Mr. Muda Yusuf is the Director General of the Lagos Chambers of Commerce and Industry. In this interview with NGOZI AMUCHE, he says the nation’s tax policy framework needs to be attuned to economic diversification, through a reversal of tax burden from investors to consumers, and that the structure of taxation is not investment friendly.
Excerpts:
In your 2019 economic outlook, you reiterated the need to forestall impending economic shock, and the risk of the country sliding into another recession. What do you mean by this?
Yes, given the challenging economic conditions, key policy reforms would be imperative to support and sustain macroeconomic stability. Some of the key policy reforms that could be looked into are the foreign exchange management frameworks that reflect the market fundamentals, the acceleration of the economic diversification agenda, normalisation of Lagos ports environment and the oil and gas sector reform, (especially the Petroleum Industry Bill).
Others are the reduction in the cost of governance at all levels, and the improvement in the domestic revenue (particularly independent revenue) to reduce volatilities of government revenues. For instance, the Nigerian economy had remained fragile with the high dependence on the oil sector for revenue and foreign exchange earnings. Although oil revenues increased with recovering oil prices in 2018, the impact on the economy was subdued by the huge foreign exchange commitments to petroleum product importations and the inherent subsidy. The high debt service obligations were also major constraints to the growth of the economy.
So what you are saying is that there is the need for accelerated economic diversification?
Of course, that’s very important, it is not negotiable. With the limited progress in the ongoing effort to diversify government revenue sources, the performance of the oil and gas sector would remain a critical factor that would shape the economy. According to estimates by Capital Economics’ analysts, every $10-per-barrel fall in oil prices will cause a three to five per cent decline of the Gross Domestic Product in most of the Gulf economies, and a slowdown of 1.5 to two per cent of GDP in Russia and Nigeria on an annualised basis. However, the outlook will depend to a large extent on developments in the oil and gas sector and the political will to undertake far-reaching reforms, beginning with the oil and gas sector.
What are the critical factors that are crucial to economic diversification in the Nigerian economy?
These factors are the quality of infrastructure, the quality of policies and the quality of institutions. The objectives of the ongoing economic diversification can be achieved. It was crucial to get these key parameters right, it was also equally critical to ensure proper alignment among these key variables to ensure sustainable economic diversification. The policy factor has many dimensions: monetary policy, forex policy, interest rate policy, tax policy, trade policy, procurement policy and investment policy. Each of these policies has a major role to play in the economic diversification process. The policy mix must be right for the desired outcomes to be achieved.
What is the place of taxation in all this?
The burden of taxation is more on the investors in the economy than the consumers. The Federal Inland Revenue Service has scant regard for due process in its drive for revenue. It is therefore inherently a disincentive to investment and economic diversification. The issue of government targeting investors more than consumers, when it comes to taxation is not in consonance with best practice principles. In an economy which is almost 50 per cent informal, this structure of taxation is not investment friendly. The formal sector of the economy bears the largest burden of the tax system. The tax policy needs to be better attuned to economic diversification through a reversal of the tax burden from investors to consumers. The use of banks as collection agents for the FIRS (in its current form) is very disruptive, distracting, arbitrary, oppressive and unfair to investors.
It is a serious disincentive to investment and the promotion of financial inclusion. This approach should be discontinued. Taxation should not be seen only as an instrument of revenue generation, it is also a potent instrument for stimulation of investment.
What is your parameter for measuring ease of doing business?
The Federal Government should sustain the momentum of the ease of doing business programme in order to reverse the declining trend in Gross Domestic Product Growth, as doing that would reduce the cost of operations of investors in the economy. With a population growth rate of 3 per cent and GDP growth of 1.5 per cent, there is a reason to worry about the wider implications for poverty conditions in the country.
The chamber was concerned about the decline in the performance of the real sector in the quarter under review, with performance of the agricultural sector dropping from 3 per cent growth in Q1 to 1.2 per cent in Q2. The manufacturing sector also declined from 3.4 per cent in Q1 to 0.7 per cent in Q2.These declines were in spite of the interventions given to support the real sector by both monetary and fiscal authorities. The real sector is still grappling with enormous productivity challenges arising from the constraint of infrastructure, particularly power and logistics.
There should be greater investment and policy focus on improving logistics and strengthening the power sector. Governments at all levels should redouble their efforts to improve infrastructure as the poor state of infrastructure nationwide is taking a toll on investment across all sectors. The differentiated Cash Reserve Ratio window that the Central Bank of Nigeria planned to use to improve lending to the real sector should be extended to other sectors of the economy, including the service sector. The service sector currently contributes 54.64 per cent of GDP and 44.67 per cent of total employment and these should shape economic policy conceptualisation and implementation. The sector is also largely driven by indigenous players and has valuable inclusive attributes. The service sector deserves more policy and institutional support to unlock its full potentials.
