PwC: Further Increase in Taxes Will Hurt Reinvestment, Exacerbate Corporate Exits

*Projects 29.5% inflation rate in H2 of 2024

Dike Onwuamaeze

PwC has warned that any further increase in taxes would cause a decline in reinvestment by firms operating in Nigeria and exacerbate corporate exits from the country.

This warning is contained in its June 2024 report titled: “Nigeria Economic Outlook: Navigating Economic Reforms,” which projected that inflation would decline to 29.5 per cent by the second half of 2024 from the 33.95 per cent that was recorded in May 2024.
The report said: “Government may reconsider any planned increase in selected taxes to alleviate the financial challenges and unlock liquidity of certain businesses being impacted by the economic pressure points…any further increase in taxes will compound the decline in reinvestment and exacerbate possible exits of corporate from industry.”

PwC stated that the impacts and implications of the reforms on businesses would include reduced revenue growth.
It said: “Inflation may erode revenue by reducing the purchasing power of consumers. This leads to low sales for businesses, which consequently impacts business revenue negatively.

“Higher production costs, import costs, and raw materials costs from the inflationary and exchange rate pressures are passed on to businesses. Naira depreciation is expected to drive up the cost of imported raw materials.
“The general rise in prices due to the removal of subsidy may increase expenses such as marketing, logistics, utilities etc,” while “high interest rates may lead to higher borrowing costs for businesses, making it more expensive to fund operations and investments.”

According to the report, economic outlook for the second half of 2024 projects a marginal decline in inflation to 29.5 per cent by year end, balancing the effects of reforms, policy actions, external pressures and food prices; particularly in the second half of the year.
It also stated that the broad economic growth outlook was indicating that the country’s Gross Domestic Product (GDP) may grow marginally by 2.9 per cent on the back of sustained policy reforms although growth prospect may be limited by elevated economic pressures.
“Fiscal sustainability concerns may remain slightly elevated, given debt servicing costs, that is, 89 per cent of the budgeted fiscal deficit is to be financed by new borrowings,” the report said.

The report also contained three broad considerations for the government, which are structured and focused policy, policy flexibility and mitigation of policy’s impact.
It urged government to prioritise macro stability by addressing security, social and pressure points of inflation and exchange rate pressures and mobilise capital to drive growth through market focused policies and intensification of investment promotion.

Besides, it advised the taking of short and long term sectoral bets focused on exports, domestic substitution and job creation.
“Government must drive fiscal prudence by optimising spending on capital projects with the highest Return on Investment (ROI), rationalise public service spending and improve revenue diversification and collection efficiency,” it added.
Under policy flexibility, the report said that government should decide when and how to introduce, defer, sequence, or stagger different policies based on current economic and social conditions.

It further advised the authorities to adopt scenario planning before any major economic reform is implemented to avoid unwarranted policy reversals and embed contingency plans within any economic policies during the planning phase.
The report further advised government to implement intervention funding schemes to support businesses with low-interest loan programmes or credit guarantees to ensure businesses have access to affordable financing despite high market interest rates.

It also enjoined government to create social safety net programmes such as unemployment benefits and workforce development programmes to absorb the job losses from business exits due to the economic pressure points.

The report also stated that businesses must consider their strategic priorities, operating models, and cost structure and should have clear-eyed strategy.
It said: “Revisit your strategy and be clear on your must haves to win in the future regardless of any economic scenario,” adding that “businesses should double down on developing systems that would enable them to win in any economic environment.”

The report also urged businesses to radically transform their cost structure and reimagine their operating models.
“Revisit your entire cost structure to establish short, mid, and long term actions to fundamentally adjust for the future. Re-imagine how you organise and collaborate by using technology accelerators and strengthening resilience,” it advised.