Nigeria, Africa’s largest economy, is currently grappling with a tax reform initiative that aims to overhaul its fiscal landscape and diversify government revenue away from its over-reliance on oil. However, with inflation exceeding 30 percent, interest rates over 27 percent, and an increasing number of Nigerians falling into poverty, the timing of this reform has raised concerns. Is it the right moment for such significant economic changes, or could these reforms exacerbate the already fragile economic conditions?
A strained economy
Nigeria’s economic landscape is in turmoil. Inflation has surged to over 33 percent, driven by rising energy prices, currency devaluation, and supply chain disruptions. According to the National Bureau of Statistics, food inflation alone has reached record highs, placing additional pressure on families already struggling to make ends meet. Interest rates, now hovering above 27 percent, have further increased the cost of borrowing, stifling business expansion and increasing the debt burden. The Nigerian economy, heavily dependent on oil, is also vulnerable to global market fluctuations.
In such an environment, the government’s decision to push forward with tax reform, which includes increasing tax rates and broadening the tax base, is understandably contentious. While the need for reform is clear, many Nigerians question whether it is wise to implement such sweeping changes when their purchasing power is already eroded.
The case for tax reform
Despite the challenges, the Nigerian government argues that tax reform is crucial for long-term fiscal stability. Nigeria’s over-dependence on oil revenue has left the country vulnerable to fluctuations in global oil prices, which are often beyond its control. With oil accounting for nearly 90 percent of Nigeria’s foreign exchange earnings, the country faces a significant risk if oil prices fall or if global demand diminishes.
Expanding the tax base is seen as an essential step toward diversifying government revenue sources. Tax reforms could enable Nigeria to move away from relying on oil, ensuring a more sustainable and resilient fiscal framework. By improving tax collection, broadening the tax base, and tightening enforcement, the government could increase its revenue base, allowing for greater investment in infrastructure, education, healthcare, and technology, which are critical for long-term development.
Moreover, with Nigeria’s population projected to reach over 400 million by 2050, maintaining a heavy reliance on oil for revenue would be unsustainable. Tax reforms are thus seen as a strategic move to prepare the country for the future, particularly by addressing structural inefficiencies in the economy and improving fiscal governance.
Read also: Tax reforms will ensure equity, fairness in revenue collection, disbursement – Oyedele
The risks of timing
However, the timing of this tax reform is precarious. High inflation, soaring interest rates, and a growing poverty rate make the proposed reforms more difficult to swallow for an already burdened population. When the cost of basic goods and services is spiralling, adding more financial pressure through higher taxes could provoke widespread discontent and even further economic contraction.
For example, small businesses and entrepreneurs, already facing high costs due to inflation and borrowing constraints, may be forced to shut down or reduce their operations as tax burdens increase. The informal sector, which constitutes a large portion of Nigeria’s economy, would be particularly vulnerable. Without sufficient infrastructure to capture informal sector activity, these tax reforms could prove inefficient, leaving many businesses and individuals untaxed.
The situation is further complicated by the issue of poverty. The World Bank estimates that over 40 percent of Nigerians live below the poverty line. With such a large portion of the population struggling to survive, increasing taxes on income or consumption could lead to further hardship. Nigerians could find themselves taxed on their already limited resources, compounding their economic difficulties.
What Nigeria can do better
While the timing of the reform is indeed challenging, the Nigerian government can still manage the reform process in ways that mitigate its negative effects. Here are several steps Nigeria can take to make its tax reform more effective and equitable:
Gradual implementation: Rather than introducing all tax reforms at once, the government could phase in changes over several years, allowing businesses and individuals to adjust to new tax rates gradually. This phased approach would prevent immediate shock to the economy and provide time for the government to improve its tax collection mechanisms.
Targeted relief for vulnerable populations: To counterbalance the negative impact of the reform on low-income individuals, the government could introduce targeted relief measures. For example, tax credits or subsidies could be directed toward the poorest segments of society to protect them from rising costs. This approach would ensure that the most vulnerable citizens are not disproportionately burdened by the reforms.
Focus on efficiency and enforcement: One of the biggest challenges in Nigeria’s tax system is enforcement. Many businesses, particularly in the informal sector, remain untaxed due to weak enforcement mechanisms. By leveraging technology to modernize the tax system, the government can increase compliance and broaden the tax base, reducing the need for significant tax hikes.
Sector-specific reforms: Tax reforms should not be one-size-fits-all. The government could tailor its tax policies to different sectors of the economy. For instance, it could increase taxes on industries that have high profitability, such as telecommunications or banks, while offering tax incentives for businesses in the agricultural or manufacturing sectors that are crucial for economic diversification.
Public engagement and transparency: One key lesson from other countries that have successfully implemented tax reforms is the importance of public buy-in. The Nigerian government must engage with the public and provide clear communication about why the reforms are necessary and how they will benefit the country in the long run. Transparency in the use of tax revenues will also help build trust and increase compliance.
Conclusion
In conclusion, while Nigeria’s tax reform is a necessary step toward economic diversification and fiscal sustainability, the current economic climate raises valid concerns about the reform’s timing. With inflation, high interest rates, and rising poverty levels, the government faces significant challenges in ensuring that these reforms do not worsen the economic conditions for ordinary Nigerians. However, with a thoughtful, gradual, and targeted approach, Nigeria can achieve the long-term benefits of tax reform while minimising immediate hardship.
Ultimately, Nigeria’s success in implementing tax reform will depend on balancing the need for fiscal reform with the realities of a struggling economy. By learning from other countries’ experiences, focusing on efficiency, and ensuring that the reform process is inclusive, Nigeria can emerge from this difficult period stronger and more resilient.
Dr Brian Reuben is the Executive Chairman of the Sixteenth Council and the founder of the Africa Economic Summit
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