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Removing fiscal & policy drag on Nigerian economic growth 07 Oct 2019

Ghanaian President Nana Akufo-Addo and Nigerian President Muhammadu Buhari:
two leaders pursuing contrasting strategies to grow government tax revenue

The Nigerian government has admitted it has been funding its capital projects in the past few years mainly from borrowing. It is no longer in dispute that the administration of President Muhammadu Buhari has been running a deficit budget year after year. With the administration's new drive to borrow even more, there is no end in sight for fiscal deficits in Nigeria.
    
On the one hand this may be understandable, since infrastructure investment is supposed to yield dividends in years to come. On the other hand, there has to be high and sustained economic growth for the government to be able to generate the future revenue needed to pay back the debts used in funding these infrastructure projects. But there is a disaggregated approach to economic policymaking now evident in fiscal and monetary policies that are more likely to achieve the opposite of their intended objectives and economic growth. This is a cause for my concern.

For example, I cannot see the wisdom in the administration's decision to put a squeeze on people's pockets using fiscal and monetary policy tools. Typically, increasing consumer spending is the surefire way to sustainable economic growth in any country. A reduction in consumer spending resulting from a collapse in public confidence would put a drag on the economy, sometimes leading to a recession.

The government recently announced an increase in Value Added Tax (VAT) from 5 percent to 7.2 percent. As a tool for generating revenue for the government, VAT is blunt. Nevertheless, the consumption tax does precipitate price increases across goods and services. While the country awaits the proposed VAT to take effect after the VAT Act is amended by the National Assembly, the Central Bank of Nigeria (CBN) announced a series of policy measures that will put more squeeze on the same pockets of Nigerians.

For instance, the CBN announced new charges on cash deposits and withdrawals on individual and corporate bank accounts. The apex bank also imposed new charges on individual Point of Sales (POS) transactions. Additional restrictions were placed by the CBN on access to foreign exchange for certain imported goods, whose local production is still inadequate to meet local demand. This is a situation that will lead to scarcity and increase in the prices of those goods.

Government should be thinking long-term. I understand that politicians tend to see everything from the point of view of their term in office. But economic growth has to be nurtured through long-term planning and engendered by a stable policy environment. The Buhari administration needs to reconsider its ways and policy portfolio for the economy to grow as expected.

A Regional Exemplar

In 2016, it was clear to the government of Ghana that the economy was not growing as it should and it needed to be stimulated to forestall a potential major decline. So, in 2017, the government identified the tax burden on the private sector as a contributory factor to the drag on the Ghanaian economy. Many of these taxes were placed on production of goods and services (just as in Nigeria), rather than on profit of businesses. The government then took action by abolishing and reducing various taxes in an effort to stimulate the economy.

The list of taxes that were abolished by the Ghanaian government were:
•    1 percent Special Import Levy  
•    “Kayayei” market tolls
•    17.5 percent VAT/NHIL (National Health Insurance Levy) on financial services
•    17.5 percent VAT/NHIL on selected imported medicines produced locally
•    17.5 percent VAT/NHIL on domestic airline tickets
•    Duty on imported spare parts
•    5 percent VAT/NHIL on Real estate sales and
•    Excise duty on petroleum.
    
The government also reduced corporation tax to 20 percent (from 25 percent), while the 17.5 percent VAT/NHIL was replaced with a 3 percent flat rate for traders. It also put in place tax credits and other incentives for businesses that hire young graduates from tertiary institutions. Special petroleum tax was also reduced from 17.5 percent to 15 percent.

In a remarkable turnaround, the Ghanaian fiscal deficit narrowed to 5.9 percent of Gross Domestic Product (GDP) in 2017, down from 9.3 percent in 2016. Ghana's GDP growth target for 2019 is 7.4 percent. While still contending with global pressures like any other country, the Ghanaian government has been able to stabilise the economy through a bold fiscal reform, which unlocked private sector spending to help keep the economy afloat.

In its 2019 budget, the Ghanaian government expects full-year domestic revenue collection to be GHS 57.79 billion, representing an annual growth rate of 25.5 percent over the projected outturn for 2018. This performance is expected to be driven mainly by tax revenue. It represents the dividend of effective tax reform, which stimulates private sector and consumer spending.

