The week ahead – What’s your rate?

Nigeria’s House of Representatives Deputy Speaker and House Committee on Constitution Review’s Chairman, Idris Wase, says President Muhammadu Buhari has signed 16 constitution alteration bills into law, which includes the State Houses of Assembly and Judiciary’s financial independence. Other bills include the removal of the railway, prison and electricity from the Exclusive List to the Concurrent List. The National Assembly had in January transmitted 35 constitution amendment bills to the president for assent. A majority of state assemblies, however, failed to vote on the two bills that sought financial and legislative autonomy for local governments.

Nigeria’s constitutional amendment process has been quite the spectacle, albeit one that has been relegated to the background in light of the long, bruising election season. After a multi-year effort that began in early 2020, the National Assembly in January transmitted 35 alteration bills passed by the country’s Houses of Assembly out of a cohort of 44 bills originally sent to the states for assent. To amend a clause in the constitution, a two-thirds or four-fifths majority of each of the Senate and the House need to approve the amendment, after which it will be transmitted to the states where two-thirds or 24 out of the 36 of the various legislatures have to concur. Of the 36 states, 27 Houses of Assembly—Abia, Adamawa, Akwa Ibom, Anambra, Bauchi, Bayelsa, Benue, Borno, Cross River, Delta, Ebonyi, Edo, Ekiti, Enugu, Imo, Kaduna, Kano, Katsina, Kogi, Lagos, Nasarawa, Niger, Ogun, Ondo, Osun Rivers and Yobe—forwarded their resolutions on the bills. As is the case with Nigeria’s infamous penchant for non-transparency, no one is quite sure which proposals have scaled through this labyrinthine process. The Presidency, as far as we know, has not gazetted these bills, and it has not been reported on reliable open information sources such as the Policy and Legal Advocacy Centre’s Bills Tracker. The ones we do know, including proposals for cabinet appointments by the President and state governors to be wrapped up within 60 days of assuming office, as well as devolving responsibility for railways, power and prison management, represent a major step in the right direction. For starters, some help set Nigeria on the path to restructuring and state development as subnational units can take advantage of the freedom to build their own rail networks and electricity systems. On a practical level, neighbouring states can utilise these legal mechanisms to enhance economies of scale by cooperating to create potent economic zones that would ease infrastructural and social pressure on states like Anambra, Kano, Lagos and Rivers. Ogun, for example, has no excuse not to connect its rich interior agricultural and mining hinterland with Lagos’s ports via rail in ways that would negate the reliance on roads, which are literally buckling under the weight of growing consumer and industrial demand. Anambra and Delta can work on cross-border infrastructure to intelligently connect the fast-growing Asaba-Onitsha-Awka metropolitan area. There is even potential for international collaboration if Cross River and Akwa Ibom, working together with Benue and Taraba, build rail to their borders with Cameroon that will enhance already established economic linkages and turn the eastern Middle Belt and the South-South into an agricultural and resource powerhouse that deepens resource access to meet intra-regional demands as well as a vibrant channel for Francophone trade, heading outwards to other parts of the world. Notwithstanding, it is worth observing how the process has played out. The fundamental premise of the big bang theory of Nigeria’s much-agitated restructuring, which was the backdrop of the Goodluck Jonathan 2014 National Conference (Confab) as well as the numerous pre-independence constitutional conferences, has not panned out. The theory basically held that the devolution of a large expanse of governing responsibility to the country’s federating units should occur in one grand swoop. Abuja has chosen the bite-sized approach, only moving when necessitated by political pressure on a given issue. President Buhari’s signing of the 16 bills is, interestingly, the most comprehensive of all of the bits of restructuring that have happened in the past few years. It would appear that succeeding administrations will follow that same track. Some issues, however, remain. Local government autonomy has been a red-line issue for state governors, who have vehemently opposed any form of political and financial autonomy for local government councils. Most state parliaments failed to vote for it, and it is not hard to divorce this development from governors’ overwhelming influence over state assemblies. To end this undue influence, Mr Buhari needed to sign the bill to guarantee the financial autonomy of both state parliaments and the judiciary. The amendment that gives state legislatures financial independence is welcome, although in practice, the compensation structure available through that pipeline is traditionally not considered exciting enough for Nigerian politicians, and many would still want to be on the good side of their governors to enhance their financial situation through patronage and preferential access to state contracts. Legislating these changes is one thing. Implementation is another. There is little guarantee that these changes will be effected in the short term before the new government in Abuja and the various state governments come on board on 29 May. In the end, it is vital for the health of Nigeria’s democracy that local government autonomy is enhanced. The current movement on reform and devolution is a great step in the right direction. The fight over enhancing grassroots governance can be had at some point in the future.

