Musa: Effective Tax Collection Will Resolve Nigeria’s Debt Challenges

The Director General West African Institute for Financial and Economic Management (WAIFEM), Baba Yusuf Musa in this interview discussed his presentation at the just concluded World Bank/IMF annual meetings in Marrakech, which focused on budget mechanisms and strategies to minimize fiscal risks in the economy. Additionally, he addressed methods to enhance tax revenue generation and offered a comprehensive perspective on the direction of the Nigerian economy. Nume Ekeghe present excerpts;

Can you speak on the paper you presented at the meetings?

The paper looked at the fiscal risks that are arising which the Nigerian government needs to take note of. What the paper really looks at is the reason we always have deviations in our budget from what was forecast at the beginning of the budget to the end of the budget, we always have over the years have variation. And the principal reason was because of the fiscal risks that are associated with the economy. We thought it would be good to highlight it for the government to take note and see how they can take precautionary measures to make our budget more resilient.

What were these fiscal risks that you identified in Nigeria’s budget?

I identified about nine risks, which we need to take note of ranging from the hidden debt. By hidden debt, I mean, the debts that are not disclosed which the government usually do not report in the debt statements. Examples are inter-agency institutional debt. Inter-agency debts are debts that are usually not reported, but then they are entities that owe contractors and those are all debts that do not reflect in the actual government budget. Then, we also have other risks such as climate issues, you realise that, in recent times we have been having many climate disasters and other related issues. In addition to that we have the forecast that we usually make for instance the exchange rate, which does not really reflect the reality. If you look at the current situation, right now. If you are a state government with some amount of external debt, based on the budget that was actually projected. Now because of the devaluation of the naira, you have to generate more Naira to be able to pay for this service. But at the time of the budget formulation, perhaps you might have you know, budgeted some amount that is far less than what currently exists in the exchange rate. So, all those volatilities were highlighted to call the attention of the government. Above all, when you look at the growth forecast for the country, over the last two years we have experienced anaemic growth, and the outlook is actually not looking as gloomy as we think. The cost-of-living crisis is increasing. So most likely, we will have an increase in cost as a result of some of the policies that the new regime found necessary to achieve. So, all those fiscal matters that will maybe make the budget deviate from the time of forecast, we highlighted them all during the presentation.

What is your impression of some of these recommendations at the annual meeting given the fact that back home, the impression is that we’re already beginning to suffocate following energy, currency reform and so many things happening in Nigeria?

I really sympathise with Nigerians, but these are all issues that we’ll be raising over a very long time. We have underlying issues that should have been addressed much earlier, but the symptoms have been showing over the years. Unfortunately, we were not courageous enough to address all of them. I think this new regime came and found it necessary to address those anomalies in our economy.  It’s like you been a sick person. Sometimes when you go to a medical doctor to be able to, you know, solve your problem. You might have to put yourself through some additional pains to go through before the sickness is, is addressed. So, in our context, one can look at it from a building perspective, you can take that analogy that when you have a building that has a good foundation, and should there be any earthquake or anything that will cause the building to shake. As long as it has a good foundation, the likelihood of that building remaining strong it all will be there, but where you have a bad foundation and then of course, there is any volatility, then you realise that in the end, the building will suffer, if not collapse, but there will be serious damages. So, that’s exactly what happened in our own context. There were several fundamental issues with our economy that should have been addressed much earlier. And I think the commitment of the government was part of the issue or part of the reason why we have been dancing around certain things instead of addressing the fundamentals. That’s why for a very long time, this issue of things like subsidies, has been raging, I remember in the last 10 years, we have all been talking about it. We haven’t had any courage from the government side to address those ones. But now a new regime came and thankfully they have to really tackle the issue, but not only subsidy, of course, the exchange rate is there, and so many other economic issues that should have been addressed. But I think there is still some room for improvement. Though the new government is trying to make an effort to increase tax revenue, which is the fundamental problem with our economy, we still have a long way to go in terms of mobilising the actual tax revenue that Nigeria should have. Once we address the issue of tax, I believe that more than half of our problems in terms of debt issues, public expenditure will be address.

