Prospects for Building Fiscal Buffers to Manage Unprecedented Shocks in Nigeria

The outbreak of the Coronavirus (Covid-19) pandemic was accompanied by an unprecedented shock, with colossal impact on economic activities worldwide. One of the major effects is the global economic lock-down implemented to curb the widespread of the pandemic.  Nigeria as an oil-dependent nation, also experienced an external shock as a result of the oil price crash. The combination of these twin shock (covid-19 pandemic and oil price shock) worsened the scenario in Nigeria. For instance,  government forecasted a decline in oil revenue flow from 5.5 trillion Naira to 1.1 trillion Naira in 2020. Thus, due to these shocks, Nigeria is faced with a sudden fiscal crisis combined with other colossal effects. The effect of these twin shocks will vary across countries due to a number of factors among which the quality of fiscal space will be crucial.

Over time, Fiscal buffers have proven to be indispensable in enhancing macroeconomic resilience to external shocks by preventing them from plunging into financial strain. Meanwhile,  the Excess Crude Account (ECA) was created in 2004 in order to save excess  of the budgetary benchmark that will be generated from the sale of crude oil account. It was created to serve as an absorber of shocks caused by oil price volatility with the aim of protecting Nigeria’s budget from unprecedented shortfalls.

The ECA also serves as a buffer for public expenditure from being distorted by business cycle or waves, triggered by international oil markets. Since its inception (2004), the ECA has been taking an ascending trend until 2010 when it declined due to the financial crisis of 2007-2009. As at April 2018, the ECA account stood at $1.8 billion which declined to $324.9 million as at January 2020. It became quite daunting as the account deteriorated and further slumped to $71.8 million dollar within the range of 5 consecutive months (January 2020 – May 2020). Notably, the depletion of the ECA has a ripple effect on the economy, as it reflects not only the absence of funds that will serve as a buffer to another wave of recession, but also intensifying Nigeria’s economy, making it more vulnerable to external shocks.

Consequently, some loopholes were identified with the running of the ECA, which includes; lack of transparency and non-legal backing. Hence, in  2011, the Sovereign Wealth Fund (SWF) was created to amend the disagreements surrounding the ECA. The SWF comprises three categories of funds with visibly stated objectives. They include; the stabilization Fund, the Future Generations Fund as well as the Nigeria Infrastructure Fund. So far, Nigeria has invested only $2.53 billion in the SWF between 2012-2019. While the Stabilization fund of the SWF serves the same purpose with ECA, only 20 percent accounts for the fund, while the future generation fund and Nigeria infrastructure fund justify the remaining 80 percent. As at December 2019, the Stabilization Fund which ought to serve as buffer to economic shocks was reported to have only $351 million. However, in April 2020, a withdrawal of $150 million was granted by the federal government to  serve as a supplement to the government’s Federation Accounts and Allocation Committee’s disbursements for allocation to the 3 tiers of government. This brought down the balance of the SWF to the total amount of $201 million, a far cry from $0.5 billion.

Furthermore, Nigeria’s growth rate is forecasted to plunge to -3.4% in year 2020 which by indication is worse than the growth rate of -1.6% when Nigeria experienced recession in 2016. The bottom line is the nation is distressed with a double shock from Covid-19 pandemic as well as dwindling oil price. This scenario was more aggravated by the fact that the buffers that were created to absorb these forms of shocks have not been effective. While the ECA is faced with a hitch of depletion, the SWF is faced with problems of low savings. Accordingly, the World Bank stated that, “External balances are fragile to hot money movements, and fiscal buffers are exhausted, making Nigeria’s economy vulnerable to external risks”. Therefore, the absence of a strong buffer to these shocks will only push the economy to another wave of recession with a more difficult recovery path. As a result, the prevalent scenario will continue to constrain the budget envelope, consequently limiting its fiscal space.

Building Fiscal Resilience: Some Policy Suggestions

The incidence of these scenarios – the Covid-19 pandemic and the plunge in crude oil price underscores the need for government to look inward to build more fiscal resilience or fiscal buffers that would absorb any unprecedented shocks.  Many countries around the world, including Nigeria, are now faced with massive instability, and if a next wave of recession hits the global economy, most countries will not be able to recover without sufficient buffers.  

It is therefore imperative for Government to take a deep look at how to save and invest more in critical infrastructure that will generate substantial revenue. The following are viable solutions that can help build fiscal buffers and economic resilience in both the short and long term.:

Prudent Management of Funds

There are criticisms surrounding the use of the ECA funds in particular. Its lack of legal support and proper structure has made it subject to urgent and inadequate withdrawals. Likewise, the ECA does not have sufficient debit and credit records as well as conforming withdrawals or approvals for these withdrawals This has mandated the incorporation of the ECA with the SWF since the latter has covered the identified loopholes of ECA and is doing even better despite meager funds under its authority.  The accounts should be treated prudently, of the utmost importance. Withdrawals of funds should be restricted and made only exigent reasons such as the recent economic situation.

Ultimately, the federal government needs to look inward and adopt a more judicious spending regime, improve efficiency to guard against waste and deploy more technology, it is often cheaper and innovative, so it can generate new opportunities.

