The Changing Pattern of Federal Government Revenue in Nigeria: A Decadal Analysis
Nigeria’s economy is a middle-income, diversified economy that is still developing. Its manufacturing, finance, service, communications, technology, and entertainment industries are all growing. In terms of nominal GDP, it is the largest economy in Africa, and in terms of purchasing power parity, it is the 27th-largest economy in the world.
Africa’s largest economy is that of Nigeria. The nation’s resurgent manufacturing industry, which in 2013 surpassed all others on the continent in size, supplies a sizable share of the goods and services for West Africa. The IMF estimates that Nigeria’s debt-to-GDP ratio was 36.63% in 2021.
The changing pattern of federal government revenue in Nigeria over the past decades has been a critical determinant of the country’s economic growth, development, and fiscal stability. As Africa’s largest economy and one of the continent’s major oil producers, Nigeria’s revenue landscape has experienced significant shifts influenced by domestic and global factors.
Understanding the evolution of revenue streams is crucial for policymakers, economists, and stakeholders to make informed decisions, plan for sustainable development, and address the challenges of revenue volatility and economic diversification.
By understanding the changing patterns of federal government revenue in Nigeria, policymakers can identify opportunities for improvement, design effective fiscal policies, and strengthen measures to enhance revenue generation and allocation.
Furthermore, this analysis will contribute to the ongoing dialogue on achieving sustainable economic growth, reducing dependency on oil revenues, and fostering economic diversification in Nigeria for a more resilient and prosperous future.
Nigeria’s Revenue Profile
Oil and non-oil revenues are the major sources of government finances. The oil revenue includes proceeds from sales of crude oil, petroleum profit tax, rents, and royalties while the components of non-oil revenues are companies’ income tax, customs and excise duties, value-added tax, and personal income tax.
Since the 1970s, oil revenue has been the dominant source of government revenue, contributing over 70 percent to federally collected revenue (CBN, 2000). Federally-collected revenue recorded a substantial increase while its structure also underwent dramatic changes during the period 1970-1980, resulting from favourable developments in the international oil market.
The Federation Account revenue increased sharply from N634.0 million in 1970, representing 11.3 percent of GDP to N15, 233.5million or 30.0 percent of GDP in 1980 but dropped thereafter to N12, 595.8 million or 17.2 percent of GDP by 1986 following the glut in the international oil market. The growth in gross receipts was attributable to increases in revenue from both oil and non-oil sectors.
However, the oil sector has remained the dominant source of foreign exchange earnings since the mid-1970s. The contribution of oil to federally-collected revenue rose significantly from 41.4 percent between 1970 and 1972 to 73.9 percent between 1973 and 1979, and averaged over 70 percent for most of the 1980s, reflecting largely the high price increases recorded from the mid-1970s, following the drop in world oil supply as a result of the Middle East crisis (CBN, 2000).
The oil price volatility of 1973 and 1974 brought about substantial windfall in foreign exchange earnings as the price per barrel of Nigeria’s crude oil increased progressively from US$2.42 in 1970 to US$8.4 in 1973, and peaked at US$40.0 by 1980. Oil revenue received a further boost in the second half of the 1980s upon the adoption of deregulatory measures under the Structural Adjustment Programme (SAP).
Consequently, total federally-collected revenue increased sharply from N12, 595.3 million in 1995 and accelerated to N582, 811.1 million in 1997 before declining to N463, 608.8 million in 1998. As a proportion of GDP, total federally collected revenue was relatively stable, moving from 17.2 percent in 1986 to 18.6 percent in 1997 before declining to 16.3 percent in 1998.
The total federally-collected revenue continued to increase after the democratic era from 1999 which rose from N949, 187.0 million in 1999 to N7, 303,671.55 billion in 2010 and N11, 271,290.0 billion in 2014.
Decadal Analysis Of The Changing Pattern Of Federal Government Revenue In Nigeria
Decade 1: 1960s
The 1960s marked Nigeria’s independence, and the primary source of revenue during this period was agriculture, particularly cocoa, palm oil, and groundnuts. These commodities played a vital role in generating foreign exchange earnings and supporting the young nation’s economic growth.
Decade 2: 1970s
The 1970s saw a drastic transformation in Nigeria’s revenue pattern, driven by the oil boom. With the discovery of substantial oil reserves in the Niger Delta region, crude oil became the dominant source of revenue, contributing a significant portion of the federal government’s income.
This period was characterized by a substantial fiscal surplus, leading to rapid infrastructure development and increased government spending.
