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Weak Fiscal Buffers to Confront Incoming Administration

By on May 5, 2015

Nigeria’s weak fiscal buffers and election spending have created a fiscal gap that must be bridged to enable the incoming government perform its duties effectively.

To this end, analysts have advised the incoming administration of Major General Muhammadu Buhari (rtd) to block fiscal leakages and ensure that Nigeria’s tax system is strengthened.

Analysts at the Financial Derivatives Company Limited (FDC), stated this in their latest economic bulletin for April. Buhari defeated incumbent president Goodluck Jonathan in a presidential election that took place in March this year.

According to the FDC report, whilst borrowing has been embraced as a necessary option to facilitate government spending, there is no consensus on how tax revenues should be increased.

They pointed out that in order to boost tax revenues in Nigeria, there is need for a review of the existing tax structure to imbibe basic qualities such as fairness, adequacy, simplicity, transparency and administrative ease.

This, they argued, would encourage voluntary compliance, “since people will know what tax funds are used for. Other measures that may be taken to strengthen the tax structure include: improve quality of tax information system to determine the accurate number of eligible tax payers, enforce penalties for tax evasion and strengthen tax audits, greater collaboration between the tiers of government to harmonise taxes, encourage international collaboration to combat illicit outflow of funds from the country.

“The incoming federal government administration led by Buhari will likely follow through on its promise to block tax leakages based on its anti-corruption stance. This is a step in the right direction but will not come easy since some of the problems are deep-rooted and may require some time to overhaul.

“In the short term, we believe that blocking leakages is a more viable option to boost tax revenues, rather than raising the tax rates. This is because increasing the tax rates immediately may provoke further ways of avoiding tax. In the medium-to-long term, we advise that government work towards improving transparency in the tax system as a way of building trust. Then, it might become more feasible to raise the tax rate.”

The new administration is taking over in trying times that call for a well thought-through strategy for addressing the economic headwinds.

While some of these macroeconomic challenges are external such as lower oil prices, others are domestic (insurgency and wide infrastructural gap but to name a few). Nigeria’s capacity to absorb these shocks is reduced because of low fiscal and external buffers.

Continuing, the report listed other issues the new administration should put at the front burner to include the immediate passage of a realistic version of the Petroleum Industry Bill (PIB). This, they advised should occur concurrently with the restructuring of the NNPC and provision of fiscal incentives for international oil companies, “as this will attract investment dollars.”

“The issue of fuel subsidy should be addressed. The kerosene and diesel subsidies have been removed already. A Marshall plan of spending to address the insurgency in the North-east as well as the post conflict investment for the restoration of the region. Zero tolerance for corruption and blocking all forms of leakages.

“Addressing the infrastructure deficit of approximately $400 billion. The development of road and rail infrastructure for instance, will facilitate increased economic development and boost domestic and regional trade. Increase spending on the health and education sectors.

“Ensuring corporate governance across all sectors, industries and government parastatals will have a positive impact on the markets. This will also encourage the inflow of foreign investment, as the business environment is made more transparent and easy to operate in,” they added.

 

[This Day]