Ekpo: FG Must Bring in More People into the Tax Net

0

Prof Akpan Ekpo was until last December, the Director General of the West African Institute for Financial and Economic Management. He was a former Vice-Chancellor of the University of Uyo as well as a former member of the Monetary Policy Committee. In this interview, Ekpo, who presently is the Executive Chairman, Foundation for Economic Research and Training, advises whoever wins the rescheduled presidential election expected to hold this weekend, to pay greater attention to the economy. Obinna Chima presents the excerpts:

We are in the eve of a presidential election and there is so much concern about the economy. Irrespective of the election outcome, what do you think is required to grow the economy?

I think the economy in the past has had a lot of hiccups, there was a recession in 2016, we got out of the recession, the government gave an Economic Recovery and Growth Plan (ERGP), which is not really a plan, but a medium-term framework to restore growth. I hope that any party that wins will concentrate on the economy.  What do I mean by that? Concentrate on ensuring that 80 per cent of Nigerians can enjoy the resources of the country. To do that, they must develop infrastructure like power, quality education, quality health delivery system and so forth. When an economy does that, then such an economy is on the right path, because you can be growing and not be developed. China grew double-digit years back and sustained it to move 700 million Chinese out of poverty. And Nigeria has the resources to do that. So, any government that comes in must begin to focus on Nigerians. In fact, the ERGP has it, but they have not done it to a satisfactory level. They call it investing in people, they must invest in Nigerians. Because even if you build railways, people still have to man those things. Then, any government that wins must be strategic, in moving the country forward. What do I mean by that? First it must have a comprehensive economic plan, lets say 20 to 25 years, which will be passed into law so that no new government can come in and truncate it. That was how the Asian countries were developed. That happened in some years back when we had Vision 2020, but it was abandoned. So, whoever wins the election, whichever party that wins, the economy should be the main focus and that focus should be on basic needs. Give Nigerians power and they will pay for it, give them water, good roads, education good health system and other things will follow. But if you are growing and the growth is showing positive signs and these basic infrastructure are not available, then you have not done anything.

You talked about aggressively driving economic growth and provision of infrastructure, as you are aware, these things require fund to put them in place. How can the government raise the required revenue?

You know the Nigerian government’s revenue is dependent on the oil sector and I call the oil revenue exogenous revenue because you have no control over the price and you are not even in control of the output. You can’t use that to finance long-term development. You should see it as a windfall and use it as such, as they did in Norway. We have not done that over the years. So we must diversify the economy into other areas so that we can earn foreign exchange from other sources outside the oil sector. Another way of making money is to look at the tax structure. I am not saying we should increase tax rate, but we need to bring more people into the tax net. A lot of Nigerians who are wealthy or rich don’t pay tax, you have to bring them into the tax net.  Then you have to tax luxury goods heavily. For example, if you go to Abuja and Lagos airports, the number of private jets that you see, they should pay tax.  Then also you look at some government owned enterprises, and here, I am not saying privatise them, I will prefer the word commercialise them. In other words, let those companies be managed by private sector people with government still holding substantial shares.  If you have to privatise them, let it be open, and not secretly done, so that anybody can buy shares. Thirdly, people will not like to hear this, our Value Added Tax (VAT) rate is the lowest in the world. If you tinker with VAT to even 6.5 per cent, that will generate a lot of revenue. So, those are the areas, because right now the government needs liquidity to do a lot of things. But, let me say that it is good to tax because like I said, Nigeria’s tax to Gross Domestic Product (GDP) ratio is one of the lowest. But there is a limit to taxation, you have to have service delivery, I pay tax because I get service. If people are not happy about the service delivery they will not pay tax, except those who are working and they don’t have a choice. Again you can generate more tax by looking at people who are employed, if employment increases, people will work and they will pay tax. When you have a high unemployment figure, it means that a lot of the youths are unemployed. That is a serious problem because you are losing tax from that. The next thing will be how will the government create employment? Nigerian cities are the least policed in the world, if you employ a lot of policemen in thousands, you are creating jobs. They will police the citizens, they will earn salaries and they will pay tax. So the government has to think of how to do it.

 

 

You mentioned power as one of the things that anybody that wins the election has to focus on. Looking at how far we have gone with the power sector reform and we are still without regular power supply, what do you think can be done to have an improved power supply?

