Rwanda’s President Paul Kagame has often urged Africa’s business and political leaders to “stop thinking about development as something we do with external resources.”
The current managers of the Nigerian economy will do well to heed this advice. They will spend 2016 struggling to rebalance their economy and its tax system. They must save their nation from the spasms of the Dutch disease.
Nigeria entered 2016 with its lowest external reserve levels in 10 years.
Nigeria’s foreign reserves peaked at $63 billion in September 2008. By January 2016, it had dipped to around $29.3 billion, barely enough to cover four months of imports.
The price of Nigeria’s Bonny Light crude was trading at $34 a barrel as this edition of FORBES AFRICA went to press. It has been dropping since September 2008 after attaining a record high of $147 in July that year. Prices for cocoa and iron ore have also been falling over the last two years.
Economists believe that the full effects of the resource curse may have finally caught up with Africa’s largest economy. For the third time in three decades, Nigeria’s economy is in serious wahala (Nigerian speak for trouble). Dwindling government revenue, foreign exchange pressure, institutionalized corruption and a massive infrastructure deficit confront the nation.
Like many resource-rich, mono-product economies, Nigeria faces the daunting challenge of curbing its appetite according to the size of its wallet. Embedded in Nigeria’s 2016 budget is a ginormous N6 trillion ($30 billion) revenue shortfall. The deficit financing will come from the domestic and international debts markets. But domestic resource-mobilization might be the key to fiscal and monetary efficiency.
Crude oil has defined Nigeria’s political economy for decades. It will continue to play a significant role, alongside commodities and Nigeria’s abundant natural gas reserves. Earnings from non-oil sectors, such as services, agriculture and entertainment, will continue to grow.
As Finance Minister, Kemi Adeosun, began talks with international finance institutions for external loans worth $3.5 billion to augment the 2016 budget, the local media was awash with two news reports – both revealing Nigeria’s scandalous administration of its tax regimes and import earnings under previous governments.
The first expose was a report published by ActionAid, an international NGO, which revealed how Nigeria had forfeited a staggering $3.3 billion in revenues through a three-part tax break granted to three of the world’s biggest oil and gas companies, over a 10-year period. Apparently, and obviously unknown to many Nigerians outside the infamously opaque petroleum sector, the tax breaks for Shell, Total and Eni started in 1999.
In a country where millions live in extreme poverty, the social cost of the tax giveaways is huge. The amount is double Nigeria’s education budget for 2014; and the money could very well have given 70 million young Nigerians access to quality education, rebuild the university system and tackle entrenched problems in the health system, according to ActionAid.
“It is a striking example of how a global race to the bottom on tax is harming resource-rich countries,” the NGO’s report says.
Previous ActionAid research shows that tax breaks cost developing countries at least $138 billion every year.
The second matter was the revocation of all import waivers granted to several “favored” firms and politically-connected entrepreneurs by previous governments between 1999 and 2015. Excise duty revenues from the Nigeria Customs Service for 2016 is consequently expected to be significantly higher than previous years. Finance ministry sources say Nigeria lost N797.8 billion (around $4 billion), between 2011 and May 2014, to import waivers and tax holiday concessions.
Nigeria’s lax tax system is just one of several public sector development issues awaiting resolution by President Muhammadu Buhari’s cabinet. Figures from the Debt Management Office show that in one year, Nigeria’s debt burden grew by N1.31 trillion ($6.57 billion) to N12.6 trillion ($63.2 billion) as at the end of 2015.
Also during the 2015 financial period, the state-owned Nigerian National Petroleum Corporation posted an operating loss of N267 billion ($1.34 billion). Its four refineries, with a combined installed capacity of 445,000bpd, continue to underperform.
Value Added Tax (VAT) and Company Income Tax (CIT) will account for 80% of the Federal Inland Revenue Service’s (FIRS) projected revenue haul in 2016.
Comparatively, Nigeria’s tax revenue performance is 7.4% of GDP compared with 27.4% in South Africa, 18.7% in Malawi and 19.5%, Kenya.