Structural Reforms

Fiscal reforms are of paramount importance in this situation. The government needs to intensify and embrace structural reforms to build an efficient institutional and policy framework to manage the volatility of fluctuations in the oil sector fluctuations, in order to sustain the growth of the non-oil sector. More importantly, unwavering reforms that have a significant impact on the trajectory of the economy, such as the removal of subsidies, elimination of forex and trade restrictions, greater transparency and predictability of monetary policy and increased domestic revenue mobilization should be put in place. These Structural reforms will attract private investment, given that private investment serves as an engine growth for the economy as well as a good fiscal stimulus, and will therefore stand as good resilient in absorbing shocks. In 2019, Nigeria  ranked 131 among 190 economies in the Ease of Doing Business. This result is quite daunting looking at the prominence of business in an economy.  As a stabilizer of many macroeconomic variables as well as a driving factor of the economy, it becomes very vital for government to vigorously implement responsive policies to support the expansion of businesses.

Intensify Economic Diversification

The recent events in the Nigerian economic performance especially the effects of  the twin shocks re-echoes how important it is to diversify the Nigerian economy .Economic diversification has unlimited potentials to increase Africa’s resilience to external shocks as well as influence the attainment of its economic growth and development. Although, some actions have been taken to diversify the Nigerian economy from excessive dependence on crude oil to development in the non-oil divisions, Nigeria is still inexperienced as far as diversification is concerned. This is because it is not enough to invest in a particular sector and abandon it.  There is a need for constant follow up and the formulation of appropriate policies in place to ensure that the sector develops to a desired point.

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Assessing Africa’s digital response strategy to Covid-19

Digital technologies have proven to be a crucial factor in the fight against covid-19, and response strategies to reduce the social and economic impacts of the pandemic. With the restriction in human interaction and closure of international borders to curtail the spread of the virus, usage and reliance on digital platforms has become the only medium of human interaction and economic transaction to mitigate and minimize the disruptive effect from the covid-19 virus. While the scope and scale of digital usage varies across countries based on extent of digitalization, some form of adoption of digital systems are witnessed in every country, including Sub-Saharan Africa countries with the lowest internet connection.  

Like every other part of the world, digital economy plays four critical roles in response to COVID-19: surveillance, sensitization, social welfare intervention and substitution. These are couched as 4Ss as discussed below:

  • Surveillance: Although the reported number of covid-19 cases are relatively low on the African continent, the pandemic has created a need to efficiently and promptly track and trace persons who might have been exposed to identified carriers of the virus, to curb further infection. At a regional level, the Africa Centres for Disease Control and Prevention, an umbrella body, provides intelligence support and cross border monitoring for member countries of the African Union. Countries within the region have also resorted to relying on a combination of different digital applications, call records and software for contact tracing. Some examples include; SORMAS which is used in locations in Nigeria and Ghana, COVI- ID solution deployed in South Africa, and a mobile tracing app used in Uganda. In addition, digital platforms have been helpful in enforcing compliance with social distancing regulations and reporting cases of default.

  • Sensitization: Digital platforms have also been instrumental in creating awareness and sharing information about symptoms, preventive measures, personal hygiene, and other health and government advisory related to the pandemic. African countries have adopted a wide range of media in disseminating information to citizens. For instance, South Africa set up an interactive WhatsApp chat service in various local languages to respond to general queries about covid-19. A free online tool is available to Nigerians to assist in self-assessing health risk category based on users’ symptoms and travel history, and this helps reduce unnecessary calls to the disease control hotlines. Also, other means of digital communication such as government websites, social networks, mass text messages, radio and television jingles, have been adopted across the continent during this period, to ensure citizens are constantly informed.

  • Social welfare delivery: Livelihoods have been negatively impacted due to the effect of reduced economic activities, especially for vulnerable individuals and those operating in the informal sector who have suffered job loss, and their savings are inadequate to cater for such an unexpected event like the pandemic. Therefore, African states have had to expand or introduce new social protection programs to provide relief in various forms to affected citizens, ranging from tax breaks, to fund transfers, food banks, extended loan repayment periods, interest rate freeze, and so on. Although some countries adopted cash-in-hand relief payments, digital channels have been quite popular in distributing stimulus packages, in order to minimize queues and comply with social distancing rules. Countries such as Togo, Malawi, Zimbabwe among others, have offered intervention funds which can be accessed through mobile banking or online platforms.

  • Substitution: The disruption in daily activities has triggered the use of digital alternative measures to cope with the changing landscape. Some of these substitutes include working from home, increase in online grocery and food shopping, education delivery using e–learning platforms and other digital channels, legislative and government functions conducted via teleconferencing, medical check-up through virtual consultation, increased reliance on social media as means of interacting and connecting with friends and family, and so on. All of these digital alternatives have been used across African countries.

Weaknesses and gaps in Africa’s digital economy exposed

While the renewed importance of the digital economy offers opportunities for Africa, it however has its downside. The level of misinformation spread through social networks has been alarming, and difficult to curb, thereby posing a real problem to governments and health officials across the region during this period. The effect of such cases of false news has been far-reaching, creating public distrust and making some citizens doubt the severity of the virus, while some others have erroneously consumed harmful products touted as cures for covid-19.        

