria’s fiscal package is relatively small. Its fiscal support package in response to the COVID-19 pandemic, estimated at 0.3 percent of GDP, is noticeably lower than that of comparators. Sub-Saharan African countries, emerging markets, and Low-Income Developing countries3 have committed additional spending and foregone revenue averaging 1.4 – 3.5 percent of GDP. While some spending and foregone revenue has not been fully costed in Nigeria, thus preventing a precise comparison with peers, it is unlikely to match the magnitudes in these comparator countries.
2020 Budget Revisions and COVID-19 Support
Citation: IMF Staff Country Reports 2021, 034; 10.5089/9781513568461.002.A003
4. Nigeria’s COVID-19 public health spending need is likely to be moderate. An estimate using IMF’s Coronavirus Health Cost Model, based on a Susceptible-Infectious-Recovered (SIR) epidemiological model and health cost assumptions informed by the SDGs costing reports, suggests that Nigeria’s COVID-19 health cost for enhancing healthcare capacity and treating patients by 2021Q1 is likely to amount to 0.3 percent of GDP, which is relatively low in comparison to other countries. This is mainly because Nigeria’s official total number of confirmed COVID-19 infections (62,853 as of October 31, 2020) has been very low relative to the size of its population (302 per 1 million people) and is much lower than the SSA average. The number of active cases peaked in end-July at around 22,000 and has steadily declined thereafter to about 3,000 by end-October. About 2/3 of the COVID-19 health spending needs would have to be met by the State and Local Governments (SLGs).
Estimated COVID-19 Health Spending Needs (no second wave)
(percent of GDP, cumulative)
Citation: IMF Staff Country Reports 2021, 034; 10.5089/9781513568461.002.A003
Sources: IMF staff estimatesTotal COVID-19 Cases per Million Population
(as of 10/30/2020)
Citation: IMF Staff Country Reports 2021, 034; 10.5089/9781513568461.002.A003
Sources: worldometers.infoCOVID-19 Tests per Million Population
(log scale, as of 10/30/2020)
Citation: IMF Staff Country Reports 2021, 034; 10.5089/9781513568461.002.A003
Sources: worldometers.info5. Additional COVID-related health spending needs in Q4 of 2020 and 2021 would be limited but subject to risks. Assuming a continuation of the current trend of declining active cases, the number of patients requiring hospitalization would be limited. However, this outlook is subject to several risks. First, a possible second wave of COVID-19 infections could add to additional health spending pressures of about 0.2 percent of GDP, assuming that it occurs in 2021Q1 with the peak that is about the half of that is in the first wave. Secondly, Nigeria lags in COVID-19 testing, with the number of tests conducted per million population staying at a fraction of the average of regional peers. Limited testing could have masked a significant number of unreported infections, which, in turn, could lead to larger outbreaks that would eventually call for additional public spending.
6. Fiscal impact beyond the need to increase health spending could be significant from a resurgence of COVID-19. The IMF’s DIGNAR-19 model, which is a combination of a dynamic macroeconomic model and a SIR epidemiological model, is used to simulate the impact of a second wave of infections starting in 2021Q1 on Nigeria, based on the assumptions that the Nigerian government (1) adopts a mild lockdown reducing contacts by one third of the reduction experienced during the more severe lockdown of April 2020; and (2) increases health-related expenditures by 0.2 percent of GDP in 2021. In addition, under this scenario, oil prices are assumed to tumble in 2021, averaging at $30 per barrel; and the sovereign bond spread on external commercial debt would rise to 3 percentage points, similar to the increase in 2020Q1. With these assumptions, GDP is projected to contract by 1.7 percent in 2021, and the fiscal deficit is expected to worsen by 1 – 1.5 percent of GDP per year for the medium term, reflecting mainly the loss of oil and non-oil revenue, and to a smaller extent, the increase in public health spending and borrowing costs. Public debt would rise to 41.4 percent of GDP by 2024, i.e. 5.9 percent of GDP higher than in the baseline scenario.
