Aworinde: Why FG Must Expand its Tax Net

Aworinde: Why FG Must Expand its Tax Net

Dr Olalekan Aworinde is a Senior Lecturer in the Department of Economics, Pan-Atlantic University, in this interview he speaks about measures the government can adopt to shore up its revenue as well as to bring about stability in the forex market. Obinna Chima brings the excerpts:

How important is a trade policy to any nation?

When you have a trade policy, the implication is that the direction as well as the volume of your trade will go to a particular country or a particular part of the world. This has a lot of implications on the forex market. It could be that the lack of trade policy is one of the reasons why we have been seeing the continuous devaluation of the naira. If you have a trade policy in place, the implication of that is that you will be looking at a situation of export expansion; that is trying to expand your expansion. That is because it is the expansion of exports that would bring in the forex earnings. The implication is that you are likely going to see a situation where the naira is stable, if you have more goods from your country being exported to other countries, because you will be receiving dollars in exchange. This improves the dollar supply. But in Nigeria today, the reverse is the case. We now have a situation whereby we now have more imports than exports, which is one of the reasons we have the constant pressure on the naira exchange rate.

Beyond that, what other measures do you think the country can adopt to stabilise the naira exchange rate and the forex market?

Beyond the issue of trade policy, there are so many other ways to stabilise the forex market. This has to do with the expansion of exports, which is export diversification. When we say export diversification, we are saying the government should diversify into other sectors of the economy. Recently, we had a situation whereby the crude oil price nosedived and being a mono-product economy, it had severe impact on our economy. The proceeds from oil represents about 90 per cent of Nigeria’s total revenue. So, once there is a fall in crude oil price, it affects the Nigerian economy. In essence, what we are trying to say here is that the country should diversify into other sectors of the economy. Diversification could be all about encouraging SMEs to produce goods that can be exported. The country has a lot of resources.

Look at cocoa, the groundnut pyramid, and several others. So, it is essential for government to motivate cocoa farmers in the west, support the groundnut in the north and other parts of the country. So if the federal government can start exporting these goods in large quantities, you will discover that it would put a downward pressure on the foreign exchange market. Aside the issue of trying to expand domestic exports, government can also sell its foreign exchange assets and buy our own currency. In essence, being the fact that the CBN is the major advisor to the Nigerian government, what they can do is to sell some of our foreign assets and buy the currencies of those countries. Let’s say Nigeria has a lot of assets in foreign exchange, we can then try to buy the currency of that country, for example, the US dollar.

When we buy the currency of the US, you will discover that we denominate our investments in that currency, meaning that we have more dollars in our possession. So, once we have more of dollars in our possession, it would go a long way in taking away pressure from the naira. Aside from that is also the issue of the central bank, being the one controlling the monetary instruments in Nigeria, what they can also do is to increase interest rate. By increasing the interest rate, it would attract inflows into the Nigerian market. That is because potential investors would always want to go to environments where they can have higher returns. So, once there is higher returns, the implication is that it would attract more inflows of investment.

That would essence put a downward pressure on exchange rate. But the danger in this is that when you have high interest rate, it would affect domestic investors meaning that it would be difficult for them to get bank loans. Another thing they can do what I refer to as naira demonetisation. If the government can do that, it would help the naira to appreciate. And what do I mean by demonetisation, it is the act of stripping a currency unit of its status as legal tender. That is, we can the face of maybe the N10, N20 or even N50. This will dissuade the hoarding of the naira. So, once this is done and we have a situation whereby people no longer hoard the naira, you will discover that it would lead to an increase in the value of the naira. In essence, once there is demonetisation of the naira, it would curb money laundering and eliminate black money in the financial system. So, these are some of the things the government can do. Aside from that is also that they can reduce inflation, which would always have positive impact on the appreciation of the naira.

Can you shed more light on the idea of selling government’s naira assets to buy dollar assets?

I am not saying that we should move to a situation whereby there would be dollarisation of the economy. What I am referring to here is a situation whereby for example, the Nigerian government bought a lot of US government bonds; the idea is that it would automatically lead to a depreciation of the dollar against the naira. And at the end of the day what the Nigerian government can do in that case is that by the time they buy the US treasury bills, the proceeds of that transactions would be brought back to Nigeria. A lot of countries have practiced that and an example of such is China, which over the years has been practicing that. What they do is that when they buy a lot of US treasury bills, when they sell it, the proceeds from that would go to the Chinese economy, which leads to an appreciation of their currency.

So, how will the idea of demonetisation stabilise the exchange rate?

It affects the exchange rate in the sense that what people have hoarded in their homes, the implication is that it is no longer useful to them and the implication is that it is the new currency that is in place that people would now start to use. That means that what they have kept is no longer going to be useful to them. And we have been seeing a lot of countries that equally did it and it had positive effects on their naira. Ghana is an example.

Aworinde: Why FG Must Expand its Tax Net

Let me start by saying that the Eurobond is also linked to buying the currency of a foreign country in the sense that at the end of the day, you will be able to bring the proceeds of that into the Nigerian economy. That is one of the ways. Aside from that, there are different ways the government can finance its budget deficit. One of such is through government borrowing; it is either they sell government properties or it is either they print money. All of these have its own advantages and disadvantages. Of course, in terms of Nigeria’s debts, we are always being deceived. That is because when we talk about the sustainability of a debt, it is about solvency and liquidity. Emphasis has always been on the solvency without looking at the liquidity.

Solvency in the sense that if you look at the percentage of the debt to Gross Domestic Product (GDP), they would tell us that it has not gone beyond the threshold. But, when we look at how liquid is our debt, the proportion of our revenue that is linked to debt, which is the debt-to-revenue. If you look at that, you will understand that we are not liquid. Recently, we were told that more than 90 per cent of the revenue that are generated by this government is used for debt service and that is dangerous. So, the issue now is that only about three per cent is now left for us. So, what are the other things that can be used in terms of our expenditure out? So, that is the danger in the use of debts. I am not saying debt is bad, but there is a lot of danger in it if we don’t look at the liquidity aspect of it.

Now, aside the issue of debt, government can start to sell some of its properties so as to raise revenue. Of course, this will depend on the number of investments that the government has and also how appreciable are the investments. But another question is how well can it go. However, we must understand that this is a short-term alternative because you wouldn’t want to sell all your investments at once. Now, the last one which has to do with printing of money, studies have shown that when you have excess money in circulation, it would lead to an increase in the level of inflation.

So, there would be a continuous increase in the prices of goods and services. The fact there is that if the monetary sector is growing, lets by five per cent, as a result of printing new money and there is no commensurate growth in the real sector of the economy, at the end of the day it would bring about inflation. That is because the total value of goods and services that are produced would not be commensurate with the volume of money in circulation. The truth of this, I can tell you is that the only way out is for government to expand the tax net.

Tax collection remains the major revenue of the government. There are lots of people that are not taxed; Nigeria is under-taxed. Of course there some issues of double-taxation in certain cases, but I can tell you that a lot of people are under-taxed and a lot of people are evading taxes. So, if there are proper machinery in place so that people cannot evade taxes any longer, I can tell you that our borrowing will reduce drastically.

A lot of people are not paying tax to the government. And even when they pay the correct tax to the government, there is high level of corruption on the part of some tax authorities which reduces the revenue the government generates. If you look at what is happening in the polity concerning the Value Added Tax, it is as a result of the fact that revenues that these state governments receive are not enough for them and they feel they are being cheated.

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