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Rising unemployment, inflation further dampen Nigeria’s ambitious non-oil revenue projections

Rising unemployment, inflation further dampen Nigeria’s optimistic non-oil revenue projections

Nigeria’s rising unemployment and inflation are fresh hurdles the government, already faced with tepid economic growth, must scale to meet an ambitious N4.83 trillion non-oil revenue projection for 2020.

Nigeria’s inflation rose to a two-year high of 12.82 percent in July from 12.56 percent the month before, while unemployment rose substantially from 23.1 percent in the third quarter of 2018 to 27.1 percent in the second quarter of 2020.

Experts are of the opinion that it is unlikely for Africa’s largest economy to meet its non-oil revenue projections given the real income pressures faced by households and businesses. While government revenue from VAT will suffer from the worsening unemployment and inflation rate, Companies Income Tax will also be badly hit by an economy on the fringes of a recession.

“The Value Added Tax (VAT) revenue increased by 8.45 percent from N600.9 billion obtained in half-year 2019 to N651.7 billion in 2020, but I see this increase as not substantial because VAT rate was increased by 50 percent from 5 percent to 7.5 percent in 2020”, said Gbolahan Ologunro, a Research Analyst at CSL Stockbrokers.

“An 8 percent improvement in generated VAT revenue for a VAT rate that was increased by 50 percent is an indication of weak spending on the part of consumers, and in the face of the global pandemic as well as the rising inflation and unemployment rates in Nigeria, consumer spending might take a further downturn,” Gbolahan said.

“The same negative trend is expected for Company Income Tax (CIT) as profit in most companies remain under pressure as their revenue is still being affected by rising input cost due to foreign exchange devaluation, existing bottlenecks in the distribution network as well as the hike in PMS,” he said.

Tunde Leye, partner at SBM Intelligence, said that Company Income Tax (CIT) and Value Added Tax (VAT) which make up the bulk of the non-oil revenue type are closely tied to the level of consumption and economic activities.

“The investment and consumption component of the Gross Domestic Product (GDP) function are indicators and consequences of unemployment and inflation, as such, food inflation which is what is currently being experienced in Nigeria means that people are going to be spending more of their income on food, and a reduction in their income will impact VAT revenue negatively,” Leye said.

“Rising unemployment and inflation rates mean a reduction in CIT and VAT revenue for now, although there might be a spike in VAT in Q4 2020 and Q1 2021, this will however be a normal spike because this would be a festive period, after which the downward trend in VAT will continue,” he said.

Earlier in the year, the government projected a marginal decline in key non-oil revenue components including VAT and CIT.

It however appears that the suggestion of a 50 percent decline in projections for non-oil revenue made by the tax experts polled in a Business Day survey still stands.

By the end of May 2020, the prorated VAT revenue for the period was only achieved by 42.7 percent as actual VAT revenue was N522.95 billion instead of the targeted N912.76 billion.

Also, revenue from CIT did not meet its target for the period of N749.42 billion as only about 63.9 percent of the pro-rata for January to May was achieved at N497.07 billion.

If the half-year figures for CIT and VAT revenue are doubled, CIT revenue would be N994.14 billion and VAT revenue would be N1.05 trillion, a respective shortfall of 44.7 percent and 52.1 percent.

But of course, with the increases in unemployment and inflation, Nigeria might not even see anything close to the doubled amount of the half-year CIT and VAT revenue, according to Emmanuel Faith, process analyst at General Electric.

During 2016 recession, CIT revenue declined by 6 percent to N933.54 billion from its 2015 figure of N993.18 billion, while VAT revenue increased by 66.2 percent to N828.19 billion from its 2015 figure of N498.23 billion.

Nonetheless, neither CIT nor VAT was able to meet up with the prorated annual revenue of N1.79 trillion and N1.47 trillion respectively.

“We are expecting a recession by Q3, so we expect less consumption in the economy which will in turn bring about an underperformance of the projected non-oil revenue,” said Yinka Ademuwagun, research analyst at United Capital.

“The CIT revenue expectation is however tricky as revenue is declining for some companies and improving for some other companies like the telecommunication and financial services companies, the net impact of the current economic issues might therefore balance out any negative effect so that the amount of CIT revenue raised may not be affected,” he explained.

Boboye Olaolu, sub-Saharan African economist at CSL Stockbrokers, emphasised that non-oil revenue shortfalls call for short- and long-term cushioning measures.

“To support non-oil revenue generation in 2020 is a bit difficult as revenue mobilisation cannot be achieved in a short period. However, in the short term, the government should adjust foreign exchange rate some more to increase revenue and cut back on subsidies like electricity as well as a total deregulation of the oil and gas sector to free government expenditure,” Boboye said.

“On the long term, we need to completely eliminate subsidies in the energy sector as between 2017 and 2019 alone about 7.5 percent of the entire FGN revenue was spent on this subsidy-this is really huge,” he said.

Boboye said some tax exemptions need to be revisited and efforts to increase tax compliance should be intensified so that there could be more efficiency in tax collection.

“To further reduce unnecessary government spending, public agencies that have almost similar functions should be consolidated while efficiency techniques should be introduced in public agencies to ensure that they are accounting for their expenditure and at the same generating expected revenue,” he said.