The National Population Commission (NPC) has said the 2023 census is not ethnically or politically motivated during a workshop for journalists. The commission said the census would be conducted digitally per the United Nations recommendations. Census Manager, Dr Inuwa Jalingo, said the technology adoption would ensure complete coverage of the country, reducing errors in the entire process and facilitating efficient resource deployment. Nigeria had shifted this year’s census from 29 March to May because of the postponement of the governorship and legislative elections. The Federal Executive Council (FEC) also approved ₦2.8 billion for the headcount.

The NPC’s inability to resist the urge to “shalaye” (a Yoruba word for an unnecessary explanation) stems mainly from the reputational damage many of Nigeria’s institutions have suffered in the last few months. A flurry of bizarre court rulings has left the judiciary scrambling for legitimacy, and the Independent National Electoral Commission (INEC) wittingly and unwittingly found itself with egg on its face following its conduct in the recently concluded electoral exercise. For the security agencies, poor approval ratings have always been a constant. They have never bothered to improve on their poor perception among the larger population actionably. This lack of care is what has rubbed off on the NPC, whose census exercise is viewed under partisan lenses. This is a lesson for institutional integrity and government as a continuum: The failings of one institution have enormous implications for others despite distant connections. It has been 17 years since the last national census, hence the need for a census to enhance effective policy planning. It is also good that the commission wants to do it digitally. If there is no fraud, we might know the country’s true population for the first time since the 1950s. That is a massive ask. In Nigeria, population numbers are central to politics, which is about who gets what, when, and how, according to Lasswell (so Dr Jalingo saying the exercise will not be politically motivated is more than rich). Population has long been heavily incentivised in the country because it is used as a basis for revenue allocation. Removing these incentives will help us have a more credible census; a statement affirming neutrality will not do that. Apart from conducting the census digitally, the commission should make active plans to disincentivise population falsification. Furthermore, the failure to conduct a census in 2016 — ten years after the last census — was bad enough but largely fits with Nigeria’s sociocultural disregard for data. Nigerians should be asking themselves why the census is coming mere weeks after the election when the NPC’s data would have guided the electoral process to make the results more transparent. There is also the cost conversation. According to the government, the total estimated cost for the enumeration exercise is ₦869 billion ($1.17 billion). Put another way, it is about a third of the ₦3 trillion the country would save if it follows through on plans to end its petrol subsidy. Post-census activity alone is estimated to cost ₦626 billion. The government has made budget provisions for just 25% of the census cost and is soliciting contributions. Considering the unlikeliness of securing such funds and the possibility of policymakers reverting to cheaper population estimation methods that use existing baseline figures, the possibility of a further postponement is high. Finally, the employment of a digital census, as welcome as it is, leaves more questions than answers. What are the areas where the census will be conducted digitally? Is the resort to digital data collection a product of insecurity in many parts of the country? If so, what are the NPC’s plans and methodology for arriving at accurate data from those parts and areas in the country where internet penetration is low?

Nigeria’s Finance, Budget and National Planning Minister, Zainab Ahmed, has urged the incoming administration to increase the Value Added Tax (VAT) from the current 7.5 percent to 10 percent, saying this would stimulate the country’s economic growth. She said the government had used the finance bills to block leakages, and strengthen the Federal Inland Revenue Service (FIRS) and the Nigeria Customs Service. The minister also disclosed that the federal government would remove the controversial petrol subsidy before the end of President Muhammadu Buhari’s tenure, attributing the delay to the 2023 general elections and the forthcoming national population census.