In addition, the transition to dependence on digital technologies threatens to cause further exclusion as not all citizens are able to leverage digital alternatives in combating the impact of the pandemic. There are reported cases across the region of uneven access to digital services for educational needs, business operations, and so on. A number of factors are responsible for the digital gap within the continent:

  • High costs: Due to high incidence of poverty, a significant proportion of citizens are unable to access the internet because they cannot afford data charges and expensive smart devices. Based on the 2019 report on the state of broadband published by United Nations Educational, Scientific and Cultural Organization and International Telecommunication Union, the cost of 1GB of data for the poorest 20% of Africa’s population is equivalent to almost half of their monthly income. As a result, the proportion of Africa’s population that use the internet is significantly lower than the global average.

  • Poor digital skills: Africa has a low literacy rate and this has an impact on digital competencies of its citizens, thereby limiting digital usage. Individuals who operate in the informal economy and earn income on a daily basis such as petty traders, subsistence farmers, pastoralists, artisanal miners, among others, have been severely impacted by recent changes in daily activities, but are unable to adapt business operations due to limited education and lack of digital skills, as well as other factors. An estimated 85.8% of Africa’s workforce operate in the informal sector and rely on physical interaction for their livelihood.

  • Poor broadband penetration: According to the United Nations Economic Commission for Africa, rural and remote communities within the region are grossly underserved with low levels of broadband connectivity. The World Bank also estimates that about 100 million Africans live in areas without mobile networks. This trend can be explained by the fact that investments in broadband and mobile networks tend to be targeted at profitable urban regions with substantial economic activities rather than less commercially viable rural areas. Also, due to inadequate telecommunications infrastructure, certain regions even in urban areas although connected, have suffered from unreliable broadband coverage during the lockdown, thereby limiting access to the internet.

  • Lack of digital identity: Digital identification is usually used to verify an individual’s identity online and often linked to official or legal forms of identification, biometrics and other online personal information or activities.  However, approximately half of the continent's population do not possess government issued identification nor digital profile, thereby restricting access to entitlements for which a means of identification is a prerequisite, such as accessing relief packages, public services, financial services and so on during the lockdown.

The above constraints have ripple discriminatory effects on daily life, schooling options, means of livelihood for micro and small businesses, access to welfare funds, and so on. For instance, it could worsen pre-existing inequalities in the region’s educational systems, as vulnerable students in public schools are more likely to experience difficulty in accessing digital learning due to lack of digital infrastructure, broadband connectivity and digitalized teaching content.

Urgent need for data governance and greater inclusion

Data gathering and information sharing continues to be an indispensable part of research to curb the spread of the virus, monitor its impact and finding preventive or curative medicine. However, with more data flying across the web, the risks of data breaches and human rights violations have become more visible. In the months following the lockdown, there have been several reports in various African countries on dangers of digitalization in relation to hacking, financial fraud, disinformation, exploitation of youths, among others. Even before the pandemic started, the African Union had estimated an annual loss of $3.5billion from cybercrimes across the continent. Although free flow of information across the region is essential at this period, and for long-term regional cooperation and integration plans like the African Continental Free Trade Area, it is imperative to promote a trustworthy mechanism that ensures protection of citizens civil rights.

This problem underscores a need for comprehensive data governance to support rising digital economy in Africa. If effectively implemented, data governance can address challenges in the areas of privacy, misinformation and alignment of cross-country data regulation to curb cybercrime among other concerns. A report by the Centre for International Governance Innovation reveals that most African countries are yet to enact laws and regulations for digital data protection and security, and for the few countries that have existing data governance structures, these structures are either not fully operational or not up to global standards required to ensure real digital transformation. Effective data governance has therefore become increasingly important at both national and regional levels.

The African Union recently issued a digital transformation strategy for the next ten years (2020 to 2030), which provides policy recommendations for improved data protection to be implemented by member states. Still, a lot more work is required. National data governance frameworks need to define responsibilities and ownership of data assets, specify processes for mitigating data infringement, ensure accountability, integrity, transparency and stewardship, safeguard data privacy and security, protect human-rights and empower citizens to make informed decisions regarding data sharing, discourage unfair practices, while still facilitating free flow of information for innovation and growth of the digital economy. Technologically driven innovations should be encouraged while having regulations that mandate responsible data collection and usage. A policy regime that is thorough, yet flexible, such that it promotes creativity.

Therefore, policy reforms and digital infrastructure investment drive bordering on data governance and digital inclusion are necessary as Africa, and indeed the world gradually readjusts, and recovers from the effects of the pandemic. African countries need to collaborate to ensure all citizens have reliable and secure digital access in order to be competitive in the new economy. Public/private partnerships and investment might be the way forward to ensure inclusion of underserved rural communities. As we embrace international or cross-border integration, data privacy and localization laws are essential. Also, data localization presents a viable tool for governments to exercise control and partake in the value associated with data generated within national borders. Overall, this calls for the right balance in order not to be too restrictive and discourage integration.

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Are agriculture and economic development still antithetical? Reflections for a post-COVID recovery plan

If evidence were still required, the coronavirus pandemic and the consequent nosedive of oil prices has once more reminded us of the shortcomings of Nigeria’s oil dependence.

