African economies are projected to recover this year
January 22, 2021/AfDB
By Akinwumi Adesina, President of African Development Bank
Your Excellency, President Muhammadu Buhari, GCFR, President of the Federal Republic of Nigeria
Your Excellencies, Governors,
Chairman of the Federal Inland Revenue Service, Muhammad Nami
Distinguished Ladies and Gentlemen
I would like to wish you Mr. President and all of Nigeria a Happy and Prosperous New Year. I am delighted to address you today, as President of the African Development Bank – and as a Nigerian.
I thank you Mr. President for your incredible leadership, tenacity and resolute support behind my re-election as President of the African Development Bank for a second term. I am proud to be a Nigerian, any day, anytime and anywhere.
Thank you Mr. President for inviting me to this First National Tax Dialogue organized by the Federal Inland Revenue Services (FIRS). I congratulate you on this Dialogue.
We all live today in very difficult times in Nigeria, Africa and the world with COVID-19 pandemic. To many lives have been lost. One death is one too many. I wish to commiserate with the Government and with the people of Nigeria on the lives lost. I wish to also commend the concerted efforts being deployed by Nigeria at all levels, including by the private sector, to tackle the pandemic.
Before the pandemic, 6 of the 10 fastest growing economies in the world were in Africa. With the pandemic shock, growth plummeted. Africa’s GDP growth declined by 2.1% 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.
Nigeria has not been spared. The economy shrunk by 3% in 2020 on account of falling oil prices and effects of the lockdowns on economic activity. The pandemic has impacted on budgetary balances and increased debt burdens.
Nigeria’s Debt-to-GDP ratio will push debt service payments beyond more than 60% of federally collected revenues. With shrinkage in oil revenues, debt service payments pose the greatest risk to Nigeria.
The African Development Bank Africa estimated that Africa faces an additional financing need of $125-154 billion by the end of 2020 to respond to the crisis. IMF estimates that Africa will need $345 billion in additional fiscal space by 2023.
Africa’s debt also is rising. Debt-to-GDP, which has been stable at 60%, has risen to 70-75% of GDP. The bulk of the debt has been for private bond issuances on the global capital markets — Eurobonds. As countries’ currencies devalued and external reserves plummeted, in the face of declined economic activity, many African countries face risks of debt distress.
Out of 38 African countries for which Debt Sustainability ratings are available, 14 are in high risk of debt distress, while 6 are already in debt distress.
To put a human face on the pandemic effects, we estimate that 28-40 million people in Africa are projected to fall into extreme poverty, and 30 million jobs would be lost due to the pandemic.
The African Development Bank has been very responsive in supporting Africa. The African Development Bank launched a $10 billion Crisis Response Facility to support African countries to meet the fiscal and economic challenges posed by the pandemic. The Bank provided $288 million in budget support to Nigeria to cope with the fiscal challenges posed by the pandemic.
The African Development Bank also launched a $3 billion fight COVID19 bond on the global market, the largest ever social bond in world history. It is now listed on the London Stock Exchange, the Luxembourg Stock Exchange and the Nasdaq.
I wish to commend the leadership of President Buhari and all the State Governors, and the private sector, in tackling the pandemic. It has been very challenging, given the second wave of the pandemic.
But let us not be deterred. Nigeria and Africa will overcome this pandemic.
African economies are projected to recover this year. The African Development Bank projects that GDP growth will recover to 3.4% for Africa, as economies open up, commodity prices recover, tourism bounces back, and global value chains recover their manufacturing capacities.
We project that Nigeria’s economy is poised to recover to growth of 1.5% in 2021 and 2.9% in 2022, according to the African Development Bank’s soon to be released African Economic Outlook.
But building back will require a lot more resources. Taxes form 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.
Making tax codes simpler and reducing administrative burdens and formalities are important to move from informality to formality. Doing so will allow people to be able to better assess their tax obligations.
Digitalization of tax collection and tax administration is critical to ensure greater transparency of the tax system, widening of the tax base, while mitigating compliance risks and encouraging voluntary tax compliance.
The Government should focus a lot on corporate taxes, and ensure full compliance. But it is important to ensure that such taxes do not discourage investments.
Nigeria can learn from the case of Estonia, which taxes corporate incomes, but based on distributed profits. This allows corporations to re-invest their profits in expanding their businesses.
Taxing corporate revenue, instead of profits will discourage investments needed to grow businesses and create jobs.