In one of the bits of political theatre that Nigeria continues to spit out in spades, the country’s finance minister is asking her successor to tighten the cost item she turbocharged on the Nigerian economy while advocating for the kind of revenue leakage plugs that her ministry has been advocating for in finance bills since 2020 but hasn’t driven through. There are enough short and mid-term cost-swelling actions that Mr Tinubu’s financial team must take up once they get into office, which would make life unbearable for Nigerians in the short term but benefit the economy. Ms Ahmed has already set the ball rolling on one of those necessary inflation drivers — the subsidy. By the budget assumptions her team prepared and the Ninth Assembly approved, fuel subsidies should be gone by June, almost doubling what Nigerians pay now for petrol. It is unclear if that will happen. The next is electricity subsidy. In the first quarter of 2022, the Nigeria Electricity Regulatory Commission (NERC) said ₦35.2 billion ($47.5 million) was paid to reduce the deficit in the electricity value chain. The government has said it would stop electricity subsidy payments, but it has reneged on that vow. If Nigerians are to see a progressive increase in power supply, then the government would have to find ways to work with unions and other stakeholders to increase distribution companies’ cost and billing efficiency. That way, the companies can raise more money for operating expenses and improve their service delivery. According to the Nigerian Energy Support Programme (NESP)’s 2023 report, the shortfall in electricity tariff reached ₦2.5 trillion in 2022, and it projects ₦600 billion more to be added to that in 2023. This deficit has to be chipped at by Nigerians, which would add to the inflationary pile. On top of these, the new CBN governor would need to remove most, if not all, of the 44 blacklisted items for forex. Whoever that person will be would have to ease the levers on forex inflows and outflows to boost confidence in that sector. That again, in the meantime, would temporarily swell inflation. In other words, increasing VAT to 10% does not rank that high on the priority list. The government should be using existing resources to facilitate trade liberalisation in Nigeria, which is heavily concentrated in Lagos and is set for even more concentration when the Lekki Free Trade Zone starts full operation. That would serve as a major signal to investors that this is a sensible place to do business. Data on capital imports for Q3 2022 is not yet available, but Q2 2022 data showed a 2.4% decrease in capital importation from Q1. Over the same period, foreign portfolio investment plunged by 21% and direct investment by 5%. Put another way, Ms Ahmed and her boss, the President, are leaving behind an asphyxiated economy. With a VAT rate of 5%, Nigeria achieved its highest tax-to-GDP ratio in 2011 at 9.6%, according to the Organisation of Economic Cooperation and Development (OECD.) The lowest was 5.3% in 2016. Debatable as it may sound, the most revolutionary contribution the finance ministry achieved in the last eight years is the tax amnesty scheme, VAIDS, implemented by the Federal Inland Revenue Service (FIRS) in 2017, and that was implemented by Ms Ahmed’s predecessor, Kemi Adeosun. Laudable as VAIDS was, it added less than 50 basis points to Nigeria’s low tax to GDP rating despite the then FIRS boss, Babatunde Fowler, saying in 2018 that five million more people were added to the tax net, bringing the overall number of taxpayers to over 19 million. As Ms Ahmed bows out of office, she leaves a tax-to-GDP ratio of 5.5%. That figure is a decline from the 6% achieved in 2019, 18 months after VAIDS concluded in June 2018. In that year, Nigeria’s tax-to-GDP ratio was 6.3%. Although the Buhari administration pushed hard on levying Nigerians for income, it could not maintain the momentum it gained in 2017. The next two OECD reports will complete the frame of Ms Ahmed’s revenue generation prowess. While her call to increase the VAT rate — particularly when compared to the Africa average — may be in order, we disagree with her reasoning concerning the outcome that an increase in the VAT rate will drive economic growth. It is likelier in fact, to increase transaction costs and reduce overall trade volumes while boosting government revenues – a very short-term gain. Rather than scaring away potential investors and further depressing business in Nigeria, the government should address issues that limit its revenue-generating capabilities and encourage doing business in Nigeria. The work of widening the tax net, stimulating economic growth, and generating more employment is more important than merely increasing tax rates. When the majority of young people who should form the bulk of the tax-paying net in the country are without employment, tax revenues suffer. An increase in tax revenue is an incidental to economic growth and not the driver. Therefore, the government should be focused on economic growth and employment; the tax revenues will follow. Nigerian businesses are already operating under the worst conditions; they don’t need slack ministers to make things worse.

Ghana’s Finance Minister, Ken Ofori-Atta, will travel to Beijing on Wednesday to meet Chinese officials and discuss a proposed restructuring of Ghana’s debt. “The talks are expected to focus on ways to reduce Ghana’s debt burden and secure additional financing assurances for the country’s economic programme,” an unnamed source with knowledge of the talks told Reuters. China is Ghana’s biggest bilateral creditor, with about $1.7 billion of debt. The government’s current priority is to secure the IMF board’s approval, with the fine details of debt treatment operations to follow later, the source added.