Decade 3: 1980s
During the 1980s, Nigeria faced economic challenges due to fluctuating global oil prices and mismanagement of oil revenues. The country experienced a severe economic downturn, leading to a debt crisis and the implementation of structural adjustment programs (SAPs) by the International Monetary Fund (IMF) and the World Bank.
Decade 4: 1990s
The 1990s witnessed a partial recovery from the economic crisis of the previous decade. The government introduced economic reforms to diversify the economy away from oil dependency, with increased attention on non-oil sectors like telecommunications, banking, and services. However, oil revenues continued to play a dominant role in federal government finances.
Decade 5: 2000s
The 2000s marked a period of relatively stable economic growth and increased government revenue due to rising oil prices in the global market. The government implemented policies to attract foreign direct investment (FDI) and promote non-oil sectors. However, overreliance on oil revenues remained a significant concern.
Decade 6: 2010s
The 2010s brought both opportunities and challenges for Nigeria’s federal government revenue. The global financial crisis of 2008-2009 had an impact on oil prices, leading to fluctuating revenues.
Additionally, the country faced security challenges, such as the rise of insurgency in the northeastern region, which impacted economic activities and revenue generation.
In response to the vulnerabilities of oil revenue, efforts were made to diversify revenue streams. Initiatives like the National Tax Policy aimed to strengthen tax administration and broaden the tax base. However, progress in revenue diversification was slow and uneven.
Decade 7: 2020s
At the beginning of the 2020s, Nigeria faced significant economic challenges, including the 2020 oil price crash and the global COVID-19 pandemic. These events further exposed the risks of overreliance on oil revenue and underscored the urgent need for economic diversification.
The government intensified efforts to enhance revenue collection, streamline tax systems, and reduce leakages. Additionally, there was a growing focus on non-oil sectors such as technology, agriculture, and manufacturing to stimulate economic growth and create employment opportunities.
Challenges And Implications of The Changing Pattern of Federal Government Revenue
The changing pattern of federal government revenue in Nigeria presents several challenges and implications for the nation’s economic development:
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Overreliance on Oil: Nigeria’s dependence on oil revenues has made the economy vulnerable to global oil price fluctuations, impacting government budgets and fiscal stability.
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Fiscal Sustainability: Fluctuating revenue streams and the challenge of expanding the tax base have affected the government’s ability to implement long-term development projects.
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Economic Diversification: The need for diversification to reduce dependence on oil remains a critical priority for sustained economic growth and resilience.
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Tax Collection Efficiency: Improving tax administration and compliance is essential to increase non-oil revenue and strengthen fiscal capacity.
The Failure of The Changing Pattern of Federal Government Revenue
Nigeria’s changing pattern of federal government revenue has seen several failures that have hindered the country’s economic growth and development. Some of the key failures include:
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Overreliance on Oil: Nigeria’s heavy reliance on oil revenue has been one of the most significant failures. The country’s economy has been overly dependent on oil exports, making it highly susceptible to fluctuations in global oil prices. When oil prices drop, as seen during the 1980s and more recently in the 2020 oil price crash, the government faces significant revenue shortfalls, leading to budget deficits and economic challenges.
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Mismanagement of Oil Revenue: Despite generating substantial oil revenue during boom periods, the Nigerian government has often mismanaged these funds, leading to rampant corruption and wasteful spending. Funds meant for infrastructural development, social programs, and public services are sometimes embezzled or diverted, leaving critical sectors underfunded and the majority of the population impoverished.
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Inadequate Diversification Efforts: Although the need to diversify the economy away from oil has been recognized for decades, progress in this regard has been slow and insufficient. Non-oil sectors, which have the potential to drive sustainable economic growth and create employment opportunities, have not received enough attention and support from the government. This failure to diversify has left the economy vulnerable to oil price shocks.
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Weak Tax Collection Systems: The Nigerian tax system has been marred by inefficiencies, low compliance rates, and widespread tax evasion. The government’s efforts to broaden the tax base and increase tax revenue have not yielded the desired results. This failure to improve tax collection systems has limited the government’s capacity to generate non-oil revenue and adequately finance public services and infrastructure projects.
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Security Challenges: Pervasive security challenges, such as the Boko Haram insurgency in the northeastern region and other forms of criminality, have disrupted economic activities and investment, impacting revenue generation. The instability in certain regions has also hindered efforts to tap into their economic potential.
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Lack of Policy Implementation: Nigeria has seen various economic policies and initiatives aimed at addressing revenue challenges and promoting diversification. However, the lack of effective implementation and follow-through has been a recurring problem. Political instability, bureaucratic bottlenecks, and vested interests often obstruct the successful execution of well-intentioned policies.
