On August 10, 2022, the World Bank raised an alarm on Nigeria’s dwindling revenue and rising debt, warning that if nothing was done to arrest the trend, the country might be facing an existential threat.
Over the years, Nigeria has continued to experience massive reduction in revenue amid increasingly high payment running into trillions of naira on fuel subsidy, compounded by other economic challenges.
For instance, the Nigerian government spends an exchange of N15.5bn (about forty –four million dollars) daily on petrol subsidies despite spending 118% of its revenue on debt servicing.
The fund the government spends on petrol subsidy is over a third of its current 2022 budget, far surpassing the funds for education, health, security and infrastructure. Despite being the largest the producer of oil in Africa, Nigeria still imports all of its petrol because of the absence of functional refineries. With the current price of petrol at N165 per litre, the government revealed that it spends about two hundred and eighty-three naira subsidizing each litre of petrol. A situation the World Bank has warned is unsustainable and counterproductive.
At the backdrop of this, and like a doctor who has diagnosed serious disease which can be life threatening if not checked, the international financial institution was forced to alert the government that if it failed to take precautionary measures to address the issue of low revenue; and urgently seek ways of optimizing its tax system and focusing on other ways to cut unnecessary expenditures and boost revenue, the country will find itself in very dire straits.
Speaking at a virtual pre=summit meeting of the World Bank organized by the Nigerian Economic Summit Group, NESG, recently, with the theme, “Critical Tax Reforms for Shared Prospects,” the Senior Public Sector Specialist, Domestic Resource Mobilisation at the World Bank said that Nigeria has failed to reap the benefits of the current hike in fuel prices, despite being a major player in the Oil Producing And Exporting Countries, OPEC, because of the huge amount it is spending on fuel subsidy; adding that if the country wants to make progress, Nigeria may consider eliminating the subsidy.
Eliminating the subsidy according to the international financial institution will help the government to increase its spending on key areas such as infrastructure and human and social development. Te country will require to pay more attention to sectors like education and health which have some very low indicators. And with the demography of the country projected to be by 2050 the third most populous country in the world, addressing some of these challenges is very important.
In 2022 alone, the Minister of finance, Budget and planning, Zainab Ahmed, disclosed that the government had budgeted four trillion naira, warning that the figure might increase to a little over six trillion naira next year should the subsidy persist.
According to the minister the reduction in revenue has put the government in such financial difficulty that the government had resorted to borrowing, thereby causing an astronomical rise in the debt burden to forty-one trillion naira, with fears that it may rise to about forty-five trillion by the end of the year.
The situation is made worse by the low revenue accruing to the nation from oil despite the hike in the price of crude coupled with revenue from the country’s non-oil sector, which is among the lowest. All these happening in spite of the country’s world acclaimed status as the giant of Africa with the largest population and expectedly the largest economy in Africa.
In order to change the fortunes of the country and increase revenue, the government is looking in the way of increasing tax. This however poses a problem since according to the former minister of finance, Kemi Adeosun, only about two hundred and fourteen persons pay tax of about twenty million naira and above; while the most active tax payers are those PAYE, whose deductions are made from source. Official calculation pegged tax to GDP ratio to about six percent, which is low. And with low employment level , with the few who have some job or businesses feeling over taxed, it is difficult for the country to be able to raise its revenue base through tax alone.
Only recently, the government in desperate bid to heed the World Bank’s warning resorted to expanding its tax base to include five per cent tax on telecommunication services in addition to existing excise duties on some goods like beer, wine, beverages etc.
The government is also considering improving revenue from cross-border transactions and other international tax measures. To this end, the government is specifically looking to strengthening and modernizing the tax laws for better results. Government wants to make the tax system more progressive and efficient in terms of compliance and ensuring that the right tax base is being targeted.
Increasing and reforming non-oil tax revenue has continue to be of immense concern and a priority for the Nigerian government; and this is underscored by the intense concentration the government continues to give to this sector especially as it concerns tax collection. This has become immensely important for the government bedeviled with the onerous task of finding funds for important spending on infrastructure, human development and social spending.
Looking for ways to gain extra revenue to carry out its functions has become hugely important and a herculean task for the government for different reasons: One, interest payments as a share of tax are very high around a third for overall or two-thirds for the Federal Government. This is not only because interest payments are high , but because the denominator is incredibly low.; with Nigeria having one of the lowest tax ratios in the world; this poses great challenges.
Analysts have, however, pointed out that while it is fair for the government to try to expand its tax non-oil base in a bid to increase revenue; this was however not the only means recommended by the World Bank to solve the problem. They claim that the government should also explore other areas such as fighting corruption within the system and striving to pluck all areas of leakages within the system. The World Bank has also advised a scaling down of the cost of governance, which many consider as huge, in addition to employing all the fiscal and monetary policies that will help direct the country’s economy on the growth trajectory.
With the right mix of policies and structural reforms, Nigeria can experience broad-based growth that is shared across all segments of society, the World Bank advises.