• Friday, June 21, 2024
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Nigeria needs more than taxes to fix its ‘insufficient funds’ problem

Lagos, four others owe 34% of states’ $5.34ten domestic debt

For Africa’s largest economy, recent growth has been tepid post-Covid despite an uptick in demand for crude oil. A growing debt profile subsisting alongside a currency-induced foreign exchange depletion has resulted in a shortage of revenue in Nigeria.

Following a recession – technically defined as two consecutive declines in the GDP – that was buoyed by the lockdown imposed in 2020, the economy slid into a dire shortage of funds. The legend of a mono-cultural economy still holds sway as crude oil notoriously accounts for the majority of income – 42percent during the pandemic.

As lockdowns were relaxed around the world last December, it brought respite for the global economy. As of then, the price of Nigeria’s Bonny Light crude was $49.99 per barrel. Today, it averages $73.12 with daily production also shooting up to 1.42 million from 1.12 million barrels per day. Sadly, these gains have not translated to improved earnings for the Federal Government perhaps due to increasing cost on security fighting northern Nigerian Boko haram terrorists and bandits, a rising debt, and debt servicing profile, a large oil refining bill, and a recurrent expenditure that gulps three-quarter of the total budget.

The rise in foreign exchange earnings to $36.7 billion in the third quarter following an earlier five year low of $33.3 billion in the second quarter of 2021 was essentially due to inflows from the IMF, and Eurobond proceeds, as announced by the Governor of the Central bank of Nigeria (CBN) Godwin Emiefele at the France-Nigeria Security and Economic Summit held in Paris France in October 2021.

The oil subsidy debacle lingers at the forefront of planned policies for 2022, with subsidies set to be removed on petroleum products. The CBN Governor identified a flawed business case as the premise for the discontinuation of subsidy payments even as the importation of petroleum products now consumes close to 30 percent of outward forex expenditure.

Still, it would be self-destructive to halt the searchlight on the next optimal source of revenue. Though now, it would seem that the government has now accorded preference to taxes as a solution to current funds shortage, perhaps as businesses are bound by fiat to comply with them and inherently with respect to the recommendation given by the International Monetary Fund (IMF)

“Once economic recovery takes root, Nigeria will need to increase the value-added tax rate to at least 10 percent by 2022 and 15 percent by 2025 —the average in countries belonging to the Economic Community of West African States— to create effective fiscal space.” The International Monetary fund (IMF) Executive Board said much earlier in the year.

Read also: Why Nigeria should be bothered about its growing external debts

On the seventh day of the last month of the year 2021, President Buhari acted on this recommendation when he sent the Finance Bill to the National Assembly to make changes to taxes Nigerians pay. Zainab Ahmed, the minister of finance, had long warned Nigerians in advance to expect to pay more taxes in 2022.

Tax and pro-tax strategies have also been found worthy to support the 2022 budget. The President listed the “enhancement of tax and excise taxes, review of tax waivers and concessions, boosting the e-customs and single windows initiatives, and the safeguard of revenue from the oil and gas sector’’ as key to boosting revenue during his presentation of the 2022 proposed budget to the National Assembly in October 2021.

Oblivious to the low official tax bracket Nigeria falls in sub-Saharan Africa, many of the counter voices trailing the review of tax laws in Nigeria have echoed a combination of extant awareness of the current tax burden being borne by citizens relative to their contemporaries globally and the prevailing institutional and developmental challenges. The Nigeria tax is not broad but narrow.

An onerous exposition was undertaken by the Tax Foundation. They explained that “Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability”

For them, the goals of Tax base broadening will principally revolve around “the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences”

For the President of the African Development Bank (ADB) Akinwunmi Adesina, his concerns dwell more from the “transfer of the government’s responsibility to her citizens” thus inevitably raising the implicit tax rate.

If the assertion by Adesina is anything to go by, it would mean that a dependence on taxes is bound to result in an even greater decline in wellbeing, welfare, and economic growth because additional taxes reduce the amount individuals and firms can aside as savings and ultimately investment.

Aside from taxes, borrowings look to be an attractive destination for the government and a ready source of funds to undertake medium to long-term infrastructure projects.