Despite decades of rhetoric on the merits of diversification, oil still represents more than 90 percent of the total value of Nigerian exports, and more than half of all government revenue, thus largely determining the government’s expenditure potential. The federal government’s budget for 2020 was designed on an assumed average oil price for the year of US$57 per barrel — a price that has proved a mirage since the start of the health and economic crisis.

Since strategic, and preferably abundant, government expenditure is a necessary requirement on Nigeria’s path towards achieving the Sustainable Development Goals (SDGs), it therefore follows that the fate of Nigeria’s development project remains hostage to the unpredictable fortunes of the oil industry.

When the pandemic eventually subsides, finding different, less volatile sources of government revenue, foreign exchange and employment will need to be an absolute priority for policymakers. This will have to begin with a modernisation of Nigeria’s agricultural sector.

The world is changing, development theory should too

Following Arthur Lewis’ research in the 1950s, traditional development economics has envisioned the shifting of a rising portion of labour into higher productivity activities as the centrepiece of an economy’s development. In this light, economists have mostly employed a convenient tripartite division of economic activities into agriculture, manufacturing and services — with increasing employment in the latter two sectors seen as the Promised Land. This was mostly with good reason: industrial development promised highly productive, labour-intensive economic activities that traditional agrarian economies could only dream of.

Yet this has ceased to be the case. As Cramer et al. (2018) point out in their brilliant study of Ethiopian horticulture, excessive neglect of agricultural activities in the obstinacy to promote transition towards industrial manufacturing can lead to the loss of numerous opportunities — ones Nigeria can hardly afford.

The changing tastes of international consumers, coupled with the increased efficiency of global cargo transportation, have opened up a market for agricultural products that would never have been possible just decades ago. Processing agricultural goods, therefore “industrialising”, is no longer the only way to add value to primary commodities. The ever-growing global demand for a year-round, fresh, and increasingly higher quality (think “organic”, “fair trade” etc.) supply of “raw” agricultural products is turning the once archaic practice of agriculture into a knowledge intensive, highly productive activity, often much more complex than many forms of manufacturing.

To illustrate this point, Cramer et al. discuss the astounding complexity and coordination required in the production for export of poinsettia flowers in Ethiopia — in comparison, Adam Smith’s proverbial pin factory comes across as child’s play.

While the final good is ultimately unprocessed and may appear the product of little more than traditional agricultural practices (several botched attempts make it hard for the author to believe, but you need not be a botanist to grow a flower), the surface-level simplicity masks a sea of highly-technical knowledge and expertise in fields as far apart as biology, supply-chain logistics and marketing that make modern horticulture no less valuable than many industrial activities. Throughout the process, jobs are created along the supply chain, steady streams of foreign exchange are generated and the economy’s overall productivity is increased — the three main purposes of seeking industrialisation in the first place.

It is therefore no wonder that development economists are starting to develop theories surrounding what Cramer et al. call the “industrialisation of freshness”, but the same concept of adding value within agriculture can be extended to the quality of the good and the efficiency of yield, not just the freshness with which it is brought to developed markets.

All of this should be more than sufficient to convince Nigerian policymakers that investing in agriculture must at least be considered in the country's post-COVID recovery.

Cutting out chocolate

To illustrate what this paradigm shift could mean, let us take the case of Nigeria’s most important agricultural product: cocoa. Cocoa beans remain Nigeria’s largest agricultural export, yet the sector has witnessed a steady decline since the heydays of the post-independence period: in the decades from the 1960s to 2016, average yearly cocoa production declined from 420,000 tons to just 192,000 tons.

Talk of reviving the sector has been a constant feature of political debate particularly since the return to democracy in 1999, but the vast majority of the conversation has centred around statements such as: “Nigeria is yet to fully capitalise on cocoa production, as most of the beans are sold unprocessed” — as quoted from the Proshare intelligent investment platform.

While it may certainly be true that strengthening Nigeria’s fairly meagre processing capacity could be a job-creating, productivity-enhancing, forex-attracting development — you will certainly not find opposition to strategic forms of ‘traditional’ industrial policy here — the narrowness of this vision neglects the potential for generating positive outcomes from the improvement of cocoa bean production itself.

Yield-enhancing practices could certainly be explored, but even more important would be government support for the specialisation in higher quality cocoa bean production.

To the untrained eye, different varieties of cocoa bean may appear rather similar. However, in truth, cocoa quality is assessed through a plethora of complex criteria including: the genetic origin of planting material; morphological characteristics of the plant; flavour characteristics of the cocoa beans produced; chemical characteristics of the cocoa beans; colour of the cocoa beans and nibs; degree of fermentation; drying; acidity; off-flavours; percentage of internal mould; insect infestation and percentage of impurities.

Obtaining the desired levels of each parameter requires sophisticated expertise that makes the notion of agriculture as a ‘backwards’ trade seem rather inapt.

As the International Cocoa Organisation (ICCO) points out, there is growing value in producing ‘fine and flavour’ cocoa as most major chocolate manufacturers include premium quality chocolate products in their range that “require fine or flavour cocoa from specific origins in their recipes, in order to achieve the required distinctive taste or colour of the chocolate. Many new chocolate artisans are emerging as well, bringing more demand for this cocoa type”.