Well, I will like to disappoint you in two or three issues. Firstly, power in the last one year has improved marginally compared to previous years. But the problem with it is that the Nigerian elites are not interested in the power sector. The way they unbundled the existing government plans was not transparent enough. They sold it to their own cronies. All over the world, we know companies that can give us power and we ought to have invited them during the power sales because they have the expertise. Nigeria has all the ingredient for us to have power supply, how come we don’t have? Again, state capture. How come everyday people are setting up generator companies to sell generators?  They are not interested in the power because it is a struggle. If power is there 24 hours, those guys would no longer be in business. You call it power reform, but I don’t think there was any reform. For example, if you are selling any asset, you sell both the assets and the liabilities. Now, you bought a power plant, you did your arithmetic very well before acquiring the assets, all of a sudden the company said that they didn’t know gas would be a problem. Instead of the government saying that you have bought it, you should go and fix, they started bailing them out again. I was the chairman of Akwa Ibom State Investment Council for almost eight years, so I know what I am talking about.  When you sell a government asset, you set a limit, say if after 5 years we don’t see any improvement, we will take back the asset. Rather than doing that, the central bank went again to give them another money in form of support.

 

(cuts in)…But in the power sector agreement there is the clause that allows government to repossess the assets?

 

Have they implemented it?  The power sector is already in crisis. Why not get known companies to come and fix this thing. It might not be in one year, but at least they will be honest. The unemployment we talked about earlier is tied to the power sector. Britain, Germany, US, they all run 24 hours power supply, so factories run three shifts and by doing that they create jobs. In Nigeria, here a factory that runs power for eight hours on national grid is very lucky. So, power is crucial and we said from the onset that if you increase power by just one per cent, the GDP will grow by 3.5 per cent. So, the power assets were sold to their cronies. I thought this government would revisit that process because the people they sold these things were not experts. The only person who understood this thing was even removed from government- Barth Nnaji. His own company understood the power sector challenges very well, but they removed him because of the issues he was raising. So, you need a government that will fix power. No country develops by being defined as a generator-driving economy. If you go to Ikoyi, Victoria Island and Lekki, all in Lagos, they are all running generator. It doesn’t work that way.

 

You earlier said the government needs liquidity. Are you advising them to keep borrowing considering the rising debt and the huge amount of money being spent to service debts?

 

 Let me say that generally, there is nothing wrong in borrowing if you borrow to finance capital projects that will pay its way. For Nigeria, they have been borrowing into a pool and we don’t know whether the money is for recurrent or for capital. And it didn’t start with the All Progressives Congress (APC), all the other governments were doing it. Our debt service is very high, it is rising all the time, which is not too good. But if you take debt service to GDP ratio, it is low. And why is it low? It was because we rebased our GDP. We rebased the GDP and the denominator was very large. So, if you divide the denominator, you will have enough space to keep doing what you are doing. Do we have the capacity to manage the debt? At the national level they have, at the state level, they don’t have because states’ debts are also increasing. For me, I always argue that with our external reserves, we should reduce our foreign borrowing drastically and use our external reserves to finance infrastructure. The government will not agree with me on this. That is why I tell them always to compute debt to revenue ratio and not debt to GDP, because GDP does not pay debt, but revenue does. If they compute debt to revenue ratio, it will show that almost all our revenues go to paying debt. They don’t like doing that. The International Monetary Fund does it.

If revenue is the denominator and revenue fluctuates because of oil, if you are not so sure of your revenue source, so what they do now is that you do both now. That is, you compute debt-to-GDP and debt-to-revenue.

 

Considering developments in the global economy, the US-China trade war, Brexit among others, what should be the structure of monetary policy in Nigeria today?

 I think the global environment is important like the US-China relationship. What they are doing now is very crucial. I always argue that no country wins a trade war. China is a world power whether we like it or not. So if both sides’ tariffs go up as they are going up, it will affect us.

But are we ready for the likely impact of what is playing out in the global environment?  So, monetary policy will depend on several things – the exchange rate, the growth of the economy and what we call the macro-fundamentals. If you watch in Nigeria, monetary policy has virtually been the only policy that has been making noise, that is my view, and I might be wrong. And there is still tightening the monetary policy rate (MPR) has not changed for many years. Is that good or bad? The central bank might have its reasons, but for me as an outsider looking at what they are doing, the MPR is supposed to be an anchor rate to have impact on the lending rate. But today, it doesn’t have impact on lending rate. The average lending rate today is about 25 per cent. The MPR has impact on interbank rate somehow and then the cash reserve requirement has virtually remained the same. But I think the CBN has kept monetary policy tight so as not to temper with the exchange rate. For inflation, at 11.37 per cent, it is not bad for our economy. Any country should know its benchmark. You can have inflation of 50 per cent and still be doing well. Some countries even induce inflation in other to stimulate growth. So, for me, monetary policy should be loosened since the economy has recovered from recession and we are on a growth trajectory. This is now the time to loosen monetary policy to stimulate growth, by working with fiscal policy. In other words, I wish the CBN will not continue to tighten monetary policy.

