Like other national governments, the Nigerian government makes money primarily off the sweat of its corporate and individual citizens. Hence we begin with an overview of how Nigerians and Nigerian businesses make money. The CBN suggests it is largely from the agricultural sector, which accounts for about 40% of all goods and services produced in the country each year (what economists call Gross Domestic Product, or GDP). Next is a sector defined as “Industry and Crude Oil”, which has historically accounted for between about 20% and 30% of GDP, depending on several variables (price of crude oil, disturbances in the Niger-Delta, and OPEC quotas, to name a few). The “Services” sector (consisting of communications, financial services and transportation) accounts for about 17% of GDP, as does a sector called “Wholesale and Retail Trade”. The balance is made up by a sector called “Building and Construction”. In essence, most of the money made in Nigeria comes from agriculture, industry (made up largely of oil), services and trade. Most of the money comes from sales within Nigeria, but a small proportion comes from sales to citizens of other countries, of which the sale of crude oil and gas accounts for about 95% of total.
Now some argue that a lot of the business activity in Nigeria is not captured by our statisticians, and that a sizeable grey economy exists in the country. This line of argument makes sense – we all know unregistered businesses that operate out of sight of government and the people at the National Bureau of Statistics. And one need not look further than the swarm of okada riders on Lagos roads. Who records the money they generate? Given these very valid points, some researchers set out to determine the size of Nigeria’s informal economy. One such research, conducted by the World Bank, estimates that Nigeria’s grey economy accounts for about 77% of documented GDP. Factoring that into the calculations of per capita GDP increases Nigeria’s 2009 figure from $1,118 to $1,978; an improvement, but still some way from documented per capita GDP for developing countries like Brazil ($8,230), Mexico ($8,143), and Botswana ($6,064). If it makes you feel better though, we are ahead of Ghana ($1,098), Benin ($745), and Togo ($431).
Now we come to the Nigerian government itself. As mentioned earlier, like other national governments, it makes money primarily off the sweat of others’ labour—specifically the private oil companies (POCs), in its case. The Federal Ministry of Finance published an interesting document during Okonjo-Iweala’s tenure. It was called the “Guide to understanding the federal budget”. I believe that document should be mandatory reading for all Nigerians. Why? Because it shows how “our government” makes the bulk of its money. In a nutshell, inflows into the notorious Federation Account (which the three tiers of government depend on for their existence, and more importantly, their “chopping”), are made up primarily of the following oil-based revenue sources: sale of the country’s own share of crude oil and gas produced by joint-venture operations with POCs; Petroleum Profit Tax levied on the profits declared by POCs (85% of declared profit!); royalties on every barrel of oil produced, whether produced by a joint-venture operation or not (20% of value!).
The balance of the inflows into the Federation Account come mainly from Corporate Income Tax on non-oil companies (30% of profits) and duty fees charged on imported goods (between 0 and 50% of value). A committee (the Federation Account Allocation Committee, or FAAC) meets monthly to share the spoils between the three tiers of government, using the following ratio: Federal Government, 52.68%; 36 state governments, 26.72%; and 774 local governments, 20.6%. I won’t even begin with a discussion of the absurdity of this ratio.
There is another important source of revenue for the three tiers of government, namely revenue from Value Added Tax on goods and services (5% of value). This revenue is paid into another account (called the VAT pool), and is shared in a way that favours the state governments over the Federal Government (FG): states get 50%, local governments get 35% and the FG gets 15%.
These aforementioned revenue sources have historically accounted for the FG’s allocation from the FAAC account as follows: crude oil sales (44%); petroleum profit tax (20%); oil royalties and rents (10%); Corporate Income Tax (5%), custom duties (9%), and Value Added Tax (6%). Independently Generated Revenue (IGR), which represents revenue from others sources besides FAAC and VAT receipts, has historically accounted for about 4% of total. As you can see, even Big Daddy is hugely dependent on oil revenue, as it accounts for about 74% of total.
These figures are only for the FG. Let us turn our attention to the state and local governments. The CBN’s annual report for 2009, the most recent full year report, shows the way these tiers of governments make money. In 2009, only three states (Lagos, Sokoto and Ogun) achieved figures above 29% for IGR as a percentage of total revenue. The average percentage across all states was 17.8%, and states ranged between 1.2% (Ondo) and 62.2% (Lagos). The rest of the revenue for the average state came largely from FAAC allocations (64.9%) and VAT receipts (8.9%). The corresponding figures for the average local government was less impressive—IGR as a percentage of all revenue was 0.6%, with the balance coming largely from FAAC allocations (64.3%), state government allocations (1.9%) and VAT receipts (15%). Once again, we see a major dependence on oil, which is why I described the NNPC as the government’s private business in yesterday’s post.
So with the bulk of revenue coming from the oil companies, is it any wonder why “our leaders” hardly pay attention to us? It seems to me that we only “supplement” their revenue with the taxes we pay, and hence, are limited in our ability to influence them. But would we be able to influence them even if we paid higher taxes? Put in another way, would the fact that citizens pay higher taxes make the government more accountable to them? As was mentioned earlier, Lagos State generates most of its revenue from taxes, yet the jury is still out on the responsiveness of the state government to its citizens.
In light of these questions, tomorrow we will take a look at how the three tiers of government “spend” the money they make, and will explore how that is related to the dismal state of public services and infrastructure in the country.