However, as with most African producers (Madagascar being the exception), Nigeria has exclusively produced lower grade ‘bulk’ beans, where productivity and value-addition is lower and margins are tighter, leaving the dominance of the fine and flavour production to South American competitors.

Moving forward, strategic partnerships with top-of-the-line chocolate producers to develop capacities to enter niche final product markets should certainly be explored. In so doing, the Nigerian cocoa sector could cut out a strategic angle into the northern markets, guaranteeing higher value exports, and protecting itself from regional competitors that have often outperformed Nigerian producers due to, among other things, better infrastructure and more efficient organisation of the cocoa markets.

In general, policies to facilitate knowledge production and dissemination, strengthen infrastructural support and incentivise quality upgrading within agriculture can form the basis of a successful industrial policy without the imperative to industrialise.

Moving industrial policy beyond ‘industry’

With the (frankly, too slow) fall from grace of the Washington Consensus, a new consensus is emerging surrounding the paramount importance of government industrial policy to foster structural change. This development is welcome. However, the return to prominence of industrial policy must take stock of the changes in the global economy that have occurred since the peaks of government-led development in the post-war, post-independence period. This article has sought to echo Cramer et al. in highlighting the risks of maintain the monolithic view of structural change as a unidirectional move away from agriculture.

While the Nigerian cocoa beans example would require a much more in-depth evaluation than that provided above to guide policy design, it is important that this sort of thinking — one that sees the value of agriculture beyond being a breadbasket and labour source for industry — enters the mindset of development practitioners and policymakers.

Ultimately, industrial policy to engender structural change is about investing in activities that are able to foster employment, generate foreign exchange and shift larger portions of the workforce into higher productivity occupations. Traditionally, this has been synonymous with prioritising industrial manufacturing over agriculture. This should no longer be the case.

This article was first published by the Africa Portal

(Main image: A cocoa plant at Shofolu village in Ogu State, southwest Nigeria, on 30 August 2016. - Pius Utomi Ekpei/AFP via Getty Images)

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COVID-19 and the Shrinking Fiscal Space for Education in Nigeria

The immediate costs of the coronavirus (COVID-19) pandemic on education in Nigeria are evident. With school closures that have persisted for ten weeks, students - especially the most vulnerable, are missing out on learning. The government and individual schools are adapting by switching mediums and delivering learning through digital platforms. However, the stark digital divide (in terms of both infrastructure and knowledge) that plagues the country is resulting in an exacerbation of pre-existing educational inequalities. The cost of recovery will be high, but the sector will inevitably be confronted with a costlier issue: between the effects of the pandemic and crashing oil prices, the fiscal space to fund basic education will shrink significantly. 

Revised Budget - Fall in revenue from the dual shock of COVID-19 and crashing oil prices

The prolonged disruption in economic activity due to the pandemic, combined with the collapse of oil prices and the reduction in demand for Nigeria’s oil products are severely impacting Nigeria’s fiscal position. The International Monetary Fund projects that the economy will contract by 3.4 percent in 2020, a fall from the previously anticipated 2 percent growth. The total budget, which was set at N10.59 trillion is in the process of being revised downward by about 15 percent. Oil and gas exports, which make up around 76.1 percent of Nigeria’s total exports and more than half of revenue, are predicted to fall drastically, with oil revenue being revised downward to N924 billion from N2.64 trillion. Non-oil revenue targets have also been revised downward by 10 percent, as industries across all sectors continue to grapple with the effects of the pandemic-induced disruption in economic activity. In sum, total revenue has been adjusted downward by 34 percent.

With regard to actual performance, the projected numbers are close to performance as at the end of Q1. The reported gross and net oil and gas revenues were short by over 28 percent and 31 percent respectively, and non-oil tax revenue was N269.41 billion, representing a shortfall of about 40 percent of the predicted amount for Q1.

Dissecting the effect on education financing

While we don’t know the full extent of the economic crisis on education spending, we attempted to make a prediction by looking at education spending during and after the most recent oil crisis in 2014, and factoring in accessible education expenditure information at both the federal and state levels. This section is divided into two: what we know (information that is readily available), and what we don’t know (unavailable information).

What we know: Looking at a past oil crisis and the Federal Budget

  • Looking at a past oil crisis - a decline in education prioritization

We analysed GDP and education spending during the 2014 oil price crash, where a fall in crude oil prices from $100/barrel to $52.65 led to a decline in total budgetary allocation from N4.694 trillion to N4.493 trillion in 2014. The fall in crude oil prices negatively affected total allocation to education, as it declined from N496.783 billion to N484.26 billion, but the share of education budget was maintained, increasing slightly to 10.7 percent. 

In 2016, crude oil prices further declined to $43.73, but total budgetary allocation grew to N6.06 trillion. At the time, the government was able to increase the budget (by increasing debt), however given the country’s current debt burden and the global nature of the pandemic, borrowing conditions could be unfriendly, and borrowing could further worsen the country’s fiscal crisis. Despite this increase, the budget for the education sector was reduced to N480.278 billion in 2016. The increase in budget and the decline in education spending led to a decline in education budget by 3 percentage points in 2016. Since 2016, and before the current oil crisis, oil prices have been recovering slowly, and both the total budget and allocation to the education sector have increased consistently. However, the education sector budget, as a share of total budget allocation, has steadily declined since, reaching its lowest level of 6 percent in 2020. 