Tax was the major focus throughout the discussions at the meeting, the need to raise more tax revenue and all that. But the companies are already bleeding, and individuals are also reeling because of the reforms, what can the government do in this situation?

There are a lot of opportunities for us to tax. The presentation I gave, I highlighted four principal areas where the government needs to really look into. Number one is the issue of property tax. When you take the property tax ratio to GDP of Nigeria is virtually less than one per cent, despite all the wealth that we have. When you take the ratio of properties to GDP is less than one per cent compared with an average of about five to 10 per cent in lower-middle-income countries like ours. That is one source that we can look at, and there are several opportunities to mobilise those tax revenues on properties. Just take the capital cities of any of our states and see the number of buildings, and how many landlords are actually paying tax to the government. If you take that ratio, you realise that there are very few and there are just some minimal issues that government should do to mobilise those ones. We need to have like a register that identifies who the owners of properties are and have a reporting format that can easily be tracked. If you give out your house on rent, it is a source of income and you should declare it and pay a certain percentage but that has not been happening. That is why people are complaining. The problem is that the civil servants, all employees in the formal sector are the ones taxed by the government but those who are in the informal sector, and those who have properties, who are millionaires are actually evading the tax that they were supposed to pay.  So that’s one source. Another source is digitalisation we have been doing over the years, we should have addressed the issues that relate to digitalisation. We have actually tried to digitalise the collection process, but there are room for improvement. In the collection process, checks and balances should also be improved. For instance, if one is to pay a certain amount of money through an online format or to the federal revenue authorities, in many cases you will find when you want to pay the tax the website so many cases will not work, but if you walk physically there to the Internal Revenue Department, somehow you will see that it will work. So, in my view, there has to be some form of monitoring mechanism that at least someone should be checking to see that all these are things working so that investors and those who are willing to pay the tax online should have easy access. If you go to the ports, the port authority in this century why do we have to go on physical inspection with all the technology that we have, but in actual sense when you go there, how many scanners are working in our courts? And that gives room for evasion because whatever you bring, I don’t think the Customs are strong enough to go through every container and check all this in so the efficiency of even the collection to be improved. But one thing also I think there has to be some kind of synergy even among the collection or the collection agencies, you know, over the years customs built a lot of experience in the collection of taxes. And if you ask the customs, they will tell you that Nigerians generally do not declare the actual content of whatever they bring into the country. So, we have to find the reason why these things are being done that way so that at least we have confidence that let Nigerians declare whatever they bring and pay the actual duty that should be paid. I also raised the issue of all these waivers that we have been given. I think the waivers are really becoming another source of leakage to our tax collection system. Once those kinds of waiver issues are addressed, I think the government will mobilise much more than what they are realising now. So, I have highlighted about three or four areas where the government can look into it and I believe if they follow that, they will really improve our tax collection.

On enhanced tax collection such as property tax, there may be pushback from citizens who are responsible for building their own roads and providing their own power. Also, who would collect property tax, state or the federal government?

Starting with the issues raised about, building their own roads, providing their water, electricity and so many other things. Well, you’re absolutely correct that those are issues that the government needs to be providing in terms of infrastructure to the citizens. But then when you also consider that the government is making efforts and what we need as a government is to build confidence. Remember when Fashola was governor of Lagos State, people were able to build confidence in terms with the citizens. People had seen, work being done with whatever was being collected. I remember at that time, people came voluntarily to pay, their taxes. So that is what we need, that kind of leadership is what we need in the country. So, once you build that confidence, and the government start giving infrastructure people will volunteer to come and pay. So, both sides have an obligation to, to make the citizens have the obligation to pay the tax and the government has also an obligation to show you the dividend of what people are paying that if they’re able to provide roads and I think we’re beginning to see that aspect of improvement in the governance, arrangement of taxes and in terms of utilisation of the tax. Not only that, even the amount that we borrow, if you travel on some roads there are some areas where you will see some signboards, a good road is you know constructed with Sukuh. We need more we need more of those kinds of improvement. Well as government you don’t really need to put to say that this is what we use the money for. But, it’s part of the transparency that we really need.  In other countries what you see is action. Secondly, relating to his on the issue of inter-governmental arrangement as to whether this area relates to the state or the federal government. The issue of tax collection is the totality that we are talking about when only restriction to the federal government or to the state. It is the total both the state and the federal government need improvement in their tax collection system. So, when you improve even as a state, if you improve your methodology, the way of collecting taxes and utilisation of those taxes, it will give you enough resources and make you not to borrow. So, you have resources your expenditure will increase and your ability to provide infrastructure and other services to the citizens will improve.

