The COVID-19 pandemic has exposed the already susceptible and vulnerable nature of the Nigerian economy. Series of aftermath events ensuing from the locking down and voluntary social distancing measures, exposed how volatile the economy is to shocks and fluctuations in the crude oil market due to its over-dependence on oil for forex. The first four months of 2020 (January through April) saw a significant decline in Nigeria’s most precious commodity, crude oil. Nigeria’s Bonny Light crude price fell from $70 in January to an average of $58 per barrel in February before crashing to an average of $10 per barrel in March and $14 in April 2020.
State of the Federation Revenue from January through April
Recent data by the Central Bank of Nigeria (CBN) on the state of the federation finance gave significant insights into the state of the economy.
The chart above shows federally collected revenue as against the benchmark stipulated in the budget. ₦1.25 trillion was expected to be generated in January and February, however, ₦952.5 billion and ₦845.1 billion was generated respectively implying that only 76% and 68% of expected revenue were achieved.
The month (March) which ushered in the Great Lockdown, saw a steep decline in revenue by 14% to ₦729.64 billion (M-o-M) compared to ₦1.32 trillion expected to be collected showing underperformance of 45% revenue collection. Mild recovery was experienced in April’s revenue to ₦915.28bn against ₦1.32trillion expected, an improved 70% target revenue generated.
Underperformance in revenue generation characterized the periods under review. March experienced the least targeted revenue compared to other months ensuing from the effect of the pandemic. With an average of 70% target revenue generated, it is reasonable to state that either an overestimation of projected revenue in the budget was made or revenue-generating capacity is low, reflecting the general state of the economy.
The figure above shows the proportion of Oil and Non-oil proceeds to federally generated revenue.
Although shortfall in revenue was experienced in the months under review, oil remains the driver of the Nigerian economy albeit accounting for less than 9% of the GDP. Interestingly, out of every ₦100 generated, ₦58 was generated as proceed from crude oil, thus stressing the monolithic nature and level of dependence of the economy.
Oil price sold at average $60-$70 per barrel before the pandemic hit (January through late February). Shutdown in Mainland China sent crude prices crashing. The pass down effect meant low demand, low sales, and oil glut in the international oil market driving crude prices down. Brent shedding to historic low prices, while WTI declined to negative territory on April 20.
For decades now, Oil revenue has been the mainstay of the Nigerian economy. The year 2020 isn’t different, oil contributed ₦799bn and ₦739bn in January and February (58.4% and 59% of total revenue) respectively to the gross revenue generated in each month.
Oil revenue dipped by 5% in March to ₦469.59bn following a steeper decline in crude oil prices (average $58 in February to $10 in March). Only 64% of the projected ₦739bn that was estimated for in the budget was achieved. April saw a slight increase in oil following mild recovery in crude oil prices (from $10 in March to $14 in April). ₦528.43bn was generated in April, 2020 showing 12.5% increase from the previous month.
Non-oil revenue also contributed a significant quota to the gross federation revenue, a total of ₦395.7bn and ₦348.5bn were generated as non-oil revenue in January and February respectively. Implying that 88.5% and 77.9% of projected revenue in January and February was achieved. As experienced in oil revenue, a significant decline in March was also recorded with a mild recovery in April. March revenue fell to ₦260bn compared to ₦578bn expected to be generated (That is, only 45% of projected revenue was collected).
April 2020 non-oil revenue bounced back growing by 48.8% to ₦386bn although way below the ₦578bn threshold in the budget.
Weak Crude Price Slows Oil Revenue
The figure below shows the contribution of oil revenue components to total oil revenue from January to April 2020.
Although proceeds from oil were below the benchmark estimates, they still account for a significant portion of Nigeria’s revenue.
Interestingly, Petroleum Profit Tax (PPT) was the highest contributor to proceeds from crude oil. PPT is a tax collected by the government from the income of upstream oil firms (firms involved in drilling oil). ₦301.4 billion (54% of total oil revenue) and ₦284.2 billion (58% of total oil revenue) were collected as PPT for January and February respectively. PPT dipped to ₦259.63 billion in March with a strong rebound in April rising by 29% to ₦334.9 billion following mild recovery in crude oil prices. It’s worthy of note that a positive correlation exists between the price of crude oil and PPT generated within the economy.
Domestic sales of oil and gas also accounts for a significant portion of Nigeria’s gross revenue. ₦189.3bn and ₦138.6bn were generated in January and February surpassing the ₦79bn budgeted revenue. Compared to other sources of revenue, domestic sales of oil and gas have been relatively stable contributing ₦148.5bn and ₦147.15bn in March and April respectively.
Export of Crude and Gas and other forms of inflow from sales of crude completes the sources of oil revenue. A combined ₦207bn and ₦40.6bn respectively compared to ₦396bn and ₦361.92bn expected to be generated were recorded in the periods under review. 52.3% of targeted revenue was achieved in the export of Crude Oil and Gas in the months under review compared to 10.5% revenue from Other oil inflow.
Summarily, all expected sources of revenue underperformed in the period under review. PPT contributed the chunk of revenue to Oil revenue followed closely by local sales of oil and gas. Export performed just above average is attributed mainly to weal demand in the international market.
Covid-19 Induced Sloppy Non-oil Revenue
The chart below shows the proportion of components of Non-oil revenue from January through April 2020.
Corporate Tax levied on firms accounts for a large proportion of non-oil revenue. ₦142.2bn was collected in January 2020, this same source declined in February and March following uncertainties in the economy, with a strong rebound in April. ₦86.1bn and ₦61.9bn were generated in February and March respectively. This was far below the threshold estimated in the 2020 budget implying that only 56.3% and 40.5% respectively of estimated revenue from corporate tax was collected.
Although the economy was under lockdown, a rebound of 120% increase in Corporate Tax to ₦139.6bn was collected in April showing an outstanding 90% targeted revenue generated. Specifically, the increase in Corporate tax during the period was attributed to the settlement of outstanding corporate income tax due by the Nigeria Liquefied and Natural Gas producing company (NLNG).
With a rise in Value Added Tax (VAT) rate from 5% to 7.2% in the Finance Act 2020, all eyes were on how VAT would affect revenue. VAT collected exceeded ₦110bn for the very first time in January 2020. A total of ₦114.8bn was collected showing 80% targeted revenue generated. Topsy-turvy domestic economic outlook coupled with weak consumer spending in February and March saw a significant decline in VAT revenue. ₦105bn and ₦99.6bn were generated in February and March respectively. 20.8% recovery in VAT revenue saw the inflow increased to ₦120.3bn in April 2020.
Interestingly, Customs duties in the months under review outperformed the expected revenue with an average of ₦15bn monthly. Revenue generated by any independent government agency also contributed to the federation purse. The least amount of revenue by government independent agencies was recorded in March, (₦9.42bn), which shows an underperformance of 82.2% when compared with the targeted revenue of ₦53bn.
Conclusively, Petroleum Profit Tax, Corporate Tax, VAT have shown that the significant role of taxation in an economy cannot be undermined. For the coming months, we expect an upside in government revenue given the recent devaluation of the naira as well as the downward revision of the projected oil price ($28/barrel) in the 2020 budget. Also, with social distancing measures being elapsed gradually, we see business activities rising up albeit slowly, thus contributing to an uptick in revenue. We however believe the revenue generation will still not be up to par when compared with the pre-COVID period.
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