Breaking News

Nigeria’s deep fiscal quagmire and tax conundrum

Kindly Share This Story:

By Olu Fasan

LAST week, most Nigerian newspapers were awash with stories about the International Monetary Fund’s 2019 Article IV Consultation with the country. This is an annual process in which the IMF scrutinises a country’s economic management and reports its findings.

The IMF doesn’t pull punches in its reports, and this year it minced no words about the state of Nigeria’s economy. Economic growth is stunted, it said, by “persisting structural and policy challenges”. One of such challenges is “low revenue mobilisation”. As the IMF put it: “The revenue base is simply too low to address the current challenges”.

Nigeria- map

Nigeria is, of course, a mono, oil-dependent economy, which is at the mercy of volatile world oil prices for 70 per cent of its revenue. At 5.9 per cent of GDP, Nigeria has the worst tax to GDP ratio in sub-Saharan Africa and at three per cent of GDP, its non-oil revenue mobilisation is one of the lowest in the world. As a result, this country is constantly prone to fiscal shocks, as every adverse movement in world oil prices puts its economy out of kilter.

But being in dire fiscal straits has rarely constrained Nigeria’s budget sizes. For instance, as the economy went into a tailspin in 2015, following the collapse of oil prices, President Muhammadu Buhari’s 2016 budget was N6.08 trillion, with a deficit of N2.2 trillion.

The following year, with the economy still in recession, the budget was a record N7.29 trillion, with a deficit of N2.3 trillion. The 2018 budget was ratcheted up to N9.12 trillion, with a deficit of N1.95 trillion. All the budgets were based on unrealistic revenue projections, resulting in bigger deficits, funded through increased borrowings.

Government officials are quick to say that Nigeria’s spending, deficit and debt levels are not extraordinary by international standards. Indeed, looked at in isolation, that’s true. For instance, at 12 per cent of GDP, government spending as a share of GDP is low when compared to, for example, India’s 27 per cent, China’s 34 per cent or the UK’s 38 per cent. Equally, Nigeria’s debt as a share of GDP is low at about 27 per cent when you consider that for several countries it’s well over 70 per cent.

But such comparisons are misleading because they ignore the critical issue of debt service to revenue ratio. As the IMF once pointed out, “Nigeria’s Debt/GDP ratio, at about 25 per cent, is relatively low, but debt servicing, which takes about 50 per cent of revenue, is quite high.”

Indeed, the IMF estimates that servicing the outstanding debt will gulp up about 63 per cent of the Federal Government’s revenues for 2019! A country that spends 63 per cent of its revenues on servicing debt, surely can’t have much left to spend on priority areas, such as health and education.

That was the context in which IMF advised Nigeria to broaden its revenue base “to lower the ratio of interest payments to revenue and make room for priority expenditure”. But how would Nigeria achieve this? The truth is that this country is woefully incapable of mobilising internal revenues and, on their part, the citizens are unwilling to pay taxes, lacking any moral imperative to do so, let alone the statutory obligation. As someone put it: “In Nigeria, the government pretends to tax people and people pretend to pay”!

Yet, this is a serious matter, for the statistics are staggering. According to a recent analysis, 67 million of Nigeria’s labour force of 77 million are not registered tax payers.

In 2016, just 241 people paid more than N20 million in personal income taxes, as reported by the Ministry of Finance. Indeed, Dr. Tunde Fowler, the executive chairman of the Federal Inland Revenue Service, RIRS, was quoted in one newspaper as saying that “over 6,772 billionaires don’t pay tax”. Less than six per cent of registered taxpayers are active in the corporate income tax category, and Nigeria raises less than one per cent of GDP in VAT revenue, according to the IMF.

With such an abysmally low revenue mobilisation, with a tax-to-GDP ratio of just six per cent, the worst in Africa, Nigeria certainly lacks the wherewithal to achieve accelerated growth and develop state capacity. Which is why it is ludicrous that the Buhari government is talking about raising the VAT rate by 50 per cent and introducing new taxes when there are acute weaknesses in the tax administration system, as well as the problem of systemic non-compliance.

But there is systemic non-compliance because government lacks legitimacy in the eyes of the people. That lack of legitimacy stems from the woeful failure of successive Nigerian governments to meet the basic needs of the people. Nigerians literally have to look after themselves.

Think of it: nearly 50 per cent of Nigerians have no access to electricity; only 29 per cent have access to sanitation; over 90 million of the people live in extreme poverty; two-thirds of the world’s hungriest people live in Nigeria and seven other countries, and Nigerians are the sixth most miserable people in the world. Truth is, there is no social contract in Nigeria; instead, what exists is deep distrust between government and citizens,which, of course, breeds systemic non-compliance.

Nigeria is in a deep fiscal quagmire yet faces a serious tax conundrum: it lacks the capacity to administer taxes and, more worryingly, the legitimacy to induce voluntary compliance.

Kindly Share This Story:
All rights reserved. This material and any other digital content on this platform may not be reproduced, published, broadcast, written or distributed in full or in part, without written permission from VANGUARD NEWS.


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.
Do NOT follow this link or you will be banned from the site!