That Nigeria’s debt is humongous and the economy has a revenue challenge are no longer in contest, how the country will exit the quagmire is now the concern. Kunle Aderinokun wonders if the appointment of the new chairman of the Federal Inland Revenue Service, Mr. Muhammad Nami, will make any difference
Nigeria is at a crossroads. The debt stock is burgeoning with service payment to revenue ratio trending northward and increasingly becoming more unsustainable, hence, something drastic must be done to turn the tide.
According to the Debt Management Office, the country’s total debt portfolio hit N25.701 trillion ($83.882 billion) this year’s June, out of which the states and the federal capital territory accounted for N5.276 trillion ($17.220 billion) and the remaining portion accumulated by the federal government. The external debt portion of the total debt stood at $ 27.163 billion in the review period, but by the time the recently approved $30 billion foreign loans are fully contracted, Nigeria will be burdened with $57.163 billion debt.
It expected that with the additional foreign loan, the federal government will be servicing the humongous debt with about 80 per cent of revenue. This is a significant increase from the current 58 per cent debt service. As it stands the debt service position has crowded the capital budget, leaving a very low revenue for critical infrastructure development, thereby stunting economic growth.
However, the federal government through the DMO has said most of its new loans were taken from China and the World Bank and were contracted at discretionary interest rates with long years of moratorium. Besides, the debt office said at the current level, the country’s debt stock is sustainable.
But the International Monetary Fund has cautioned Nigeria alongside other African countries against rising level of indebtedness to China, saying the non-Paris Club creditors, “create some instability or some vulnerabilities.”
The Financial Counsellor and Director, Monetary and Capital Market Department, IMF, Tobias Adrian, said this during a media briefing on the Global Financial Stability Report (GFSR) at this year’s IMF/World Bank annual meetings in Washington DC.
Adrian, who responded to a question on the elevated external debt levels in Nigeria and whether the federal government should shift to more of domestic borrowing, Adrian said: “Both domestic and external debt markets are important for economic growth and development and both markets should be well developed; but of course, any borrowing has to be managed in a responsible manner. There are both costs and benefits.
“So, borrowing can be helpful for economic growth and investment, but it can also be dangerous when negative shocks arise. So, we have done a lot of work in the IMF on debt sustainability and debt management and we have a host of recommendations of how to manage debt in a responsible manner.”
There is no gainsaying the fact the nation’s debt situation has left the economy in a precarious situation, especially with low revenue, making the recovery pace of the economy, which recently exited recession, slow.
The IMF, in a report after the conclusion of its staff’s visit to Nigeria early October, alluded to this. According to the Bretton Woods institution, the pace of economic recovery remains slow, as depressed private consumption and investors’ wait-and-see attitude kept growth in the first half of the year at 2 percent, a rate significantly below population growth. Headline inflation has fallen, reaching its lowest level since January 2016, helped by lower food price inflation.
“Spurred by one-off increases in imports, the current account turned into a deficit in the first half of 2019 after three years of surpluses. Gross international reserves have fallen to below $42 billion at end-August 2019, mainly reflecting a decline in foreign holdings of short-term securities and equity. The exchange rate in various windows remained stable, helped by steady sales of foreign exchange by the Central Bank of Nigeria (CBN).
“Carryover from 2018 to 2019 helped increase public investment spending in the first half of 2019, but revenue underperformed significantly relative to the budget target in the first half of 2019. Over-optimistic revenue projections have led to higher financing needs than initially envisaged, resulting in overreliance on expensive borrowing from the CBN to finance the fiscal deficit. Federal Government interest payments continue to absorb more than half of revenues in 2019,” IMF stated
To further appreciate Nigeria’s current economic situation, few days ago, Moody’s Investors Service, one of the global credit rating agencies, in its report, changed its outlook on country’s ratings to negative from stable.
It explained: “Already weak government finances will likely weaken further given an extremely narrow revenue base and persistently sluggish growth that hinders fiscal consolidation.
“As pressures mount, there is a risk that the government resorts to increasingly opaque and costly options to finance a moderate but rising debt burden.
“Moreover, vulnerability to an adverse change in capital flows is building in light of Nigeria’s increasing reliance on foreign investors to fund the country’s foreign exchange reserves.”
The Finance Minister, Budget and National Planning, Mrs. Zainab Ahmed, just like her predecessor, Mrs. Kemi Adeosun, insists Nigeria does not have a debt problem, but a revenue challenge.
“We have heard repeatedly that Nigeria is inching towards a debt crisis and we have consistently said that Nigeria does not have a debt crisis. Our total borrowing rate is just under 50 per cent of our GDP, while the multilateral institutions project for a country to borrow from 50 to 55 per cent of the Gross Domestic Product (GDP).
“What we have, is a revenue problem. Our revenue performance by half year is 58 per cent. So, we have designed this Strategic Revenue Growth Initiative early this year, which has three thematic areas,” noted Ahmed, recently.
According to government, Nigeria’s tax to GDP ratio is 6 per cent, which is the lowest in the world. Oil revenue, which accounts for a major lifeline for the economy is not reliable and can no longer sustain the economy, hence the need to expand tax revenue.
Realising the ensuing economic challenges and the dire need for adequate revenue to buoy the economy, the federal government proposed a Finance Bill and in October, submitted same to the National Assembly, which graciously passed it. But the bill currently awaits President Muhammadu Buhari’s assent. The finance bill seeks to establish practical measures to generate additional revenues for the government to partly finance the deficit in the 2020 Budget. To achieve these, the bill sought to amend various tax laws in the country.
The bill proposes fiscal measures in support of the 2020 Budget of the federal government, with extensive tax implications for the country. With a total proposed expenditure of N10.33 trillion against total expected revenue of N8.15 trillion, resulting in a deficit of N2.18 trillion. The 2020 Budget is projected to be financed partly by tax revenues expected to be generated through the key fiscal changes introduced by the bill.