C. Creating Fiscal Space in the Near Term
7. Work on adjustments in VAT and CIT laws to align these tax instruments with good global practices should continue. Tax law amendments that address policy and compliance gaps by removing ambiguities in law and removing redundant tax expenditures could reverse the significant non-oil revenue leakage. This streamlining of the tax codes would also reduce compliance burdens. As economic recovery gradually sets in, excises could be broadened to cover fuel and telecom airtime. Efforts to review and rationalize the multiple pioneer status incentives should be prioritized, and the review and removal of customs duty waivers should be resumed, excluding those on medical supplies (IMF, 2017).
8. Reinvigorating revenue administration is crucial for safeguarding fiscal resources as COVID-19 loses momentum and lockdown measures are loosened. The FIRS suspended field audits, investigations, and monitoring at the onset of the pandemic to curb contagion through human contacts. Although some mitigating measures have been put into place, including improving the e-filing process, to facilitate the payment of taxes, filing, declaration and payment compliance have inevitably deteriorated due to extended deadlines, limited availability of staff and taxpayers’ weakened financial positions. As active cases and new cases of COVID-19 infections continue to decline, it is essential to restore the normal functioning of revenue administration and restore compliance to pre-crisis levels. Field audits can be resumed as restrictive measures are gradually phased out. Ongoing reforms should continue. Plans to utilize automatic exchange of information (AEOI) on the offshore deposits of residents for the first time in 2020 should roll out as planned to reduce cross-border tax evasion (Grote et al, 2020). In addition, efforts to upgrade the IT infrastructure of tax administration (e.g. ITAS) should also proceed as planned. There is also a need to elevate the use of third-party information and data analytics to minimize the impact of suspending field audits.
9. A multi-pronged approach should be taken to safeguard oil revenue as oil prices have yet to fully recover to pre-crisis levels.
Processing oil revenue at a unified and market-determined exchange rate rather than the official rate would boost oil revenue available to the government. Staffs estimates show that the use of official rate as opposed to the more depreciated market rate (the l&E rate) for official transactions have resulted in foregone oil and gas revenue of the generai government amounting to N500 billion in 2019. Allowing greater movement in the l&E window exchange rate to reflect market developments would help diffuse BOP pressures and deliver immediate gains to both FGN and SLGs.
Spending adequate resources on protecting Nigeria’s oil and gas assets that extract and transport crude oil, gas and refined products is an effective revenue measure with immediate payoff. The Nigeria Extractive Industries Transparency Initiative (NEITI) reported that the value of volumes of crude oil and refined products stolen from Nigeria in the last decade amounts to $41.9 billion—and this loss is growing (NEITI, 2019). Introducing advanced fingerprinting technology for crude, improving the metering infrastructure, and comprehensive policing and guarding of the oil and gas infrastructure could dramatically improve the country’s fiscal oil and gas resources.
Reforming the institutional and regulatory framework for the petroleum industry -including the fiscal regime – is essential to fully realizing the potential of the sector. Expeditious establishment of the new petroleum fiscal framework will be critical to ensure new license bids and decisions on oil and gas exploration/development accelerate. The comprehensive overhaul of the policy and regulatory framework in the Petroleum Industry Bill provides long overdue steps to separate the commercial and regulatory functions in government, and adjustment in fiscal terms broadly position Nigeria in the right zone internationally. A quick adoption of the PIB could help boost oil revenues and lay a solid foundation for a recovery in the oil sector. Enhancing the governance of the oil sector and transparency of oil-revenue administration by publishing NNPC’s financial statements and reports submitted to FAAC could also increase oil revenue collection.
