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I was the keynote speaker at an economic dialogue on Nigeria organised by Konrad Adenauer Stiftung (KAS) and the Delegation of German Industry and Commerce in Nigeria (AHK) on 23 May 2019. Titled “Road to Economic Development: Challenges and Opportunities”, the dialogue was aimed at shaping the priorities of the incoming second administration of President Muhammadu Buhari. The following is the final and fifth part of the highlights of my speech.
Take a charge on bank deposits to raise revenue
For the authorities, the most pressing matter is revenue. When there has been a boom in the economy, it was largely because crude oil prices were high. I doubt very much that it was crude oil itself that caused the boom, though. After all, oil is just about 10 percent of GDP. My reckoning is that a buoyant public purse and consequent free-spending government tends to inspire confidence all around. In other words, when the government is “happy”, it tends to be contagious. As oil prices are volatile, the weight of that purse varies with the times. Thus, there is a need for it to be reliant on more stable sources of revenue. In other words, we need the government to be “happy” most of the time.
Nigerians in formal employment are already taxed automatically. Those in the informal economy are not. And while even those Nigerians would not mind paying taxes, there is a lot that discourages them. Taxing consumption via value added tax (VAT) tends to be an effective way to bring as many people as possible into the tax net. At 5 percent, Nigeria’s VAT rate is relatively low. (Kenya’s is 16 percent.) So, the Nigerian government could certainly increase the VAT rate. Judging from the recent public reaction to a “testing of the waters” of sorts about such a move, however, it may not be ideal at this time.
There is another way. Nigerian banks currently charge all their customers, without exception, an account maintenance charge. And in spite of the complaints, they have by and large been able to get away with it. So, what stops a government, which has authority over the banks, and is probably more deserving of such a charge, from doing the same? In other words, the Central Bank of Nigeria could simply deduct a percentage of banks’ deposits (US$82 billion in 2018) as a “patriotic tax”; 5 per cent should probably do the trick.
It would certainly be more efficient and palatable than increasing the VAT rate. The key thing here is that you are not going to be chasing anyone to get revenue. You simply tax the deposits of all Nigerians with a bank account the way banks already “tax” them via an account maintenance charge. When you add the US$4 billion from a potential 5 percent charge on bank deposits to about US$26 billion (2018) revenue the government already gets from oil, we could easily have a deficit-free budget this year and years to come.
Unify the exchange rate to attract investment
Growth is at an anaemic 2 percent. Such is the pessimistic outlook that an economy that not too long ago ran at a rate of more than 5 percent is now only expected up by about 2.5 percent in about three years or so. And considering that population growth is about 2.5 percent or more, this level of growth would still not be adequate to deal with the problems that we have. Most experts agree we would be able to accelerate the current tepid growth by attracting more investment; which is currently quite low at 13 percent of GDP (Ethiopia’s is 38 percent of GDP.) A major impediment is our multiple exchange rate regime. Thus, a unified market-driven exchange rate would be ideal at this time.
Authorities on track; try harder
To be fair, the authorities are already doing some of these things (see earlier published parts 1-4 of the column). Still, we need to put pressure on them to do the following urgently. Raise power tariffs, raise VAT or take a direct charge on bank deposits, remove fuel subsidies, unify the exchange rate, list the state oil firm on the stock exchange. And for ongoing infrastructure projects, like rail and roads, a higher priority should be placed on those that connect key trade infrastructure; the Lagos sea port, for instance.
And considering there is increasing interest in Nigeria’s digital economy by global tech firms, there should be a deliberate drive by the government to attract more tech foreign direct investment (FDI). Also, action should be afoot to build the relevant pipeline infrastructure that the soon-to-be-completed Dangote oil refinery would need to transport its output across the country. That way, it would not create another traffic gridlocked area in another part of Lagos, the commercial capital; where incidentally, another port is being built. These are simple and practical things that can be done now to improve our lives.