The Nigerian Approach

I have taken the time to show the example of Ghana; this is not because the Ghanaian economy has no challenges. Rather, my aim is to explain what is possible if consumer spending is encouraged through fiscal policy measures. In Nigeria, we are doing the opposite of what Ghana has done. Taxes are going up. Monetary policy tools deployed by the CBN are increasing the squeeze on consumer funds.

Nigeria emerged from recession in 2017, as GDP growth rate for the year reached 0.8 percent, driven mainly by the oil sector. Growth was higher in 2018 (at 1.9 percent). Economic growth is expected to hover just above 2 percent in 2019. Yet, instead of stimulating consumer spending in the economy as a way to kick-starting growth, the government seems to be doing the opposite.

Nearly a quarter of Nigeria's workforce was unemployed in the third quarter of 2018, according to data from the National Bureau of Statistics (NBS). An additional 20 percent was underemployed. The number of people in the labour force increased from 75.94 million in Q3 2015 to 90.5 million in Q3 2018. Yet, there is virtually no growth in the stock of jobs. The unemployment rate, which was 7.4 percent in Q2 2014 was 23.1 percent in Q3 2018.

These figures should call for a massive growth initiative. However, the government seems to be focused on growing its own revenue at all cost, even if it means killing the goose that lays the golden egg.

Recommendations

So, what can the government do? Some government policies can take months or even years to yield desired results. Consequently, the state of the Nigerian economy over the next 3-5 years will be determined by government policies today. Nevertheless, there are some policies that can have immediate but also long-term impact.

In my opinion, the Nigerian government (focusing on the low-hanging fruits) needs to be bold and take the following steps immediately:

1.    Reverse the proposed VAT increase: Apart from the potential inflationary effect of VAT increase, it also reduces the money in the pockets of consumers as their purchasing power is reduced. The proposed VAT increase will not stimulate spending, but contract it.

2.    CBN should slow down its heedless Cashless Policy drive: More Nigerians do not have bank accounts than those that have. Rather than squeezing the few, the CBN should first initiate banking reforms that will get more people to have bank accounts and come on-board the formal economy. Working with other agencies, the CBN should consider incentives that will grow investment in the telecommunication sector that will increase reliable mobile and broadband coverage across Nigeria before intensifying its drive to achieve a cashless economy. To this end, the CBN should:

a.    Reverse its new directive on cash deposit and withdrawal charges. Depositing cash should be made easier and encouraged.

b.    Reverse the planned introduction of charges on individual POS transactions. If the policy takes effect, it will discourage the use of POS, when the CBN should, in fact, foster a cheaper payment channel.

c.    Work with the deposit money banks to consolidate their charges (that have nothing to do with services that relate to cost of funds) into a few headings. The situation where some banks have over ten charge headings for a basic customer is unacceptable. People should be supported to keep more of their money. When they do, they will spend more. This is what will grow the economy.

3. Introduce a zero percent Welcome Tax rate for all new businesses for the first three years: With the many challenges facing start-ups in Nigeria, taxation should not become one of the problems they face. A zero-tax rate will not only encourage all new businesses to eagerly register with the government (instead of doing business underground); it will also show government is more interested in the success of new businesses than taxing them right from the start. Once captured in the tax pool, these businesses will then pay taxes in future as they grow.

4. State governments need to deal with the problem of multiple taxation and levies: The media report stating that the Lagos State Government asked a mobile cycling startup to pay a huge sum before it can operate, if it is true, is an example of how to depress private sector spending in any economy. New businesses should be encouraged and nurtured, not taxed to death by myriads of state revenue collection agencies. I will appeal to state governments to do their part in boosting private sector spending by reviewing the tax and levy regimes they operate.
    
I am sure there are plenty of other quick wins that can boost the economy and sustain economic growth. Economic growth and not taxation, is the most sustainable approach to raising government revenue as Ghana has shown. It is economic growth that increases government revenue – through more inward investments and increased tax compliance by businesses – not just ever-increasing tax rate. Moreover, incentives to increase the tax base is more effective than simply increasing the rate of taxation.
    
The government needs to reposition this economy to be productive by boosting consumer spending and improving the business climate for the private sector to thrive. As the business environment improves and more businesses are formalised, the tax base will also expand.