All Change: Nigeria Not An Oil Economy -By Kemi Adeosun

Kemi Adeosun, Minister of Finance

Descriptions of Nigeria’s economy often include such phrases as ‘Africa’s largest oil producer’ and ‘the oil rich African nation’. But, oil economies are typically characterised by low population densities and abundant oil resources.

Typical of such descriptions are Saudi Arabia, with a 10 million barrels of oil per day output and 30 million people. Kuwait, with 2.7 million barrels of oil per day, has four million people. And Qatar, with 1.5 million barrels of oil per day, has 2.5 million people.

These economies pursued an economic model that was built around a large government dependent almost entirely on oil revenue for funding its programmes and activities. Such economies could afford to have low, or in some cases, no domestic revenue mobilisation, in the form of taxes.

Tax to gross domestic product (GDP) ratios of less than 10 percent, against the Organisation of Economic Development (OECD) average of 34.6 percent, could be justified, especially in the era of high oil prices.

For over three decades, Nigeria pursued this model. But, things have been changing, with the election of President Muhammadu Buhari in 2015, propelled into office under the mantra of ‘change’.

That clamour for change, in the areas of good governance, security and economy, coincided with the collapse of global oil prices and a consequent huge deficit in government revenues.

These circumstances provided the ingredients for an overhaul of the entire economic model. The first, and rather numbing conclusion of that exercise, was that Nigeria is not actually an ‘oil economy’. With just two million barrels of oil per day and over 180 million people, simple mathematics tells us that 90 Nigerians share a barrel of oil, compared to three Saudis, 1.44 Kuwaitis and 1.69 Qataris.

With oil at just 10 percent of GDP, Nigeria simply does not fit into the mould of the traditional oil economies.

Interestingly, even nations who did legitimately fit into this narrow mould of high oil revenues and low populations, are abandoning what is now considered to be a flawed model. Thus, the imperative for Nigeria was even more urgent. Nigeria recalibrated its target peer group from the oil economies to the ‘oil plus’ economies, such as Mexico and Egypt.

Members of this new peer group have diversified economies and tax-to-GDP ratios of 20 percent and 16 percent, respectively, compared to Nigeria’s six percent.

Consequently, the change mantra had to be urgently applied to revenue mobilisation.

Analysis of the data suggests that revenue mobilisation is potentially the master key to unlocking Nigeria’s huge growth potential by funding its ailing infrastructure, including roads, power and rail.

A cursory look at the effective tax rates paid by the huge multinational and local operators, as well as the data on illicit financial flows, indicates a pattern of systematic tax evasion at all levels.

Recent statistics released by the Federal Ministry of Finance shows that Nigeria has just 14 million active tax payers from an economically active base of 70 million.

Over 95 percent of these tax payers are salary earners in the formal sector. Just 241 persons paid personal income taxes of N20 million ($65,573.77) in 2016.

Taxing the high networth and Nigeria’s huge community of entrepreneurs constitutes a critical, but yet attainable target.

The statistics for corporate tax payment shows the debilitating effects of base erosion and profit shifting, as well as abuse of an overly generous tax incentive and duty waiver system.

The historical government apathy towards revenue mobilisation is one of the effects of the mistaken identity that saw Nigeria perceive itself as an oil economy. This administration is determined to correct this identity crisis and all its concomitant effects. In that spirit, we launched an ongoing and well received, tax amnesty, the Voluntary Asset and Income Declaration Scheme (VAIDS), affording a nine-month window for Nigerian tax payer’s, both corporate and individual.

This is to regularise their tax status in exchange for a guarantee of no interest, penalty, tax investigation or further audit.

This amnesty follows successful initiatives in a number of countries, where tax evasion has been a problem, such as Indonesia, Argentina, South Africa and India.

It has been programmed to end just as the Automatic Exchange of Information, which will provide Nigerian tax authorities with unprecedented levels of information on offshore asset, becomes effective.

The initial signs suggest that Nigerians are responding positively to the new revenue narrative.

Despite the emergence from a recession, tax revenues are showing early signs of growth.

Value Added Tax (VAT) shows a 18.97 percent year-on-year improvement.

Over 800,000 companies, including some government contractors, that have never paid taxes have already been identified and are being audited.

This is an unprecedented initiative that entails cooperation between federal and state governments.

The Federal Ministry of Finance has also commenced a data-base project that combines data from the various arms of government, including bank records, property and company ownership, and customs records, to create accurate profiles of those liable to pay taxes.

The Ministry has also placed one of the world’s premier private investigation agencies on retainership to trace overseas asset.

Changing the Nigerian economic psyche is not an easy task.

By its nature, tax mobilisation risks the popularity of any government. But, the present administration understands that the short term lure of political expediency must give way to the long-term best interests of Africa’s largest economy. Her energetic, young and growing population are deserving of the chance to experience a truly transformed, sustainable and growing economy.

Kemi Adeosun, Nigeria’s Minister of Finance.