10. Preserving fiscal savings from fuel subsidy removal and proceeding with power sector reform in 2021 are critical for creating fiscal space. Fuel subsidy, which accounted for 0.4 percent of GDP in 2019 and was more than the entire FG budgetary allocation for education, was removed. It is important to ensure the smooth functioning of the automatic fuel pricing formula and prevent the re-emergence of implicit fuel subsidies as international oil prices recover. Fuel subsidy removal reduces income inequality as richer households tend to spend a larger share of income on petrol. The cost of measures to mitigate the impact on the poor would be relatively small. Electricity tariff increases, originally planned for April 2020, to eliminate tariff shortfalls were understandably put on hold due to the pandemie. Introducing these tariff increases in 2021 would free up significant fiscal space (0.4 percent of GDP in 2019). Distributional impact from tariff increases would be limited, as 60 percent of the subsidy was used to cover electricity consumption for the richest 10 percent of the population and 90 million of the poorest Nigerians have no access to power.4 Some scaling-up of social transfers would be needed to protect those poor households to be affected by higher electricity tariffs. Its cost would represent a fraction of the fiscal savings.
Petrol Expenditure by Income Percentile
Citation: IMF Staff Country Reports 2021, 034; 10.5089/9781513568461.002.A003
Source: National Bureau of Statistics, IMF Staff estimates11. It is important to ensure transparent use of IFIs resources as per commitments made in the RFI Letter of Intent. These include creating specific budget lines for the tracking and reporting of emergency response expenditures and reporting on the transparency portal; publishing procurement plans and procurement notices for all emergency response activities; and timely publishing of an independent audit into the emergency response expenditures and related procurement process. The Nigerian authorities have created specific budget lines to facilitate the tracking and reporting of emergency response expenditures and have reported funds released and expenditures incurred monthly on the MOF’s Transparency Portal. Moreover, the Bureau of Public Procurement has issued guidelines on Covid-19 emergency, and the Nigeria Open Contracting Portal has been publishing Covid-19 related procurement contracts, although some contract details on beneficial ownership seem to be lacking. Ensuring public accessibility would be important. Box 2 provides some international best practices of controlling, tracking, and reporting of COVID-19 policy measures.
International Best Practices of Fiscal Transparency of COVID-19 Policy Measures
Tracking additional COVID-19 related spending through dedicated programs or sections of the budget. In Colombia, an Emergency Mitigation Fund (FOME), placed under the responsibility of the Ministry of Finance, has been created to manage resources used to mitigate the impact of the current crisis with a dedicated portfolio that is separated from other funds and resources within the general budget.
Channeling donor funding through the budget with full transparency on its utilization. South Africa requires that all donor funding received be paid into a specific Reconstruction and Development Fund and used strictly in accordance with the purpose set by the regulations and the intent of the donors.
Applying international standards of transparency to the implementation of off-budget measures. France has set up in the current crisis a bank loan guarantee scheme. Access criteria and processes are well publicized; all guarantees for large corporations will be authorized by a (published) ministerial decision. A 12-member committee (with representatives from Parliament, business associations, local governments, and the Supreme Audit Institution), created at the request of the Parliament, will report on implementation of the guarantee scheme one year after its launch.
Informing citizens about policy measures that are available and how to access them. Disseminating information on support measures through a dedicated portal, including precise criteria on the eligibility for benefits, is a useful option. Peru has created a webpage where citizens can find information on their eligibility to access the vulnerable household aid. Similar webpages have been created by other countries including Iceland, Indonesia and the UK. In Malaysia, the Ministry of Finance published an Economic Stimulus Package Booklet on its website, carrying relevant details of the package.
D. Conclusion
12. Nigeria is facing continued fiscal pressure in the near term and needs to act on multiple fronts to create fiscal space. “Quick win” tax policy measures delivering small immediate fiscal gains should be followed up with stronger revenue measures when the economy starts to recover. Revenue administration authorities need to focus on reinvigorating operations. Oil revenues could be effectively boosted by unifying exchange rates, safeguarding oil and gas assets, and speeding up policy, institutional and regulatory framework of the oil sector. On the spending side, preserving savings from fuel subsidy removal and proceeding with electricity tariff increase when appropriate are key for creating fiscal space.