This trend is revealing. The value placed on education in Nigeria by the current administration can be gleaned by the drop in the share of education expenditure in the national budget, despite yearly increases in the budget. While both the national budget and the nominal amount allocated to education have increased, the share of education has been in a steady decline. Given that research has linked funding to education quality, to the extent that this decline persists, our education system will remain stagnated. 

  • Federal budget

Nigerian budgets have tended to neglect the education sector in the past. In general, government spending is relatively small when compared with other African countries [see figure 2]. Prior to the current economic crisis, the education financing budget wavered around 9 - 10 percent of public expenditure {between 2008 and 2014: see figure 1}, against the recommended 15 percent to 20 percent.  Despite an increase in the total budget by over 255 percent between 2008 and 2020 {see figure 3}, the education expenditure as a share of total budget has fallen from 9.64 percent to 6.32 percent within the same period. Public spending on education as a share of GDP has remained below 1 percent since 2010 against the recommended 4 percent to 6 percent, and has decreased steadily since 2011, from 0.67 percent to 0.44 percent in 2020 {see figure 4}. 

Figure 1: Total Budget (Naira) and Education Budget (% of Total Budget)

Source: Authors’ Compilation

Figure 2: Education Budget (% of GDP) and (% of government Expenditure)                                       

Source: World Bank Database

   

Figure 3: Total Budgetary Allocation (Naira)                        

Source:2008-2010 Appropriation Act

Figure 4: Education Expenditure as a Share of GDP (Percent)

  Source: Authors’ compilation

The current economic crisis signifies that there will be a reduction in total budgetary allocation to the education sector, which would further dent the already neglected sector. The original education allocation for 2020 was N653  billion, roughly 6 percent of the total budget expenditure. Of this, N111.789 billion is the statutory transfer from the Federal Government (FG) to the Universal Basic Education (UBE) fund, which covers the FG’s contribution to basic education in Nigeria. The UBE fund is the main tool the government uses to influence spending on basic education at the state level. The remainder covers recurrent and capital expenditure for all education expenditure that fall within the purview of the FG. 

Given the proposed cut in the budget,  dataphyte, an open data organisation, reports that the FG has proposed a reduction in its budgetary allocation to education by almost 55 percent. This reduction is reflected in the government’s statutory transfer to the UBE Fund. Outside of the UBE fund contribution, funding of basic education is wholly within the purview of the state governments. Other than the proposed UBE cut, we don’t yet know how the total education budget will be impacted by the proposed budget cut; however, if the proportion of education spending were to remain the same (6 percent), and the budget was cut by 15 percent, the federal education budget is expected to be around 541 billion. This means that there could be a further reduction in education spending by N51 billion, which will affect other aspects of education spending outside of basic education. 

Further, a quick back-of-the-envelope calculation that accounts for Nigeria’s revised growth projection, current education spending as a percent of total budget reveals that education spending could fall as low as N500 billion this year. 

What we don’t know - State funding and availability of aid.

  • State Funding

Provision of basic education (9 years between primary school and junior secondary school) is in the purview of state governments. Unfortunately, there is a dearth of information on state budget and spending on education across all states, which makes it difficult to infer the potential impact of the present economic crisis on state education expenditure. However, we do know two things that shed light on both the states’ ability to spend, and their current economic situations. 

First, available state funding for basic education is limited for many states. The UBE funds available to the states can only be accessed upon meeting certain conditions, one of which is the provision of   a 50 percent counterpart funding to match the FG’s contribution (which is why the UBE Fund is called a matching grant). Unfortunately, many states are unable to meet this condition; as of February 2020, over N73 Billion is yet to be accessed by several states. Their inability to match the FG grant is reflective of the fact that their education budgets are small, inadvertently affecting basic education in their states - a fact that is evident in the poor quality of both infrastructure and learning at the basic education levels. 

Secondly, given the fact the lockdown measures and restriction on movements across states have taken a massive toll on the country’s economy, it is inevitable that this would result in budgetary shortfalls across all states in the country due to decreased tax revenue from all revenue streams. In 2019, the majority of state revenue was accrued through two sources: The Federation Accounts Allocation Committee (FAAC) (N2.47 trillion or 65 percent) and Internally Generated Revenue (IGR) (N1.33 trillion or 35 percent). The FAAC is a function of revenue derived through oil, which we know has been revised down by 35 percent. Of the IGR, 83.4 percent of IGR generated are from taxes while 16.6 percent are generated from state Ministries, Agencies and Departments (MDAs). Tax revenue through the IGR is also expected to decline given the reduction in sales, job losses and income cuts induced by lockdown measures and the slow down in the economy. Compounded by the need to increase public health spending across states in order to combat the virus, state budgets will also be adversely affected. 

Given that we don’t know how much is being spent on education at the state levels, we cannot make a confident projection of how much state education budgets will fall by. But what we know is this: public (basic) education will suffer both during and after the pandemic. 

