Tinubu’s options for fixing Nigeria’s fiscal crisis are a banana peel

Key highlights

  • President-elect Asiwaju Bola Ahmed Tinubu will inherit Nigeria’s fiscal crisis, which includes a fiscal deficit of N8.17 trillion and a total public debt profile of over N67.5 trillion.
  • To address Nigeria’s fiscal crisis, Tinubu may consider removing fuel subsidies and increasing value-added tax (VAT) and other taxes. However, these measures may be unpopular, leading to protests and a decline in his popularity.
  • Tinubu must explore alternative revenue sources such as increasing non-oil exports, diversifying the economy, and attracting foreign investment to address Nigeria’s fiscal crisis.

President-elect, Asiwaju Bola Ahmed Tinubu, faces numerous challenges as he prepares to take office, including Nigeria’s fiscal crisis.

In its 2022 budget, the government projected a fiscal deficit of N8.17 trillion, which is equivalent to 45% of budgeted expenditure. To fund this budget, the government has been relying on local and foreign borrowing, which has pushed Nigeria’s total public debt profile to over N67.5 trillion.

One of the most critical issues Tinubu will have to address is the need to increase revenue and reduce the country’s fiscal deficit. The choices he has to fix the problem are available but they are also banana peel.

Plugging the fiscal hole

The possible measures his government can take to fix the problem will be to remove fuel subsidies and increase taxes such as value-added tax (VAT). Calls for the government to remove fuel subsidies has gone on for years and going by comments from the current administration, fuel subsidy might be removed before the Tinubu administration takes office.

However, any decision to increase taxes may not be as easy as removing fuel subsidies even if he has a justifiable basis for doing so.  Mr. Tinubu has comparative data in his favour when it comes to generally acceptable ways of measuring taxes propensity in an economy.

The highest tax-to-GDP ratio in Nigeria was 9.6% in 2011, with the lowest being 5.3% in 2016. Nigeria’s tax-to-GDP ratio in 2020 (5.5%) was lower than the average of the 31 African countries in Revenue Statistics in Africa 2022 (16.0%) by 10.4 percentage points. This indicates that there is a void in the tax collection system, and there may be a large informal collection service that is not reaching the federal government’s coffers.

Thread with caution

However, these measures may be unpopular, leading to nationwide protests and a decline in the president’s popularity if he takes them. Nigeria also has newly elected labor union leaders who have also threatened to embark on a nationwide strike if the government goes ahead with the removal of fuel subsidies. This could torpedo Tinubu’s plans and make it difficult for him to implement the necessary reforms.

Removing fuel subsidies is a particularly challenging decision because it will lead to a significant increase in the price of petrol and other petroleum products. However, this move could save the government billions of naira annually, which can be redirected to other critical sectors such as health, education, and infrastructure development.

Similarly, increasing VAT and other taxes may not be popular with the Nigerian people, but it will generate much-needed revenue for the government. The revenue generated from these taxes can be used to finance critical social programs and infrastructure projects, which could help improve the lives of ordinary Nigerians.

Other options

Tinubu must also explore alternative revenue sources such as increasing non-oil exports, diversifying the economy, and attracting foreign investment. A diversified economy would make Nigeria less vulnerable to fluctuations in oil prices, which could help stabilize the economy in the long run.

Therefore, if the Tinubu government intends to impose more taxes, it will have to tread with caution, as players in Africa’s largest economy also complain about being overtaxed. Lower and not more taxes can have favorable effects on the ability and the desire to work, save, and invest, which can positively impact the employment situation in the country. However, if taxes negatively affect the volume of savings and investment, it can exacerbate the recession and unemployment problems.

Rather than increasing taxes, broadening the tax base could be a more effective solution for President-elect Tinubu to address Nigeria’s fiscal crisis. By expanding the tax base and collecting taxes from previously untaxed sectors of the economy, Tinubu could generate much-needed revenue for the government without overburdening the already tax-over-burdened entities. This approach could also make Nigeria a more attractive destination for foreign investment, leading to long-term economic stability and growth.

The challenge is that he will likely be going after his base, the largely uneducated Nigerians who operate largely informal businesses and are notorious for operating under the tax radar. Getting them to pay more taxes will also be daunting and painstakingly slow especially when you consider the urgency of the crisis.

Reforms are also necessary

Proffering a solution to the dilemma, Dr. Nevin says the new government needs to make the kind of changes and policy decisions that will lead to higher growth.

“People have said for years that we should grow the economy by 6, 8, or 10%. I think 10% is easily achievable if we have the right policies.”

Nevin’s position negates any intention to increase taxes in any form. Empowering businesses and individuals would also mean removing the informal tax services from the revenue equation.  The cost of doing business in Nigeria may be as high as it is because of a myriad of informal tax collections by illegal individuals and bodies, especially in the transportation sector, including law enforcement agencies. 

The implementation of essential economic reforms will also make Nigeria a much more attractive destination for foreign investors, and it will set the country on a path to long-term economic stability and prosperity.

Economist, Professor Joseph Uwalweke, says the next government will have to go further as a matter of reform to reduce the cost of governance, as it spreads the tax net and reduce the level of corruption in the system of tax collection. But we doubt a Tinubu administration will rely on reducing the cost of governance as a solution to its fiscal crisis. 

Time is of the essence

Whatever measures he eventually makes need to be taken very quickly if the president must have any chance of fixing the economy.  

New presidents typically have a honeymoon period where they are perceived to be able to get away with tough decisions. However, this honeymoon period is not unlimited, and it is important for Tinubu to take decisive action early in his presidency to address Nigeria’s fiscal crisis.

President Buhari, for example, had the opportunity to make tough decisions during his early years in office but failed to act decisively. This lack of action contributed to the economic challenges Nigeria faces today.

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