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Lack of Long-Term Planning: Nigeria has faced issues with long-term planning and budgeting. Many governments have focused on short-term goals and election cycles, leading to inconsistent and fragmented policy approaches. This lack of coherent long-term planning has contributed to the persistence of revenue-related challenges.
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Economic Inequality: The failure to address income inequality and wealth distribution has exacerbated social tensions and hindered inclusive economic growth. Unequal access to economic opportunities has limited the potential for a thriving middle class and adversely affected tax revenue.
Their Responsible For That Both In Tax Revenue And Non-Tax Revenue
The challenges in generating sufficient tax revenue and non-tax revenue in Nigeria can be attributed to a combination of factors. Let’s examine the key reasons responsible for the struggles in both areas:
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Tax Evasion and Avoidance: Tax evasion and avoidance are prevalent issues in Nigeria. Many individuals and businesses find ways to underreport income or take advantage of loopholes in the tax system to minimize their tax liabilities. This reduces the overall tax collection and hinders the government’s ability to generate sufficient revenue.
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Informal Economy: A substantial portion of economic activities in Nigeria takes place in the informal sector, which often goes unregulated and untaxed. The informal economy’s prevalence makes it challenging for the government to capture revenue from this segment of the population.
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Weak Tax Administration: Inefficient tax administration, including inadequate tax collection systems and low tax compliance rates, contributes to the revenue challenges. The tax authorities may lack the capacity to effectively identify tax evaders, enforce tax laws, and collect taxes promptly.
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Corruption: Corruption remains a significant obstacle in Nigeria’s revenue generation efforts. Corruption within tax administration, government agencies, and the private sector can lead to embezzlement, bribery, and tax fraud, resulting in revenue leakages and reduced funds available for public services and development projects.
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High Level of Poverty: Widespread poverty in Nigeria affects tax compliance and collection. When a significant portion of the population lives below the poverty line, they may not have the means to pay taxes or may be less willing to comply with tax regulations.
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Inadequate Infrastructure and Public Services: The perceived lack of adequate infrastructure and basic public services, such as healthcare, education, and security, may discourage some taxpayers from fulfilling their tax obligations. Citizens may question the value they receive in return for their taxes, leading to lower compliance rates.
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Complex Tax Laws and Regulations: Tax laws and regulations in Nigeria can be complex and confusing, especially for small businesses and individuals. This complexity may lead to unintentional non-compliance and hinder efforts to broaden the tax base.
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Limited Focus on Non-Tax Revenue Sources: Non-tax revenue sources, such as fees, fines, royalties, and income from state-owned enterprises, have not received sufficient attention and optimization in Nigeria. There may be untapped potential in these areas that could be leveraged to bolster government revenue.
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Economic Instability: Fluctuations in the global and domestic economic conditions can impact non-tax revenue streams like oil revenue and exports. Economic downturns and market volatility can lead to reduced revenue generation, affecting the government’s ability to fund its programs and projects.
Conclusion
The decadal analysis of the changing pattern of federal government revenue in Nigeria provides a comprehensive understanding of the country’s economic journey over the past ten decades.
The study has revealed significant shifts in revenue sources, influenced by various domestic and global factors, with oil revenue playing a dominant role during the oil boom in the 1970s.
Throughout the analysis, it became evident that overreliance on oil revenue has exposed Nigeria’s economy to vulnerabilities, as witnessed during oil price fluctuations and global economic downturns.
The failure to effectively diversify revenue sources has hindered the country’s ability to achieve sustainable economic growth and fiscal stability.
Moreover, the challenges of weak tax collection systems, tax evasion, corruption, and the prevalence of the informal economy have limited the government’s capacity to generate sufficient tax revenue. These issues underscore the need for comprehensive reforms in tax administration and governance to optimize revenue collection and enhance fiscal management.
The analysis also highlighted the importance of long-term planning, effective policy implementation, and investments in non-oil sectors to drive economic diversification and create employment opportunities.
Nigeria must prioritize infrastructure development, education, healthcare, and technological advancements to unleash the potential of non-oil sectors and boost revenue generation.
In conclusion, the changing pattern of federal government revenue in Nigeria reflects both successes and failures in managing economic resources. To overcome the challenges and build a more resilient economy, policymakers must focus on reducing oil dependence, improving tax compliance, enhancing transparency and accountability, and promoting a diversified economy.
By learning from past experiences and adopting forward-thinking strategies, Nigeria can pave the way for sustainable growth, stability, and prosperity in the decades to come.