Natural resources tax can play a major role for Nigeria. Given Nigeria’s high reliance on oil and gas, and minerals, the government should ensure that these sectors pay taxes and royalties that are fair and transparent.
Profit shifting, base erosion and tax avoidance by multinational corporations form 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.
If companies invest in Africa they should pay taxes in Africa. 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. Nigeria is showing good example.
The new initiative between the Federal government and selected private sector businesses to provide road infrastructure in return for tax rebates is an excellent idea.
It is conditional; and it can be assessed and measured for delivery. That is the kind of accountability needed, so tax rebates or exemptions are not abused.
Today, the Dangote Group is constructing 19 key economic federal roads, stretching for 800 kilometers across the six geo-political zones, due to company tax credits from the Executive Order 007 of 2019.
However, Governments should avoid overly generous tax holidays and tax reliefs. While there should be fiscal incentives to attract and support the private sector, governments should avoid losing too much tax earnings.
Given the size of Nigeria’s economy, the population, urbanization and consumer spending, it is a market with huge opportunities to attract investors. Yes, it has infrastructure deficits. Yes, it has a high cost of doing business. Yet, Nigeria is not a market that can be ignored.
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”.
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.
Nigeria’s bubbling youth are creative. While their businesses may be small, they should be incentivized to grow.
Over time, they will become bigger businesses that can provide much higher taxes. There is an urgent need for a fiscal policy regime that strongly supports businesses of young people in Nigeria.
Given Nigeria’s high level of poverty and huge income inequality, taxes should not be regressive, where taxes paid on goods or services are the same regardless of income.
But one thing we cannot ignore is good governance. Good governance is the “speed dial” for greater tax payments. The role of the government is not just to collect taxes; its role is to ensure that the taxes are collected transparently, used transparently and responsibly; and that citizens see what their taxes are being used for.
While there should be tax obligations for citizens, there must also be tax accountability to citizens from governments. Participatory tax-based financing systems demand participatory governance.
While tax rates are low in Nigeria compared to a number of African and non-African countries, that is not a justification to keep increasing taxes.
We must also distinguish between nominal taxes and implicit taxes — Taxes that are borne but are not seen nor recorded.
We should not simply compare tax-to-GDP ratios. We must not compare apples and oranges.
Truth be told, Nigerians pay one of the highest implicit tax rates in the world — way higher than developed countries.
Think of it: they provide electricity for themselves via generators; they repair roads to their neighborhoods, if they can afford to; there are no social security systems; they provide security for their own safety; and they provide boreholes for drinking water with their own monies. That in incredulous in itself. Boreholes are not the way to provide water in the 21st century. Every household should have pipe borne water!
Take for example that 86% of small and medium sized enterprises in Nigeria spend $ 14 billion annually on diesel for generators. Nigeria’s companies lose on average 10% of sales because they do not have access to reliable and affordable electricity.
Governments, over time, have simply transferred their responsibility to citizens. When governments or institutions fail to provide basic services, the people bear the burden — a heavy implicit tax on the population.
Taxation is a social contract between governments and citizens. Tax compliance are higher when citizens are provided the needed public goods in exchange for tax payments.
Accountability and transparency builds trust; and trust powers higher tax compliance. When citizens see the benefits of taxes they will have incentives to pay taxes.
Efforts should be made to improve overall tax administration and compliance. Weaknesses in tax administration with complex tax codes causes leakages, costing governments to lose much needed resources for development.
Tax legislations should also be stable and predictable. Given Nigeria’s structure, with three tiers of government with varying powers, efforts should be made to harmonize tax regimes and avoid multiplicity of taxes.
To succeed, efforts must be made to reform domestic tax laws and institutional frameworks. There is much scope to further improve the institutional capacity for tax audits, data management and business intelligence, at all levels, to improve tax revenue collection.
The African Development Bank is ready to provide needed technical and institutional support to the Federal Inland Revenue Service to build up its capacity for tax administration.
I wish you, Your Excellency Mr. President, all the very best of success as you lead our great nation and in your efforts to mobilize more resources for Nigeria’s development.
We will overcome the Covid-19 pandemic.
Let us arise, with faith, and strength, and a stronger sense of social contract, to mobilize resources for our nation’s development.
Let us do so with full accountability to the people.
As Nigerians, we must all pay our share.
For the nation we build is one in which we all have shares.
And together, we must make it work.
Thank you all very much.