In a lot of debt negotiations taking place within the developing world, China is the crucial missing component. Although it is the largest bilateral lender in the world, it is opaque about its lending policies and how it renegotiates with distressed customers. According to the World Bank, the planet’s poorest countries faced $35 billion in debt-service payments to official and private sector creditors in 2022, of which 40% was due to China alone. For Ghana, Chinese loans have been a reliable funding source for major projects since 2000; in two decades, Accra has racked up close to $5 billion from at least 41 Chinese loans. After several years of near-unbridled borrowing, Ghana is now debt-trapped and wading through its worst economic crisis in a generation, with a debt-to-GDP ratio exceeding 93% as of November 2022. Africa’s self-styled Black Star managed to secure an IMF staff-level agreement in December 2022 for a $3 billion facility, but the final approval has been contingent on restructuring a $44 billion debt load, of which $29 billion (67%) is owed to foreign creditors. At the domestic level, the government rolled out a Domestic Debt Exchange Programme (DDEP), which was touted as successful after it saw a more than 85% participation rate. Unlike domestic debt restructuring, external loans are governed by sophisticated rules and require more careful (often fraught) negotiations. Although Ghana has requested a bilateral debt restructuring under the G20 Common Framework, it is still unclear if all creditors will be conciliatory at the negotiation table. In fact, the Common Framework, designed to allow for speedy debt reworks, has been widely criticised for its glacial progress. The West has repeatedly criticised China for delaying developing country debt restructurings, which it disputes. As of September 2022, Ghana’s external debt was held by the following groups: China alone ($1.7 billion), Eurobonds ($13 billion), Multilateral ($8 billion), Paris Club countries ($1.9 billion) and other creditors ($3.2 billion). The breakdown makes Beijing the single largest holder of Ghanaian debt. With such a huge debt portfolio to China, it is impossible to restructure Ghana’s external debt stock without China at the negotiation table. The request made by Ghana for a bilateral debt restructuring under the Common Framework is an indication of the significant economic impact that the COVID-19 pandemic has had on developing countries. The Group of 20 major economies established the Common Framework to help these countries deal with debt crises resulting from the pandemic. The fact that Ghana has sought assistance through this plank underscores the importance of this initiative and why China can’t be excluded from this exercise. The role of China in debt relief talks for developing countries is crucial. As the world’s largest creditor nation, China has a significant stake in the global economy and is well-positioned to provide much-needed relief to countries facing debt crises. The outgoing World Bank boss’s call for China to be more active in debt operation talks for developing nations in debt crises is, therefore, timely and necessary. China’s participation in Ghana’s debt discussions is important for several reasons. First, Beijing’s lending to Ghana has increased significantly over the years, and its debt has become a major concern for any other creditor hoping to reach any restructuring agreement with Accra. Second, China’s participation in debt relief talks would help ensure that any debt relief measures put in place are sustainable and do not compromise Ghana’s medium and long-term economic development targets, which include reducing inflation to 25% from 52% and its debt-to-GDP to about 50% in the shortest possible time. Third, China’s participation would demonstrate its commitment to the global economy and its willingness to work collaboratively with other countries in a time of heightened geopolitical competition. For instance, Chad, Ethiopia and Zambia signed up for the G20 Common Framework in early 2021. While Chad secured a deal with creditors in November, Zambia is still in talks. Ethiopia’s progress was held up by civil war, and Ghana is currently at a crossroads. China is a major factor in how all three countries proceed on a path to fiscal sustainability. Beijing has shown it is willing to play ball with its debtors during restructuring talks even if the loans involved are interest-free. Between 2000 and 2019, China forgave 23 interest-free loans to 17 African countries, including Ghana. Interest-free loans account for less than 5% of the $843 billion in Chinese loan commitments incurred by 165 governments between 2000 and 2017. The bottom line is that China will likely grant debt relief if the loan is interest-free. It is not a given in all cases. In 2019 when the Congo Republic wanted to restructure $1.3 billion of loans owed to China, Chinese creditors only agreed on the condition of lengthening maturities and increasing interest rates. This new arrangement increased Congo’s indebtedness by 23.07% to $1.6 billion after the restructuring. Zambia’s debt operation has been delayed because China refused a write-down — they preferred increasing the maturity period. In Ghana’s case, failure to reach a deal with China could end the entire external debt operation exercise as other creditors watch closely for clues. In addition, with a budget deficit of almost $5 billion, failure to resolve the debt issue could result in further pressure on the cedi, rising inflation, an extension of high maturity rates and the further depletion of the country’s already drained foreign reserves. A flight out of Accra has never been more closely followed.