Nigeria’s Sugar Tax: Penance for Poor Public Health Financing?
On Thursday 6th January 2022, at the public presentation of the 2022 National Budget, the Minister of Finance announced an excise tax on sweetened sugar beverages. This tax, set at ₦10/litre of carbonated, nonalcoholic, or sweetened sugar beverages, aims to tackle the country’s rising incidence of non-communicable diseases and boost government revenues. With the average Nigerian consuming 49 8-ounce soft drink servings per year, Nigeria could generate up to ₦20 billion (US$55 million) per year in the short term. The announcement, which followed an increase in tobacco and alcohol taxes in 2018, has ushered in an era of sin taxes in Nigeria. For many years, public health practitioners and civil society groups like The Civil Society Legislative Advocacy Centre (CISLAC) and the National Action on Sugar Research have been at the forefront of advocating for sin taxes to improve population health and boost public health financing in Nigeria.
What are Sin Taxes?
Sin taxes are “health-friendly” taxes charged on goods and services that could potentially cause harm; this includes sweetened sugar beverages, alcohol, tobacco, gambling, among others. Sin taxes are not new. Over the years, sin taxes have been introduced in several countries and have become public policy tools used by governments to promote population health, even in African countries. In 1994, the South African Treasury set a target of increasing tobacco taxes from 32% of the retail price to 50%. As a result, cigarette sales declined by 30%, government revenue from tobacco taxes increased by 800% and the prevalence of smoking among adults decreased by 25% during the same time period.
How Should Nigeria’s Sin Tax Revenue be Utilized?
The introduction of sin taxes in Nigeria is a step in the right direction. However, policies do not succeed or fail on their own merit; rather, they succeed because of their implementation. So how should the sin tax revenue be utilized in Nigeria? This article explores potential ways to maximize Nigeria’s sin tax regime, notably by earmarking it as an additional source of revenue for the Basic Health Care Provision Fund (BHCPF).
Sin taxes serve a dual purpose - discourage unhealthy behaviour in the population through reduced consumption of unhealthy goods or services and revenue generation. The primary purpose of any sin tax regime depends on two factors - the political players who influenced its proposal and the motivation behind its introduction. For example, in 2014, Mexico and Chile introduced taxes on sugar-sweetened beverages. This sin tax was championed by the Ministry of Finance and was framed as a revenue-generating mechanism. On the other hand, in 2015, Colombia also introduced the tax but it was championed by the Ministry of Health as a health intervention. The inclusion of the sugary beverage sin taxes as part of Nigeria’s finance reforms suggests that the primary motivation is revenue generation. This begs the question, how can Nigeria make the most out of the funds raised through this new sin tax?
Globally, not enough funds are generated for the health sector, but the health financing deficit is more pronounced in the African continent, with an estimated $66 billion health financing deficit. One of the measures proposed by the WHO to improve the fiscal space for health is raising revenues through earmarked taxes for health.
Revenue generated from sin taxes can either be a source of general government revenue or earmarked directly for healthcare purposes. General government revenues are a preferred option, especially in countries where health is already prioritized in budgetary allocations. Earmarking is the alternative to utilizing sin tax revenue through general budgets; in this case, it dedicates the sin tax revenue stream to the health sector.
The details of how the revenue generated from Nigeria’s sugar tax have not been announced; however, it would be beneficial for the country to use this revenue source to plug its health financing deficit. The financing of the Nigerian health sector is characterized by very low public expenditure on healthcare and one of the highest out-of-pocket expenditures on the continent. Efforts at providing publicly funded health insurance through the formation of the National Health Insurance Scheme (NHIS) over 17 years ago have yielded very few results, with less than 7% of the population having any form of health insurance coverage. The 2014 National Health Act, which birthed the Basic Health Care Provision Fund (BHCPF) to provide Nigerians with access to basic healthcare services, held the promise of a breath of fresh air for health financing in Nigeria - a promise to which it has not lived up to yet.