So, there should be coordination between monetary and fiscal policy. The MPC usually has representative from the Ministry of Finance, which should be the case. Right now, the central bank is even doing fiscal policy. So, there should be coordination between the fiscal and monetary authorities to enhance growth. And then the exchange rate as well. I always ask the question, since it is stable at N360 to a dollar, what about the official rate of N305 and an investors and exporters’ window of about N362 and there are some other rates. Now, must they converge? Some say yes and some say no. My position is, even if we have a stable exchange rate is that good enough for the Nigerian economy? Stability means that there is a form of market equilibrium. But is it good enough for a country like Nigeria? My argument is also based on the fact that the naira itself is not a convertible currency. So, would we do better if the exchange rate stabilises at a lower level? Because I don’t believe in a market-determined exchange rate for an economy like Nigeria. So those are the issues that the CBN has to look at. So far they have done their best because the oil price has been going up and it has shown in our external reserves. But if oil price drops tomorrow, there would be some challenges. That is why I said that we should stop being an oil economy. Not really for us to stop entirely, but don’t take it too seriously because it is affecting everything that we do. What we are saying here today, people said it 60 years ago. Also, they need to know how to manage the reserves. Now they have tried by moving some to Chinese currency. But I feel that why should we keep much reserves outside when you have problem of infrastructure? Why are you borrowing too much? Use some of your reserves to do some things that you have to do. You know reserves are in dollars, if I was government, you know the CBN keeps the government earnings, I will tell the CBN to pay me my money in dollars and at N360/$.  

 

Your new book on revenue sharing formula for the three tiers of government, what is it all about and what were the recommendations?

Firstly, the book came out as an exercise that was financed by the Revenue Commission. We bided and got the job and went all over the six geo-political zones of the country, designed surveys and the zones we went to, the governors showed interest in it because they were calling for a higher revenue formula. So we went round for months and this book is one of the results of that exercise. Because you know by law, the Fiscal Commission does the exercise and give it to government and the government takes it to the House of Assembly which has the right to tinker with the revenue sharing formula. So, we went around and interesting enough, states that have resources like oil wanted more from the allocation for derivation and states that don’t have wanted us to use derivation.

So, when we went round, based on the results we got, Nigerians are closer more to the states than the federal government. So if states have more money all things being equal, they will do more in their areas of jurisdiction and the people can now monitor what they are doing. Then we saw that some states cannot raise internally generated revenue (IGR) and cannot even pay salaries. In fact, the study I did for UNDP years ago, if federal government’s allocation stops only Lagos and Kano can survive, not even Rivers State as at the time I did that work, and it has not changed much. So, we said let us enhance the states, and somehow all the states agreed that they need to have some increase. The issue now became how do we do it? Because I feel that the federal government is too strong. We have on paper a federal system but in practice it is not. The federal government is too strong. States don’t have too much powers, you wont know until you are involved. Before you do anything in state A, you need the federal government’s approval. So, part of it is to say let give them have more money so that they can do certain things. If you watch states are getting more than federal. Now, local government, by the time we did this work, you know the local government are still under state government. Now by the law of the country state governments are supposed to give some money to the local government but they don’t give. So we argued somewhere that if state government gives them what they are supposed to give them, added to what they are getting from the center they will be better off. But we counted only about six state governments that are doing it. A lot of people used to blame federal government, but you should blame the states and the federal government. In most of our local governments there is nothing happening. So that is what influenced that project. People are closer more to the states, I believe in what they call league of federation. Let us have strong states and a weak centre that is how we can build the country. The United States is a confederation of states, but all the states were already independent before they came together to form the US. In our own case we had a centre before we started forming the states, to renew tribal tension, that was all, nothing else. The more you created the states, the more tension we had. Pray that you don’t leave in a border town in Nigeria. For example, when you are going to Akwa Ibom from Cross River, have you ever seen where they erected a sign post welcoming you to Akwa Ibom or welcome to Calabar?  Because each time you do that somebody in anger destroy it. That is because to them, they are the same people. Our leaders don’t go down to look at these things, they just sit in their comfortable environment. So, government should try and implement the recommendations in the book and not just keep it on the shelf. We are lucky that the book came out when states are calling for the review of the revenue sharing formula.