Nigeria’s climb to 10.6%: Tax-GDP ratio rollercoaster across African countries as SA’s dip to 21%

The assertion that tax-to-GDP ratios differ widely between African countries is not just an abstract fact; it provides insight into the continent’s diverse economic realities and development concerns.

With an average of 16.5 percent for the 33 profiled countries, not all African countries are the same regarding taxes. Some raise a lot, while others have a long way to go.

According to Revenue Statistics in Africa 2023, its reports include tax revenue data up to 2021, the second year of the COVID-19 pandemic. “In 2021, Africa’s economic activity rebounded strongly from the COVID-19 shock in 2020, which caused the most severe global contraction in decades. Africa’s GDP grew by an estimated 4.9% in real terms in 2021 after suffering a contraction of 1.7% in 2020 (AUC/OECD, 2023). Higher oil prices, a recovery in global demand, and a rebound in household consumption supported Africa’s economies in 2021 (African Development Bank, 2022)”.

Tax-to-GDP ratio, 2021

South Africa’s decline from 29.1% to 21% provides insight into the sensitivity of tax collection to individual businesses, notably major corporations like Naspers. This prompts questions about economic diversification and the potential risks associated with overreliance on specific sectors.

Egypt’s tax-to-GDP ratio currently stands at 14.1 percent, sparking discussions about potential structural issues and the potential for targeted reforms to broaden the tax base and improve efficiency.

On a brighter note, Nigeria’s climb from 6.3 percent to 10.6 percent offers a glimmer of hope, illustrating the potential for improvement through sustained efforts. This positive trajectory warrants a deeper exploration to extract lessons that can benefit other nations.

Nigeria’s tax-to-GDP ratio in 2021 (6.7 percent) was lower than the average of the 33 African countries in 2023 (15.6 percent) by 8.9 percentage points.

The reasons behind these disparities are multifaceted

Resource-rich nations like Equatorial Guinea (5.9 percent) rely heavily on extractive industries, leading to fluctuating revenues and challenges in diversifying the tax base.

In contrast, countries with robust service sectors like the Seychelles (27.9 percent) tend to have higher ratios.

The prevalence of informal activity poses a significant challenge. Countries with larger informal sectors struggle to capture taxes, hindering their ability to fund essential services and infrastructure.

Effective tax administration, including efficient collection and enforcement mechanisms, plays a crucial role. Weak institutions lead to leakages and inefficiencies, further widening the gap.

In a recent post on X, Kelvin Ayebaefie Emmanuel tweeted that tax-to-GDP ratios vary significantly across African countries.

He emphasises the importance of aligning strategies with recommendations from the Presidential Committee on fiscal reforms.

“The government needs to accelerate legislation to back to recommendations of the Presidential Committee on fiscal reforms, especially as it regards:

• Collapsing the revenue collection functions of 62 MDAs to FIRS

• Mitigating the practice of deliberate underassessment of companies

• Harmonisation of taxes across federating units to 10 to streamline the process, kill duplicity, and improve the ease of doing business around Nigeria.

The Budget Office pivoting from debt as a major vehicle of covering deficit to revenue in their fiscal strategy paper with”

In response to recent fiscal developments, he acknowledges the Finance Minister’s announcement regarding the discontinuation of the use of Ways and Means (W&M) without adhering to Section 38 of the CBN Act.

Another crucial aspect highlighted by Kelvin is the need for harmonization of taxes across federating units to 10.

This measure aims to streamline the tax process, eliminate duplicity, and improve the ease of doing business within Nigeria.

Shifting the focus to the fiscal strategy paper of the Budget Office, he also commends the effort to reduce the interest on GDP to below 2 percent and lower deficit financing to below 20 percent.

These measures are deemed critical to rebalancing the fiscal landscape and preventing debt from fueling inflation and exchange rate depreciation.

In conclusion, he expresses confidence in the Finance Minister’s direction, stating, “I think the Finance Minister is on the right track.”