The Vice Chairman, Alpha African Advisory and former Chief Executive Officer of the Asset Management Corporation of Nigeria, Mr. Mustafa Chike-Obi, who was the guest speaker at a recent forum organised by the Finance Correspondents Association of Nigeria in Lagos, urged the federal government to implement policies that would enable the country achieve sustainable growth and address its revenue challenges. Nume Ekeghe presents the excerpts:
What do you think the federal government can do to raise the kind of revenue the country needs to develop?
I can comfortably say that the ability of Nigeria to borrow more money is limited. The reason being that when you borrow money it is not just the size of the debt that matters, but how you service the debt. Having enough revenue to pay back the debt is more valuable than the debt itself. For instance an individual that is wealthy enough to payback a billion, like Dangote can service a debt. The reason why this is the case and why we should not be using Gross Domestic Product (GDP) to dept ratio that some people are saying is not so high is because everything that is related to our GDP is low.
Our tax revenue to GDP is one of the lowest in the world and also revenue to GDP. So now, the way to achieve a sustainable economical development is to strategically start servicing those debts and now I can say we have exceeded those numbers as it has grown from about 35 per cent, percent to about 70 per cent presently. A past Minister of Finance said she was saving the country money by borrowing in dollars and that she has been able to save us some amount of revenue.
But I wonder if the people that are lending to us at eight per cent that some people believe is cheap instead of 16 percent, are they also not gaining because if they lend it to us in naira at 16 per cent that would be better for the development of our own economy compared to what we are experiencing presently. The reason for them lending the money at eight per cent instead of 16 per cent is that they know that by the time the money matures, if it was at 16 per cent, the dollar would not be worth as much as N350. This means that we are not saving money; instead since 1970 the naira has depreciated by approximately 50 per cent to the dollar every five years.
So how are we saving money when the dollar keeps rising? Using guarantees as the method for acquiring debts should be applied instead of straight debts. That is, if you want to build a road and you meet the federal government and they borrow you the money based on an agreement that you provide 20 per cent of the capital, while they provide 80 per cent, and if the project fails you lose your 20 percent and they pay off the 80 per cent with your guarantee.
That way you can get funding from everybody in the world. The federal government’s guarantee to GDP presently is 10 per cent; I suggest we move it to 60 per cent. In the US it is about 84 per cent. If we boost it to 60 per cent within the next five years we would generate N30 trillion in funds. It requires federal government guarantee agencies, it requires having guidelines for every guarantee that is issued, it also requires having someone to monitor that the guarantees are on the right things so as to generate profit and grow the economy. It has to be monitored and properly structured. That is how we can generate the type of funds we need for the sustainable development of our economy, removing the subsidy guarantees while creating an environment that is profitable for every form of investors are the ways we can generate enough funds.
But we have seen the country’s external reserves grow steadily, don’t you think that will help to support the economy?
External reserves are not savings, they have been spent. The only way you can spend that reserve is by giving the government naira they owe and they give the CBN dollars. So, it is not savings that Nigeria can spend in the future, because the money has been spent. The only value to Nigeria is that we can use it to buy foreign goods and with that you will still need to give them naira. So, the CBN cannot use it to buy anything because they do not have it. The external reserves is not something the government can use to build roads or industries because they have spent it already. So in every reserve you see in CBN’s books there is a corresponding naira liability on the books.
What type of relationship do you advise should exist between the monetary and fiscal authorities to achieve the desired economic growth?
In the previous and present administration the monetary and fiscal administration did not work in sync. The fiscal people always want to spend more money whilst the monetary people usually want to rein in spending because they want to keep inflation down and the exchange rate stable, so there is a clash. So I recommend that the CBN Governor should be a cabinet level position. Also the CBN Governor and the Minister of Finance should meet formally, at least once every two weeks, to make sure they are in alignment and every month, the CBN Governor, Minister of Budget and Planning and the revenue mobilisation agencies should meet with the Vice President every month to make sure everybody is in sync; and then that group should meet with the President once in three months to make sure everyone is on the same page.
Also the president should present a score card twice a year to National Assembly. So, if the Minister of Finance says the interest rates are too high and is affecting her fiscal policy she and the CBN governor can work together to have an understanding instead of hostility. The CBN is independent, but if I were the president I would set targets like double-digit growth and request for strategic methods we can put in place to achieve it and if he or she doesn’t meet up with the target I know it is best to let such person go and find someone more capable to replace such an individual.
Earlier, you said the federal government cannot pay the minimum wage that had been approved, so does that also apply to the local and state government and don’t you think the various forms of subsidy are to support the government’s welfarism programme?
On the minimum wage, the amount of federal government employees compared to the rate of employees in the entire country is less than five percent. Federal government cannot pay it yet, the state government cannot pay it and there are more state workers than federal government workers. So, I am talking about the fact that most people that have to pay it cannot and also the process it would take for them to pay it would be till the end of the year.
Concerning welfare, one of the hardest things for people that have children is not being able to give a child what they want because you cannot afford it. You cannot give what you do not have because you cannot afford it. So, I am not happy about the removal of subsidy. I wish it was possible to give every citizen $10,000 a month, but that is not possible and even is it necessary? Is it better to have running water in a village than to have fuel subsidy? Sustainable economical growth and development is the kind of welfare we need. Concerning fuel subsidy I maintain that anyone making less than N5 million a year should get fuel subsidy.
How can the country enhance its tax revenue?
Our tax revenue to GDP is very low, while our tax rate is very high, we are one of the highest in the world at 30 per cent. If you live in Lagos state, the state government comes for you for all manner of taxes you do not know about. I think we are over taxed and over taxing an economy that is struggling is always a recipe for disaster. The way to give tax benefits in Nigeria should be, for example, if someone wants to import heavy equipment that we feel is important to Nigeria, we should not give them foreign exchange at N305 to a dollar, instead we tell them to go and buy their foreign exchange at N360 to a dollar, then when they have brought their equipment in and filed their tax return we can give them the money back.
In America there is no way you can get any money from their government except through your tax return. That is why I said with the subsidy you file your tax return and we give you your subsidy back. We must make more people pay their tax, a lot of people do not. One of the things that annoys me is the issue of allowances. Allowances are not taxed and so effective tax rate for a lot of people in Nigeria is very low. They tell you your tax is 30 per cent but by the time we have medical untaxed, furniture untaxed it ends up being eight per cent. In America there is no such thing as furniture allowance, it is only in Nigeria we have that.
Therefore we should give people higher salaries and tax them. For example, a bank MD who is earning about N60 million a year as salary, but has two or three cars and his drivers are paid based on allowance, that N60 million will end up being N200 million. Thus, what I think we should do is pay the N200 million as salary and then tax it instead of paying him N60 million and then the allowances go on taxed.
This is why I think we must start taxing allowances. When they say minister’s are making N1 million, but have a whole lot of allowances like the police guarding them, drivers and the likes; by the time they are taxed for the policemen and other allowances I do not think they would be able to have so much of that at that luxury. If they are paid N100 million a year and taxed at 30 per cent, our tax revenue would grow.
That is why I also want the head of revenue collection to be a ministerial position. Many countries adjust income rates by inflation, so if someone is making N20,000 a month, if you adjust it yearly by 10 per cent nobody would notice it. Businesses are being over taxed whilst individuals escape without paying taxes.