The highlight of the recently proposed 2022 appropriation budget is a deficit of 6.45 trillion Naira with the government’s proposal to finance this shortfall using three instruments: borrowing to the tune of N5.01 trillion, a loan drawdown of N1.16 trillion, and privatization proceeds of N90.73 billion.

If anything, it is foreseeable that the adoption of borrowings and loans will prove a counterproductive fiscal action especially with respect to recent statistics released by the Debt Management Office (DMO) for Q3:2021. In the DMO report, debt servicing grew to the tune of N2.49 trillion in just nine months and the total public debt consisting of accumulated Federal, state, local government, and the FCT debts hit N38 trillion at the end of the third quarter Q3 2021.

Overall, a foremost concern as the National Assembly looks to pass the 2022 proposed budget and the Finance Bill in the coming days is the inability to branch out new sources of revenue for the economy given the dire strain on the economy presently howbeit in the presence of a range of untapped sources of revenue that do not put a strain on the economy nor diminish the productive prowess of the real sector.

Strategies using innovative revenue generation.

Upon consideration, the ideal revenue-generating model will hover around the establishment of a self-functional and productive economy that would post sustained revenue generation outcomes given that only a productive venture or entity can be taxed.

Primarily, there is a huge prospect when the government commercializes her activities. This has also been aptly advocated by the Principal consultant and CEO of the Economic Associates, Ayo Teriba. For Ayo, the “commercialization of idle, underexploited, and unutilized public assets such as lands, buildings owned by the government is key to opening new non-tax revenue streams”

He listed particular assets which fall under this category to include “idle lands and buildings of Ministries, Departments and Agencies (MDAs), Educational and Sports institutions such as 2000-plus Nigerian Postal Services lands and buildings, 2000-plus Police lands and buildings, lands and buildings owned by the defunct Nigerian telecommunication National Carrier (NITEL) and the defunct Power Holding Company of Nigeria (PHCN), 235 aging and uneconomic inner-city prisons, barracks and inner-city stadiums”

Nonetheless, if non-traditional revenue generation streams are to be adopted instead, the government can choose to outsource a largely unemployed labor force and able-bodied youths to firms, industries, and companies and get a share of income in form of commission. This she will undertake as the single largest and most credible employer of labor.

Signing up unemployed youths through social investment programs such as the N-power and the deployment of verified youths to the real sector with remuneration borne by the employers and a percentage of outsourced compensation to the government holds a great promise for the reduction of high unemployment and poverty rates which currently stands at 33.3% and 44% respectively. There is bound to also be a concomitant increase in productivity of firms and industries as with a rise in corporate profits and government revenue.

According to the World Bank, inflation has plunged seven million Nigerians into poverty and using a benchmarked poverty threshold of $3.20 per day, Nigeria’s poverty rate is 71percent.

By way of institutional support, the government can also provide the necessary assistance to help industries grow. Whether it is power generation or forex provision, conditions can be inserted in MOUs for monetary returns to the government when revenue or profits exceed stated thresholds within the period under consideration.

Reduction in the cost of governance cannot be over-emphasized together with increased accountability for infrastructural programs undertaken. Enhanced independent monitoring and control of projects can be a game-changer in closing obvious loopholes and saving more revenue.

Agricultural production remains one of the most viable sources of revenue today but currently grapples with a low capacity utilization even in the presence of abundant arable land and labor resources.

Broadening the tax net as opposed to an increase in tax rate is critical for next-level revenue generation as this will ensure that a lot more eligible taxpayers are captured in the tax bracket and thus assure an increased inflow of revenue. Nevertheless, much more attention should be accorded to the sensitization and education of taxable individuals and bodies as this holds greater value than the promulgation of tax laws themselves.

There is an untapped and untaxed huge informal sector where taxes are paid by Nigerians but whose revenue does not get to the government purse. In a recent report by the International Centre for Investigative Reporting (ICIR) street urchins in Lagos also known as Agberos generate N123 billion revenue in taxes in the transport sector with none of this amount remitted to the government. Cases like this should be looked into. Potential sources should be outlined and such sources formalized aggressively.

Finally, incentivizing firms to spend on key infrastructural programs as alternatives to tax exemptions is a good way to build capacity and production.