Estimating Nigeria’s COVID-19 Health Spending Needs
A simple Susceptible-Infectious-Recovered (SIR) epidemiological model (see Heathcote 2000 for a discussion) developed at the IMF is used to project country-specific numbers of persons requiring hospitalization. Combining these with assumptions about spare capacity, and simple estimates of the costs both of providing care and of increasing capacity in the health sector, the model is able to derive the overall additional health spending needed country-by-country. By using a well-established epidemiological model of infectious disease diffusion and assumptions about capacity constraints, the model strikes a balance between simplicity and completeness.
Assumptions for the epidemiological model are mostly universal. An exception is the assumption that mitigation measures started to have an effect four weeks after the first case was reported in Nigeria. Assumptions for hospital capacity and healthcare costs are largely informed by the SDGs costing report by Soto, Moszoro, and Pico (2019), except for the cost of a new bed and other fixed costs for every 100 new additional beds, which include the cost of importing medical equipment and upgrading medical facilities. In the absence of Nigeria-specific data on these two costs, we take standard values recommended by the model. We also assume that the public share of COVID-19 health spending is 75 percent, with the private sector contributing the remaining 25 percent.
The model projects that the health cost is likely to amount to 0.3 percent of GDP by end-2020, close to the amount included in the revised budget. In the absence of a second wave, health spending needs in 2021 would be small as the number of active cases continue to decline. In the event that the second wave hits and assuming the pattern of infection rates mimics that observed in the earlier months of 2020, an additional health spending of 0.2 percent of GDP is likely to materialize, and fiscal resources have to be provided for accordingly.
| Assumptions for epidemiological model | ||
| Basic reproduction number | ||
| Before mitigation measures | 2.10 | |
| After mitigation measures | 0.95 | |
| Average duration of the infection, in weeks | 2.50 | |
| Probability of developing severe symptoms | 0.20 | |
| Assumptions for costs, US dollars | ||
| Cost of a nurse per week | 195 | |
| Cost of physician per week | 355 | |
| Other operating costs, per week per patient | 11,654 | |
| Cost of new bed | 25,000 | |
| Other fixed costs for every 100 new additional beds | 1,000,000 | |
| Share of cost borne by the public sector | 75% | |
| Assumptions for hosptical capacity | ||
| Total beds in period 0 | 561,185 | |
| Nurses in period 0 | 291,657 | |
| Physicians in period 0 | 73,649 | |
| Available beds for Covid‐19 patients in period 0 | 5,612 | |
| Assumptions for epidemiological model | ||
| Basic reproduction number | ||
| Before mitigation measures | 2.10 | |
| After mitigation measures | 0.95 | |
| Average duration of the infection, in weeks | 2.50 | |
| Probability of developing severe symptoms | 0.20 | |
| Assumptions for costs, US dollars | ||
| Cost of a nurse per week | 195 | |
| Cost of physician per week | 355 | |
| Other operating costs, per week per patient | 11,654 | |
| Cost of new bed | 25,000 | |
| Other fixed costs for every 100 new additional beds | 1,000,000 | |
| Share of cost borne by the public sector | 75% | |
| Assumptions for hosptical capacity | ||
| Total beds in period 0 | 561,185 | |
| Nurses in period 0 | 291,657 | |
| Physicians in period 0 | 73,649 | |
| Available beds for Covid‐19 patients in period 0 | 5,612 | |
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Prepared by Hua Chai (FAD).
On March 26, 2020, S&P Global Ratings lowered its long-term foreign and local currency sovereign credit ratings on Nigeria to ‘B-’ from ‘B’. The ratings were affirmed with a Stable outlook on August 28, 2020.
Due to data limitations, only selected countries in each group are covered in the Fiscal Monitor (April 2020).
General Household Survey, Panel 2015–2016, Wave 3, Nigeria, National Bureau of Statistics.
