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Rising inflation threatens 18% Tax-GDP target, more job losses, poverty

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BY EMEKA EJERE  

Debilitating effects of early policy steps of President Bola Tinubu-led Federal Government are shrinking the possibility of boosting Nigeria’s tax revenue to a level that can end the nation’s over-reliance on debt, data from critical sectors of the economy have shown.   

It is not news that the major aim of the Presidential Committee on Fiscal Policy and Tax Reforms headed by Mr. Taiwo Oyedele is “to transform the tax system to support sustainable development and achieve a minimum of 18 percent tax-to- Gross Domestic Product, GDP, ratio within the next three years without stifling investment or economic growth.”

According to Revenue Statistics in Africa, a collaboration among African Tax Administration Forum (ATAF), African Union Congress (AUC) and OECD, an EU-AU funded initiative, Nigeria’s tax to GDP ratio is currently at 6.1%, Egypt is 14.1%, Ghana is 14.1%, South Africa is 27%, while African average is 15.6%.

However, while the fiscal authorities are counting on widening the tax base to achieve the ambitious target, there are strong indications that the earlier removal of fuel subsidy and unification of exchange rates are conspiring to create an inflationary pressure that has further weakened the production and consumption segments of the economy.

President Tinubu had in May scrapped a costly but popular petrol subsidy and lifted currency controls in June, saying the moves were to save the country from going under.

But his actions have worsened inflation in double-digits and at the highest level in 20 years. Nigeria’s inflation rate surged to 28.20 percent in November from 27.33 percent in October, the National Bureau of Statistics (NBS), revealed In its new ‘Consumer Price Index: November 2023’ released on Friday.

The rising inflationary pressures have weakened the purchasing power of consumers, even as businesses grapple with higher operating costs and lower revenue.

It would be recalled that some major foreign companies recently shut down operations in Nigeria because of a challenging business environment.

In August, GlaxoSmithKline (GSK), a prominent British pharmaceutical company, announced its decision to conclude its activities in Nigeria and subsequently withdraw from the NGX. Procter & Gamble, a consumer goods manufacturer, followed suit, revealing plans to dissolve its on-ground operations in Nigeria and turn it into an import market.

Last week, the Nigeria Employers’ Consultative Association (NECA), expressed concern about the repercussions of the current divestment of multinational companies in Nigeria. According to NECA, over 20,000 employees have been directly affected by job losses due to these recent divestments.

In a statement signed by its Director-General, Adewale-Smatt Oyerinde, the organisation warned that the exiting of these companies could lead to job losses, which would lead to increased insecurity challenges and a rise in issues such as child labour.

Oyerinde said:  “It is worrisome to note that in the last three years, over 15 organisations with a combined value-chain staff strength of over 20,000 employees have either divested or partially closed operations. This has dire consequences not only for organized businesses but also for labour, government revenue and the households.”

The Manufacturers Association of Nigeria (MAN) expressed similar concern through its Director-General, Segun Ajayi-Kadir.

 “Manufacturing in any economy is a strategic choice, and the government must decide if it wants the country to be industrialised. If so, it must take all necessary steps to remove the binding constraints that hinder the sector’s performance. Nigeria has not done so, and that is why we see closures”, Ajayi-Kadir said when he appeared on television programme recently.

Even the major supermarkets and e-Commerce giants in the country are not spared by the economic ill wind. On Thursday, Shoprite Mall announced that it would stop operation in its Kano State branch from January 14, 2024, citing “financial difficulties and high production costs combating business establishment in the country”.

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The development is coming on the heels of the current announcement by Jumia Food to cease operation in Nigeria by the end of this month due to growing economic challenges.

In the circular, Shoprite noted that the decision is regrettable, but however, necessary, hinting that all the employees working at the mall would be laid off once it ceases operation in the state.

More pressure

The situation was compounded last week when further implementation of the floating foreign exchange rate regime pushed the exchange rate for importation to N783/$, leaving importers stranded as they face more financial pressure to clear their goods at the port.

The Central Bank of Nigeria (CBN), had on June 24, 2023, adjusted the exchange rate from N422.30/$ to N589/$. On July 6, it was re-adjusted to N770.88/$, and again on November 14, it was re-adjusted to N783.174/$, and now a new regime rate of N951.941/$.

Meanwhile, the Centre for the Promotion of Private Enterprise (CPPE) has warned that an increase of the Customs duty exchange rate from N783 to N952/$ would worsen the already-high inflation rate and increase the cost of production.

In a statement sent to our correspondent, the Chief Executive Officer of CPPE, Dr. Muda Yusuf, noted that the recent review would make the cost of importation through official channels even more prohibitive and worsen the operating costs for businesses.

CPPE said this would also cause more industries that are dependent on imported raw materials to shut down while worsening the poverty situation and heightening corruption vulnerabilities in the international trade ecosystem.

It noted that the review has greater incentives for smuggling and could increase the influx of substandard products amid increasing cost of local products even as Customs revenue may decline as imports through official channels become difficult.

“The recent decision by the Central Bank to increase the Customs exchange rate from N783 to N952/$ would inflict more pains on the citizens, erode profit margins, reduce purchasing power and put the survival of businesses at an elevated risk. The frequent changes in rates are also creating serious issues of uncertainty for investors and making the international trade process increasingly unpredictable,” CPPE said.

According to the World Bank’s latest Nigeria Development Update report for December 2023 released last week, sluggish growth and rising inflation in Africa’s biggest economy have pushed an additional 24 million Nigerians into poverty within five years.

“Sluggish growth and rising inflation have increased poverty from 40 percent in 2018 to 46 percent in 2023, pushing an additional 24 million people below the national poverty line,” the report said.

The World Bank further noted that the number of the poor rose from 79 million in 2018 to 104 million in 2023, with urban poor—more exposed to inflation—increasing from 13 to 20 million. Meanwhile, poor people in rural areas increased from 67 to 84 million.

Experts believe that a sure way of widening the tax net is for government to create enabling environment for businesses to thrive so people can have good incomes from which taxes could be paid.

“You can only tax value, profit and prosperity, so government should be careful in its policy formulation and implementation in order to come up with incentive-base measures to check tax evasion”, an Economist, Dr. Tunji Adeniyi, cautioned while presenting a paper at a tax conference with the theme, “Tax Evasion in Nigeria, the solution is here“, held on Tuesday in Lagos.

‘’Efforts should also be made to formalize the informal sector by providing incentives for registration and compliance. This broader tax base will not only reduce revenue leakage but will also ensure a fairer distribution of the tax burden.’’

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