Nigerian’s economy can recover from the losses suffered with the devastation of coronavirus pandemic if the demand by the government for the fulfillment of tax obligations by citizens is balanced with the government’s tax accountability, the African Development Bank (AfDB) President, Akinwumi Adesina, has said.
Besides, he advised the government to avoid being overly generous with tax holidays and tax reliefs in its bid to use fiscal incentives to attract and support the private sector.
Mr Adesina spoke in Abuja on Wednesday at the First National Tax Dialogue organized by the Federal Inland Revenue Services (FIRS).
Participatory tax-based financing systems by the citizens, he said, should demand equal participatory governance on the part of the government.
“Government efforts to secure investments should not be based on giving too much “fiscal sugar” to the companies, so they do not suffer from “fiscal diabetes”, he said.
COVID-19 and devastation of Africa’s economy
He lamented the growing devastation of COVID-19 on world economy, particularly in Africa, saying cumulative loss to Africa’s gross domestic product (GDP) as a result of coronavirus pandemic is estimated to grow by 36.42 percent, from about $173billion in 2020 to about $236billion 2021,
Prior to the COVID-19 pandemic, the AfDB President said six of the world’s 10 fastest growing economies were in Africa.
However, with the pandemic shock, he said growth plummeted, with Africa’s GDP growth declining by 2.1 per cent last year, the worst in two decades.
“As economies went into lockdowns, people’s incomes declined, millions lost their jobs, trade volumes fell, and demand for goods and services declined. Cumulative loss to Africa’s GDP is estimated at $173-236 billion for 2020 and 2021, respectively,” he said.
Nigeria tossed into recession
With the growing devastation, Mr Adesina said Nigeria, reputed to be Africa’s largest economy currently at about N142.7trillion, has not been spared.
He said the country’s economy shrunk by 3 percent in 2020 on account of falling crude oil prices and effects of the lockdowns on economic activity as a result of the COVID-19 pandemic, which impacted on budgetary balances and the country’s increased debt burdens.
With Nigeria’s Debt-to-GDP ratio currently at about 34.98 percent, amid growing debt (N32.2trillion as at September 2020) and deficit in the annual budget (N5.6trillion), the country’s debt service is to gulp more than 60 percent of all federally-collected revenues.
Mr Adesina said with shrinkage in crude oil revenues in recent times, debt service payments pose the greatest risk to the Nigerian economy in the new year.
In Africa, he said out of the available debt sustainability ratings of 38 countries, only 14 are in high risk of debt distress, with six already in debt distress.
With the persisting impact of the pandemic, Mr Adesina said estimates showed between 28 and 40 million people in Africa are projected to fall into extreme poverty, with 30 million jobs to be lost due to the pandemic.
He spoke of the response of the AfDB to the crisis, saying apart from a $10 billion Crisis Response Facility to support African countries to meet the fiscal and economic challenges, the Bank also provided $288 million in budget support to Nigeria.
Also, he said the AfDB, which launched a $3billion fight COVID-19 bond on the global market, the largest ever social bond in world history, is now listed on the London Stock Exchange, the Luxembourg Stock Exchange and the Nasdaq.
Urging Nigeria and Africa not to be deterred by the COVID-19 scourge, Mr Adesina said he remained optimistic that African economies would recover this year to about 3.4 percent growth level as economies open up, commodity prices recover, tourism bounces back, and global value chains recover their manufacturing capacities.
He said AfDB’s projections from its African Economic Outlook showed that Nigeria’s economy would recover to a growth rate of 1.5 percent in 2021 and 2.9 percent in 2022.
In the third quarter of 2020, the country’s economy contracted by about -6.1 per cent in GDP growth rate.
Although it recovered to about -3.6 percent in the last quarter of the year, the consecutive contraction of the economy for two quarters meant the country’s economy slipped into another recession in five years.
Using taxation to Build back Nigeria’s economy
To build back the economy, the AfDB President said Nigeria would need huge resources, with taxation expected to constitute a significant part of government revenue.
“It is crucial to ensure that the tax base expands. Given that over 60% of Nigerians are in the informal sector, priority should be to support measures to move a large part of this from informal to formal sectors,” he said.
He suggested that the government should make the country’s tax codes simpler as well as reduce administrative burdens and formalities to make the transition from informality to formality simple.
The transition, he pointed out, would allow people to be able to better assess their tax obligations and fulfill them.
Need for greater tax transparency
Other suggestions included digitalization of tax collection and tax administration to ensure greater transparency of the tax system; widening of the tax base, while mitigating compliance risks and encouraging voluntary tax compliance.
He urged the government to focus a lot more on corporate taxes, and ensure full compliance, adding that steps must be taken to ensure such taxes did not discourage investments.
Citing the case of Estonia, which taxes corporate incomes, based on distributed profits, he said Nigeria could learn from it to allow corporations to re-invest their profits in expanding their businesses.
Taxing corporate revenue, instead of profits, he noted, would discourage investments needed to grow businesses and create jobs for the people.
Natural resources tax, he said, can play a major role for Nigeria, given Nigeria’s high reliance on oil and gas, and minerals, adding that these sectors can pay taxes and royalties that are fair and transparent.
On profit shifting, base erosion and tax avoidance by multinational corporations, he said this forms a huge part of “Africa’s missing taxes” and account for a large share of the over $60 billion illicit capital flows that Africa loses annually.
He said if companies invest in Africa, they should be made to pay taxes in Africa, adding that governments should use Business Investment Treaties and Avoidance of Double Taxation to strengthen these incentives.
“If a company works in Nigeria, benefits from Nigeria, it should pay taxes in Nigeria. Tax policy can be used to incentivize the closing of the massive infrastructure gap that Africa faces,” he said.
While commending the new initiative between the Federal government and selected private sector businesses to provide road infrastructure in return for tax rebates, he said this should be conditional based on regular assessment measured for delivery.
He however advised the government to avoid overly generous tax holidays and tax reliefs, adding that there should be fiscal incentives to attract and support the private sector and avoid losing too much tax earnings.
“Small and medium-sized enterprises should be further encouraged and supported, as they are the lifelines of earnings and the creators of jobs. Tax exemptions or tax deferments can be used to support their growth,” he said.
While the government should demand tax obligations from Nigerians, he said there must also be tax accountability from the governments, saying that participatory tax-based financing systems demand participatory governance.