The bill contains notable changes to the Companies Income Tax Act, Value Added Tax (VAT) Act, Petroleum Profits Tax Act (PPTA), Personal Income Tax Act, Capital Gains Tax Act (CGTA), Customs and Excise Tariff Etc. (Consolidation) Act and Stamp Duties Act.
For 2019 budget, the federal government appropriated N8.92 trillion, out of which N6.319 trillion was allocated to recurrent expenditure with the remaining N2.094 trillion for capital expenditure. Of the N6.319 trillion recurrent expenditure, debt service gulped N2.254 trillion. As at June 30, 2019, a total N3.39 trillion had been spent.
According to Ahmed, minister of finance, budget and national planning, as at half-year, the federal government’s actual aggregate revenue was N2.04 trillion, which is 58 percent of the pro rata target. This includes, oil revenue of N900 billion (49per cent performance); company Income Tax (CIT) of N349.11 billion (86per cent performance); value added Tax (VAT) of N81.36 billion (71per cent performance); and customs collections of N184.10 billion (100.47per cent performance).
She explained that the overall revenue performance is only 58 percent of the target in the 2019 Budget largely because some one-off items such as the N710 billion from oil joint venture asset restructuring and N320 billion from revision of the oil production sharing contract legislation/terms are yet to be actualized. Fiscal deductions by NNPC for federally funded projects also exceeded target.
As at the end of 2018, FIRS made a collection of N5.3 trillion, out of which Ahmed said the federal government gave N1.9 trillion budget support to states.
That is why all eyes are on the new Chairman of the Federal Inland Revenue Service, Mr. Muhammad Nami, to fulfill the objectives of the finance bill.
Although relatively unknown, Nami, who replaced Mr. Babatunde Fowler, is expected to implement the far-reaching measures outlined in the finance bill with a view to generating adequate revenue and up the ante. This will be necessary to assuage the prevailing unfortunate economic situation, where a large portion of recurrent expenditure are dedicated to debt servicing. Given the huge task before them, Nami and his team must not be told to hit the ground running; there is not time to wait.
A tax expert and Head of Tax and Corporate Advisory Services at PwC Nigeria, Mr. Taiwo Oyedele, said, “The new FIRS leadership needs to build on the gains that have been made so far especially in the area of tax awareness, better coordination with sub-national levels through the Joint Tax Board and the various initiatives to digitalise tax compliance.”
According to him, the immediate priority for the new FIRS Chairman and Board should be how to build capacity to implement the Nigeria Tax and Fiscal Law (amendment) Bill otherwise known as the Finance Bill which seeks to amend seven different tax laws and expected to take effect from January 2020.
“Other key areas of focus should include effective and efficient tax administration beyond mere tax collection. This should be measured by concrete improvements in the ease of paying taxes index, ensuring robust and transparent reporting of tax revenue generation and expansion of the tax net,” he added.
In his own view, an economist and CEO, Global Analytics Derivatives, Mr. Tope Fasua, said, “Going by his past visibility or lack of one, it is easy to despair that he may get overwhelmed by the enormity of the task, and therefore not set large targets for his team. But many times we have seen people come in from the cold and work wonders.”
Fasua believed, “The Finance Bill gives Mr. Nami a template to work with,” saying, “The idea of a finance bill should be made a permanent feature of our budgets going forward. “
Specifically, the chief executive, noted: “Mr. Nami on his own part at FIRS should ensure he broadens the tax net to include many Nigerians who are otherwise disillusioned. He should also set ambitious target beyond the N8.5trillion that his predecessor set for 2020. FIRS should be targeting N15trillion by 2021. It can be done, especially if he revisits many of the moribund tax lines that for political reasons have been neglected such as luxury tax, carbon tax, some aspects of capital gains tax, and excise duties on goods such as alcohol and cigarettes, which have seen a push back from manufacturers.”
“Mr Nami should be very diplomatic and communicative and be able to paint a vivid picture of what these stakeholders stand to gain to improve their businesses and livelihoods in order to be successful,” he however added.
Before his appointment, Nami was a tax consultant. He comes with qualifications and professional practice as well as licences from relevant professional bodies. According to a statement signed by the Senior Special Assistant, Media and Publicity to the President, Malam Garba Shehu, the new FIRS boss is armed with almost three decades of practical work experience in auditing, tax management and advisory and management services to clients in the banking, manufacturing, services and public sectors as well as non-profit organisations.
Director, Union Capital Market Ltd, Mr. Egie Akpata, is of the opinion that the new FIRS Chairman is coming into the role at a very challenging time for Federal Government finances.
“Given the macroeconomic indices, it would be difficult for the FIRS to meet its short term revenue targets. It is important to realise that FIRS does not collect personal income taxes which is left to the states. In an economy dominated by the informal sector and SMEs, it is hard to see where the increase in FIRS revenue is expected to come from. Tax paying corporates are already overburdened by a 32 per cent marginal tax rate, which is very high on a global scale. So there is no room to increase the corporate tax rate. 2.5 per cent GDP growth is unlikely to produce incremental taxes from the existing tax compliant companies,” he said.
Akpata believed the FIRS would need to significantly increase the number of tax paying companies.
According to him, the use of technology and banking information could help bring more companies into the tax net. Also, a much larger workforce would be needed by the FIRS to properly track down these tax defaulters, he noted.
Akpata, however, suggested that, if the FIRS wants to radically change their income profile, something radical needs to be done. “A lower corporate tax rate should be considered to encourage other non-tax payers to become compliant. The current 32 per cent rate is high enough to discourage businesses from complying,” he stated.