In the opening session of the meetings, the King’s speech talked about climate financing, and debt forgiveness which is beginning to build momentum across the divide, especially to the global south. He reminded the world of how Africa contributes just less than 3 per cent of the global emission, but is suffering most of the disaster coming from climate change. Can you give us a sense of how much of this conversation is catching up with the West and what kind of action countries like Nigeria expect from the global south?

So, when you’re talking about climate issues, I think we are far behind the rest of the world in terms of understanding what is going on, relating to climate change, especially the opportunities that abound. Starting from the carbon points that countries can access, there are opportunities that have been provided under the United Nations and the global arrangement, that any country that shows an improvement, or at least any country that shows its commitment to improving carbon emission has the opportunity to acquire some points and those points can be used to, get some additional resources and also, pay for some of the debt. I can’t remember any African country that really took advantage of that, and benefited from this initiative. We have been doing things that actually should improve our carbon policy, many states have policies, and the federal government itself has policies where they plant trees, and these are all aimed at improving you know, carbon emission, but we have never taken advantage to document this and, approach the international community with these facts to also earn carbon points. So, as a continent, we really need to build capacity in this area so that our ministers of finance ministers, ministers of agriculture and other ministers of environment can really work together in synergy and take advantage of that. But then, the second issue which I think we need to also understand is, the topology or the of what the carbon or the climate change is on its own. Because when you consider what climate change is, as a Western country, it is different from what climate change is, as a developing country. So, we really need to understand each other, for instance, you know, when they talk about, moving or transiting from this form of electricity to another form as a climate initiative to improve their own context, while in our own we don’t even have the power to transit from to that position. So, if you talk to an African or in Nigeria, as to transition from power away from one form of energy to energy, it has a different connotation. So, I think we have to understand and the global community needs to understand in what context are we talking about in the climate change. So, for us, I think we need to understand what are our own priorities in our climate issue, and address that that context first, or let the international community understand our own definition of climate change, so that we can have at least a group global movement, but not one side and looking at it from a different perspective and another.

We have seen moves from the CBN towards unifying exchange rates.  Recently, it removed the FX restriction on the 43 items but the challenge of liquidity in the FX market is still there, the gap between the official and parallel market rates are still widening. What are the rooms of improvements to complement these measures from the CBN?

I think the move that the CBN made is that is the right move in my view. The reason is that if we take the 43 items that have been protected you ask yourself if it is really working effectively. Have you seen it working? If you have some fundamental issues, and you don’t address them, the fundamental weakness will still be there regardless of whatever measure you take, you will only be seeing cosmetic reforms, but the issue is there, the fundamental issue is still there. So, all along, when the restrictions were made on the 43 items, the fundamental issue was still left behind and was never addressed. So, when this new government came, the issue is, should they continue the path or, we have to go back to the drawing board to address where are the fundamentals. So, I think they are beginning to address the fundamentals. And in in economy policy, we have what we call the lag, when you take a policy, you don’t see its effect immediately, it takes some months, sometimes even a year or two to get the impact. So, when you talk about the flow of foreign investors, we do not expect to see them flowing immediately. Of course, there has to be for any investor they will watch and see is the policy going to be consistent before it takes a decision. So once the fundamentals have been addressed, I believe that foreign investors will see the reality and see the importance of all these policies. The IMF made a statement commending Nigeria on the bold steps that they have taken and we expect the impact to come, but not immediately, because these are fundamental issues that are being addressed and those issues will definitely have their own effect in no distant future. So, I believe in a month or two or three, you will start to see the flow of investment because confidence is being built right now. At least the private sector knows that those issues have all along been in favour of certain aspects and are now being addressed. I’m sure you will see the impact of the policies.