By Chinwendu Obienyi
The current low level of government’s tax revenue which stands at 8-9 per cent of GDP is seen largely by analysts as insufficient to meet basic public service needs of the country. According to Shubham Chaudhuri, the World Bank Country Director for Nigeria, it has become imperative for the Tinubu administration to raise more tax revenues, enhance tax administration and bring more sectors into the tax net to aid economic growth. Chaudhuri, who spoke during a live television programme monitored by Daily Sun, offered a nuanced perspective on Nigeria’s economic situation, emphasising the need for bolder reforms and focused approach by financial institutions.
He also advocated a cautious optimism about Nigeria’s economic trajectory if the outlined measures are effectively implemented.
Excerpts
World Bank’s recently published 2023 NDU tagged ““Turning the Corner: From Reforms and Renewed Hope to Results. What is in it for Nigeria?
In this latest biannual report, we appraised or applauded ongoing reforms in the economy and suggested policy actions to fully realise reform benefits. The fact that Nigeria has been in economic doldrums for a while and the basic message of the report is that bold reforms that President Tinubu and the new administration took, just in the first few weeks, have stopped a slide towards what was clearly going to be a macro fiscal crisis.
The economy, pre-reforms was sliding off a fiscal cliff into an economic crisis, with grim outlook for key indicators such as 3.0 per cent GDP growth, 23.0 per cent average inflation, 6.0 per cent fiscal deficit to GDP, and 182.0 per cent debt servicing to revenue ratio by 2025.
But right now, the post-reforms, (including petrol subsidy removal, FX segments unification, removal of FX restriction on 43-items, enhancement of monetary transmission, among others) are now projected to improve the aforementioned macroeconomic indicators to 3.7 per cent GDP growth, 19.6 per cent average inflation, 3.7 per cent fiscal deficit to GDP, and 51.0 per cent debt serving to revenue by 2025 and so that is the turnaround that we were applauding.
We still think that Nigeria still has a long way to go in realising its full potential. If your body undergoes emergency surgery, however, it sometimes takes courage to take that step because it is going to be painful. That step of doing emergency surgery is essentially what we see as the reforms were taken. It took courage to do that, and it has been painful. I mean, any time after surgery, it hurts and so you need relief. So I think the government is providing relief. We certainly stand ready to support the provision of further relief, then begin the slow journey towards recovery and that requires a kind of sticking with this too as you know, patients have to participate in their own kind of recovery process, you know, do the painful therapy, etc. Nigeria needs to stick with the path that the President kind of embarked on instead of saying it is becoming too painful and stop because then all of the pain will have been for nothing.
Accountable leadership
I think the government should do its part. I mean, elected officials, the political leaders to do their part of course is natural and that, you know, it is absolutely right. That citizens should hold their elected leaders accountable. That is good. But I do want to emphasise that this is part of an overall process of improving the quality of public spending in Nigeria. I was at the National Council of Health meeting in Ekiti last month. Nigeria spends really small amounts on health and also most Nigerians have to pay out of pocket up to 80 per cent of their medical spending, healthcare spending comes out of pocket instead of being helped by the governor.
Part of the problem is that Nigeria needs to spend more but the point I made was that even the funds that are going towards health right now and if we look at the federal budget or the state budget, there is so much room for improvement.
There are other countries that do not spend that much more on health, and yet the health outcomes are much better. So I think this basic issue of how can the government spend better, how can citizens and all stakeholders hold government officials and elected officials accountable? Absolutely. That’s part of a robust thriving democracy.
Okay, on the specifics of individual budget items, I’m not qualified to comment. But I would like to say keep in mind the big picture where are the big buckets of spending, and this is going and is that being spent one this is why we made we were like a broken record in terms of the fuel subsidy and that was the biggest bucket of spending and we kept asking, Is this really how Nigeria wishes to spend?, To eliminate structural barriers, then this administration has to provide detailed plans to improve power and transport infrastructure, public service delivery, security, business environment, and trade liberalizing policies that minimises tariff, logistical and procedural bottlenecks.
Subsidies
I want to make one thing clear. I think more than anything else. We see our role as just putting the data, facts and clarify what the situation is. The choice is always to be absolutely clear with Nigeria with Nigeria’s leaders, but ultimately with Nigeria is the people right? What we were pointing out, is that if you just do back of the envelope kind of estimates based on information that everyone has available, what is the official exchange rate, what is the global price, dollar price of gasoline, what is the parallel exchange rate? Right now? What would be the landing cost of petroleum and then you compare that to what you see as PMS is being sold at retail. So we were saying, look, there seems to be a gap, you said one thing, the subsidy never, actually, let me correct that as well.
The change that happened in June or May 29 was real when the price was N195/litre and went up to N550/litre. Almost overnight. That was real and that was fiscal resources, public monies, naira, billions, trillions actually of naira that was not really clear on where these monies were going into.