  • Education Aid - Can it plug the gap? 

Measuring the contribution of aid to education spending in Nigeria is tasking. First, aid to the sector is highly decentralised, with donations focusing primarily on specific projects within individual states, and secondly, in general, there is paucity of data with regards to incoming funds into the sector. However, a report on the effect of aid on education financing in Nigeria found that external aid only contributed marginally to public expenditure of basic education in Nigeria. The report suggested that even a substantial increase in aid would do little to bridge the gap in the current level of funding and the amount required to achieve education goals. It found that between 1999 and 2009, education aid only contributed to 1.5 percent of total domestic expenditure (on primary education alone). Additionally, recent data from USAID reveals that in 2019, education aid to Nigeria was at its lowest after a peak in 2015 (at $84 million), falling 78.6 percent between 2015 and 2019.

Given this, and the global nature of the pandemic-induced economic crisis, it is unlikely that aid to the education sector will fill the education finance void. At best, education aid will remain at the same level, or at worst case, it will reduce. Though international organisations, the World Bank for example, have committed to boosting aid to support developing countries in their recovery, it will be difficult to extrapolate how much of this total aid will reach education sectors around the world. 

Recommendations

Nigeria continues to lag behind in terms of education financing, and with the current national and global economic outlook, the prospects for increased financing in the immediate future are bleak. Given this, the government will need to make difficult decisions about how and where to channel scarce resources available at both the national and sectoral levels. With this in mind, there are a few key things to consider:

National level

  • Prioritizing education funding: While there are a lot of moving parts involved in improving the access to quality education and inadvertently education outcomes, one key thing remains significant: money matters

Empirical evidence suggests that lack of equitable and adequate funding is a key driver of unrealized education goals. Researchers have found that adjusting school spending by 10 percent leads to a reduction in test scores by around 7.8 standard deviation (10 percent cut), and increase in test scores by 0.05 to 0.09 standard deviations (10 percent increase). Access to financing has been attributed as one of the reasons why Nigeria did not achieve its Millennium Development Goal (MDGs) targets for Universal Primary Education and Education for All, and is probably an underlying factor behind the fact that no state in Nigeria is on track to meet the SDG Goal 4 target - ensuring inclusive and equitable education for all. 

Money is a necessary underlying condition for achieving education goals. Increased access to financial resources provides the scope to achieve non-finance related education targets {indicators}. Education at all levels has suffered as a result of the pandemic, and by all estimates, students are lagging behind. We are at a critical juncture; ideally, the government would need to channel more resources into the sector to catch up, however, in a best case realistic situation, it will be important to at least maintain the pre-pandemic levels of financing. 

Sector level

  • Immediate - Supporting evidence-informed decision making: Money matters, but how money is spent is critical too. Given the scarcity of resources, it is important to monitor how resources are being allocated, and to determine if resources are achieving expected results/outcomes in order to maximize scarce resources for maximum impact. The government must channel resources and efforts toward creating a culture of learning through results-based monitoring and evaluation. All resource allocation decisions made within the sector should be augmented by three activities: tracking use of funds, measuring its outcomes/impacts against expected results, and making necessary adjustments based on findings. This should be supplemented by incorporating a results-based financing approach that removes the current arbitrary nature of funding, and directly links funding decisions to achieved results.
  • Long-Term - Develop a strong National Education Account: There is paucity of readily accessible data on state level education financing and education aid across the country, making it difficult to determine how much is being spent on education financing across Nigeria. Additionally, data about private financing/household spending on education is also limited. Collating this data is important because it allows us to glean vital information, such as whether our problem is inadequate funding, or improper use of available funding. A solution to this is to build a strong and holistic National Education Account (NEA). An NEA provides a framework for comprehensive data collection and analysis that covers all sources of funding at all levels of education and across all types of education providers. A holistic NEA will allow us to see not just how much money is spent on education across Nigeria, but it will allow us to determine who is spending money, and what money is being spent on. Developing an NEA will be difficult, but UNESCO offers a step by step guideline to help countries in developing NEAs. 

To conclude, increasing education financing, and improving data collection, tracking and impact of financing is no panacea for all of Nigeria’s education ills, but it offers a step in the right direction. Monitoring the flow of money through the system and ensuring effective use, provides a necessary condition for improving all other factors that matter for equitable access to quality education and improved outcomes. 

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Covid-19: Opportunity for reflecting on prospects for inclusive growth in Nigeria

There is huge uncertainty regarding the extent to which the current coronavirus pandemic would impact globalization and economic growth in the near future. Some experts have predicted an initial decline in international trade and economic integration, and subsequent improvement upon recovery from the pandemic, as seen in the aftermath of the global financial crisis. While others foresee a complete overhaul of how the global market system works, with a greater focus on national self-sufficiency. Regardless of the consequences, the present situation provides an opportunity for reflection, and proactive planning for the future of the Nigerian economy. It is imperative for the national economic management team and relevant stakeholders, to assess how globalization has fared in Nigeria especially in relation to inequality, and what can be done going forward, to promote sustainable and inclusive growth.