An analysis of the Nigerian annual government budget reveals very poor prioritization of healthcare spend. When adjusted for inflation, there was a 21.2% net decrease in the country’s allocation to health from 2015 to 2021 despite the country’s increasing population.
As such, earmarking the sin tax on sweetened sugar beverages could be a very effective stop-gap for Nigeria’s perpetually low public healthcare expenditure in the interim.
The Case for BHCPF Funding
So, how can (or should) the Nigerian government utilize this additional ₦20 billion in revenue per year? A viable option for utilizing this fund is expanding the revenue stream of the Basic Health Care Provision Fund (BHCPF).
The BHCPF aims to deliver free minimum basic healthcare services to the poorest and most vulnerable Nigerians through the strengthening of accredited primary healthcare centers in each of Nigeria’s 36 states. Half of the fund is allocated to the provision of a basic package of healthcare services in primary healthcare facilities through the NHIS; 45% of the fund is allocated for the National Primary Health Care Development Agency (NPHCDA) to provide essential drugs, maintain primary healthcare facilities, equipment and transportation, and strengthening human resource capacity; while the remaining 5% of the fund is allocated for the federal MoH to respond to health emergencies and epidemics.
With a well-designed and established pathway for both demand-side financing (i.e., NHIS provision) and supply-side financing (primary healthcare provision via the NPHCDA), the BHCPF is poised to maximize the benefit and reach of the sin tax revenue. On top of that, injecting additional revenue into the scheme could have a significant positive impact on the most underserved and vulnerable patient populations in the country.
The operationalization of the fund has had a slow start across different states since its inception in 2014 and inclusion in the national budget in 2018. Delays in the release of funds, misappropriation of funds and corruption are some of the main hurdles undermining the successful implementation of the BHCPF at the state level. However, the biggest hurdle is at the federal level - the main source of funding for the BHCPF has been shrinking since its inception. The BHCPF is predominantly financed through an annual grant from the federal government of 1% of the Consolidated Revenue Fund (i.e., the total federal revenue before it is shared to all tiers of government). However, due to the shrinking government revenue and reduction in the overall size of the Consolidated Revenue Fund (CRF) over time, the 1% allocation to the BHCPF has been dwindling since the first grant in 2018. In the 2021 financial year, 1% of the CRF amounted to ~₦35 billion, compared to ~₦56 billion in 2018. Based on these downward trends, without additional revenue sources, the BHCPF will continue to be chronically underfunded.
Utilizing sin taxes as an additional source of finance for the BHCPF could expand the number of patients that benefit from the scheme and increase the direct financing of primary health care centers across the country. The ₦20 billion (US$55 million) that could be generated from the sin tax in one year is enough to bridge the gap in dwindling government revenue in the 2021 CRF allocation to meet the 2018 levels. An expansion of the fund will increase the number of sponsored beneficiaries who can get free minimum basic healthcare services through the BHCPF, significantly improving access to primary care for the poorest and most vulnerable Nigerians.
Key Takeaways from TC Health: The Nigerian sin tax regime is here to stay. It presents the country with another opportunity to continue to chart its course towards universal health coverage by expanding the revenue base of the Basic Healthcare Provision Fund. While the full annual revenue generated from the sin tax may not be allocated to healthcare, even a portion of the revenue could plug the gap in a severely underfunded healthcare system. However, simply allocating revenue to healthcare will not be a silver bullet that solves the poor public health financing problem plaguing the country. Checks and balances need to be in place to ensure the revenue is reaching the organizations, health care workers and patients that need it the most. Transparency is a key element in the utilization of sin taxes in Nigeria. The country’s current rates for sin taxes are below the WHO recommendations - 20% for sugar and 75% for tobacco - but an increase in rates will be unjustifiable if it cannot be proven that the current taxes are judiciously utilized. To regain the trust of its citizens, the government should publish annual reports on the revenue generated from the sin tax and how the funds have been allocated.