A long haul over non-oil revenue collection
We all know that the FGN’s total spending is low because its revenue collection is poor and because it is fiscally responsible. The fiscal stimulus in this year’s budget, finally signed off last week, is not great. Total spending is projected at N7.44trn, equivalent to 6.7% of forecast GDP for the year. This would support the recovery from recession this year, and probably be the largest single element in the process, but would not amount to take-off.
Federally collected revenue last year of N5.68trn represented 5.6% of GDP. This was a decline of N1.23trn on the previous year, for which sabotage in the Niger Delta was largely responsible. Within a regional context, the performance was pitiful. The country data for 2016 in the African Economic Outlook 2017 shows grants, which we take to be “free” donor support, and revenue as a percentage of GDP. Nigeria’s 9.0 per cent compares with 18.7 per cent in Kenya, 20.1 per cent in Ghana and 21.2 per cent for the continent as a whole.
Perhaps the most telling figure is a ratio of 24.0 per cent for Angola, an economy with a non-oil sector a fraction of the size of Nigeria’s. Could it be that the oil majors are getting a rather better deal than they let on? (The outlook is a joint publication of the African Development Bank, the UN Development Programme and the OECD. As these publications go, it is clearly written and relatively free of impenetrable jargon.)
Our focus is on non-oil revenue collection because it is inseparable from the policy of economic diversification. While it yielded more revenue than the oil economy last year (N2.99trn vs N2.69trn) because of the pick-up in sabotage, it is very low. The take represented 2.9 per cent of GDP. The non-oil economy accounted for 93.6 per cent of GDP at current basic prices in 2015 according to the National Bureau of Statistics. Even when we allow for the informal sector, which the bureau estimated at 41.4 per cent of GDP, we have a sizeable mismatch between the productive, tax-paying non-oil base of the economy and the collection of revenue from it.
The FGN has long and short term solutions. Within the long term approach, which we endorse, it is to recruit 7,500 graduates as what are termed community tax liaison officers to educate the population on the tax system and its obligations. We could be sniffy and query the impact of young Nigerians carrying clipboards and looking lost in public markets. Rather, we think that it addresses a major oversight on the part of government, namely extending the culture of paying tax.
It will be a challenge for the graduates. People are happier to pay tax if they identify some benefits in return. Those benefits tend to require public money and the FGN is looking to boost the tax take before incurring the expenditure. The graduates will be paid a monthly salary and unspecified “performance-related incentives” for enrolment. We hope that these are generous and so underpin the target of increasing the number of taxpayers from 14 million to 17 million within two years.
As for the short-term solutions, the FGN has several in play. It has banned ministries, departments and agencies (MDAs) from doing any business with firms not properly registered with the Corporate Affairs Commission. The thinking, which has been adopted in South Africa, is that you will not land a contract from the public sector if you do not pay your taxes.
Another initiative has been to launch a register of all assets held by MDAs, both moveable and immoveable. The federal finance ministry has a particular interest in the terms on which the registered assets may be sold. The ministerial circular specifies that assets not available for inspection and not disposed of in line with set procedures will be deemed “to have been illegally withheld or converted”.
We like the tough talk yet have to ask about compliance. We often hear complaints that anti-corruption drives tend to entrap the smaller players in the crime and that no “big men” have been imprisoned. Of course, while we can quibble about what constitutes a big man, we broadly accept the complaint.
The FGN has far to go before it will see a sizeable boost to non-oil revenue collection from its long and short term approaches. There are some relatively quick fixes at hand. For example, we have long argued for a hike in the standard rate of VAT on all goods, and not just luxury items as proposed. A doubling of the rate to 10.0% would generate N830bn in a full year, assuming no change on the take in the 12 months to February. Also we suspect that there is more mileage in the grey area of the whistleblowers’ progamme. The Kenya Revenue Authority has a similar system in place for unpaid taxes rather than for looted assets. It pays 5 per cent of the recovered taxes or duties, or KES2m (US$19,300), whichever is lower.
In conclusion, the authorities have not taken non-oil revenue collection seriously for many years and will not expect a rapid turnaround. While it boosts collections over time, we hope that budget revenue from oil does not tank. For very different reasons, we hope that it does not soar, and thereby drive a rush back to rent-seeking and so undermine the diversification programme.
Head, Macroeconomic & Fixed Income Research