Globalization, economic growth and inequality in Nigeria

Adoption of neoliberal or free market policies in Nigeria can be traced to the Structural Adjustment Programs of 1986 imposed by the International Monetary Fund and World Bank, as pre-conditions for loans. These policies included deregulation of the interest rate and foreign exchange system, privatization of state owned enterprises, elimination of import tariffs, and so on. All of these measures were put in place to enhance globalization in Nigeria, through increased integration into the global economy to encourage free flow of goods, services and capital across international borders and to attract foreign direct investment.

Nigeria has recorded consistent increase in pace towards globalization and embraced more liberalization polices over the last three decades, with more internationalization into global economic system. In determining the relationship between globalization, economic growth and inequality in Nigeria, it is important to understand the channels through which globalization interacts with distribution of opportunities and resources within the country, in order to draw up appropriate policies that empower the poor to contribute and benefit from increased shared prosperity.

The discovery of crude oil in Nigeria caused an economic shift from agriculture to dependence on oil, resulting in Dutch disease syndrome whereby other sectors of the economy suffered because of increased international trade in oil and gas. Oil and gas production is capital-intensive and makes use of imported advanced technologies with minimal high skilled labour. Therefore, despite Nigeria having abundant supply of labour, expansion of trading activities in the oil sector has not necessarily translated to increased demand for labour. In addition, the crippling of the local agro-allied and manufacturing sectors has led to gross unemployment for unskilled/semi-skilled workers and higher premium on skilled labour, thus expanding the wage gap between the formal and informal sectors of the economy. Figure 1 shows a significant spike in unemployment rate since the liberalization policies commenced, rising from 5.3% in 1986 to 23.1% in 2018.

Fig. 1: Unemployment rate – Authors elaboration (National Bureau of Statistics, 2018)

Asides changes in demand and supply of labour, the Nigerian economy has become susceptible to fluctuations in the global oil market, often experiencing unfavourable terms of trade such that net exports are unable to cover imports. The lull in non-oil exports has also worsened, and can be attributed to a flawed national framework and weak institutions. Consequently, imports generally tend to be cheaper than made-in-Nigeria goods and services, thereby fueling failure of local small and medium enterprises (SMEs). This in turn reduces available jobs for low-income earners and ultimately, heightens the risk of transient poverty. Other channels through which globalization, growth and inequalities interact include; market concentration brought about by economies of scale, high entry costs, and non-tariff related entry barriers such as product or service requirements. All of these restrict market access and growth opportunities available to Nigerian SMEs, further widening income inequality gap among citizens.

In addition, increased deregulation and privatization have resulted in reduced state spending on social goods and services, thereby limiting access and affordability for the poor. Although the country has recorded relatively stable growth for an extended period, this has not translated into shared prosperity. The WorldInequalityDatabase (Figure 2) shows that the proportion of national income accruing to the top 10% of the country’s population is currently more than triple the proportion accruing to the bottom 50% of the population, with no improvement in this trend for the last two decades. Asides income inequality, other dimensions of exclusion are prevalent in Nigeria. This growing divide has the potential to undermine national stability and development. Therefore, the country is faced with the challenge of recovering from the effects of the global pandemic, and ensuring that going forward; growth brought about by increased global integration translates into equal economic opportunities for Nigerians.

Fig. 2: Share of national income – Authors elaboration (WID, 2019)

By inference, Nigeria appears to have embraced globalization prematurely, evidenced by its weak institutions, poor human capital development, unsophisticated entrepreneurship, inadequate technologies and low financial assets. This has prevented its human and capital assets from competing favourably on the global stage. Thus, only a few already privileged citizens are able to enjoy the gains of globalization, by creating monopolies in certain sectors. Consequently, reform strategies to improve efficiency and capacity of local institutions, labour and capital assets are required.

Rethinking liberalization policy in Nigeria

Globalization can be valuable for emerging markets like Nigeria, when the right institutions are in place. Therefore, Nigeria needs to build strong and resilient institutions to provide a platform for driving innovative policies geared towards diversifying the economy, building capacity and a conducive environment for business growth, while considering the impact on marginalized groups. Export promotion strategies should identify priority sectors based on potential to create jobs, boost export earnings, and have robust market linkages. Policies on port reforms, simplification of export procedures, stable exchange rate, and indigenous technology advancement should be implemented. E-commerce should also be encouraged due to its potential for levelling the playing field between small and large firms in global markets. In addition, hindrances to business growth must be fixed, for example; power supply, distribution networks, and access to finance, with extra emphasis on rural communities.

Human capital and enterprise development are also a critical factor for inclusiveness, in terms of policies that improve affordability, availability and effectiveness of education and skills acquisition programs. This has the potential of boosting labour productivity, creating more opportunities for labour mobility and increased wages for low-income earners. In order to achieve this, it may be necessary to realign budgetary allocation to the education sector to expand access for disadvantaged groups. Finally, it is imperative to revisit existing redistributive policies, to ensure social protection programs adequately cater for marginalized individuals, and that the tax system is efficiently progressive and capable of promoting shared gains from national growth. Also, it is necessary to put in place measures to curb illicit capital flight and tax evasion by multinational corporations operating in Nigeria as these could play an important role in reducing inequality of outcomes within the country.

This article was written by Sone Osakwe, Research Intern at CSEA

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