We think that right now, petrol pump prices below N751/litre indicates incomplete subsidy reforms. Now, the real deal is as the naira depreciates, the Naira cost of importing PMS will go up. Well, it depends a bit on what is happening with global oil prices petroleum prices, but that is all we were doing is pointing out that look that this subsidy might be re-emerging and more than anything else, it is just pointing it out so there can be a discussion about it. I mean, I have seen some newspaper headlines saying all sorts that we were proposing something like that, but what we were doing is pointing it out and what we were trying to do is contribute to a better informed public discourse. Hence, we think that there has to be regular publication of information which explains prices at the pump to ensure the subsidy is not reinstated, raise non-oil revenue, improve transparency of the NNPC with regards to profits and oil revenues to be remitted to the Federation Account, enhance tax system and introduce a simple turnover tax on SMEs at state level instead of various existing fees and levies, among others.
Widening the tax net and increasing taxes
At the launch of the report recently, the Honorable Minister of Finance, Wale Edun made the point that Nigeria needs to raise tax revenues, but the bulk of it should be by enhancing tax administration, bringing more people to more parts of the economy into the tax net. But that said, Nigeria kind of needs to raise revenues by lots. Its federation revenue has not improved as expected, despite oil windfalls, due to large deductions and underwhelming gains from subsidy removal.
Let me give you an example are typically back of the rule of thumb as to how much revenue a country needs to take in public government revenues in order to do the basic functions such as law and order, security, health care, rural roads, electricity, etc, it is about somewhere between 15 to 20 per cent of GDP size of the economy. In Nigeria, it is right now even after the removal of subsidies, it is about between 8 and 9 per cent of GDP, which means you are going from 8-9 per cent and that, by the way, is the lowest in the world. So it should not be that much of a surprise that many government services that citizens hope for and expect are not there. So there is quite a substantial gap that has to be made up and right now, Nigeria’s tax rates are very low. For example, countries in Sub Saharan Africa have high rates of taxes. Countries in the region, like VAT rates, in some cases excise taxes and as a result, their government revenues are also much more so I think, yes, improving tax administration and improving the efficiency of tax collection is the way to go. That is a big part of the agenda. But by itself, that won’t be enough.
Tax evasion
That’s completely understandable. So if people do not have that basic confidence that the taxes that they pay will not be used in a way that them or the economy, society will benefit, then they are going to be much more reluctant to pay and so it is something that has to be worked on both sides (FG and tax authorities). If you are collecting revenues, they also have to work on making sure those revenues are spent on providing the basic infrastructural needs of the people.
Right now, Nigeria, is what I would call a very low level equilibrium, which is where there isn’t the trust and so people are not willing to pay taxes and therefore the government even if it wanted to, is unable to provide the kinds of services, infrastructure that Nigeria needs. It is not going to be easy but it has to be a conscious effort between the FG and the masses. I can only suggest that the media, civil society groups should help in restoring this level of trust in its citizens because revenues are needed and they have to know that these revenues are spent better.
No more CBN intervention funds
We are happy with the new leadership of the CBN. One of the basic principles of economics and then I think just it is common sense is that if you have an agency or team that is set up to do X, then let it focus on doing X and doing it well and whoever is set up or in the best place to do Y should focus on doing Y. and in fact, The CBN Governor, Olayemi Cardoso has reiterated that the bank is focusing on price stability and we have to kind of spend all our attention, time and efforts on that. On these other schemes, what I call Quasi-fiscal schemes or developing interventions, they may be needed. But it is not the central bank’s qualification to take on that role. If they are needed.
They should be done properly, there should be accountability, transparency around them, and whichever part of government should take that on, should do so and so in that sense, we could not agree more. Central banks all around the world have a core function and that is price stability, and right now you know, with year-on-year (y/y) inflation in its high 20s, that is more than enough pressures on the Naira and also restoring confidence in the naira is challenging enough and so it was wonderful to hear the CBN restate its focus.
CBN’s fight against inflation and shoring up the value of Naira
If you think about what is driving the inflation rate higher and higher in Nigeria, some of it has to do with just how much money is circulating. So one part of that is the growth of money supply and the fact that the Central bank was de-facto financing the fiscal deficit of the government through the famous Ways and Means.
So if you have money in the economy that is circulating and not enough is being produced, that is going to increase prices of goods and services.
Secondly, if you go back to August of 2019, when the borders were closed, okay? Just look at the inflation series, there was an uptick as goods were flowing in, Nigeria right at that point, could not meet the demand from domestic supply and so one could actually see inflation proceeding upwards. Obviously, as the naira has depreciated. That has hurt the economy and increased prices because so many items are imported.
So in that sense, again, the Central bank’s focus on restoring confidence in the naira, getting inflation down, making sure that there is no need for recourse to Ways and Means, and tighter monetary policy is applauded. The governor mentioned open market operations as a tool and we hope this will play out in a positive way. Again, we think that there might be some short term pain but as inflation comes under control, the pressures on the naira will come down and then overall prices will keep increasing but not at the rates we currently see and incomes can keep pace.
This will help the value of the Naira and that is the link happening domestically in terms of the stance of the CBN.
If the CBN can successfully get a firm grip on inflation, that may be part of what it will take to restore confidence in the Naira.