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Economic Recession: Strong Reforms Necessary For Transformation – Fitch

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As Nigeria’s economy entered into a recession, following a contraction of the gross domestic product (GDP) growth rate of 2.06 per cent in the second quarter of 2016 as confirmed by the National Bureau of Statistics (NBS), the country will need to henceforth undergo painful reforms for it to come out of the crisis.

This was contained in a recent report by Business Monitor International, BMI, a Fitch Group company, in its fourth quarter Country Risk Report focus on Nigeria, which includes 10-year forecasts to 2025.

The BMI research document obtained by LEADERSHIP stated that oil prices are set to remain low over the medium to long term and with the international market of Brent crude averaging $65.7 per barrel over the next 10 years. The report noted that the crash of crude oil, Nigeria’s major export earner, starting from 2014, marked the beginning of an economic travail for a country that lacks domestic production capacity.

According to the report, for Nigeria to get around the economic malaise, investment must be made in critical sectors of the economy, including energy and transport infrastructure that will play strategic roles needed to transform the economy over the medium to long term. It noted that with a narrow tax base, revenue mobilization is a key issue for the administration of President Muhammadu Buhari, which came into power on the crest of popular goodwill.

The report predicted that with lower oil prices and its concomitant sharp adjustment in government revenue, coupled with a narrow tax base, domestic revenues will fall way short of the figure that is needed to plug the country’s gaping infrastructure deficit.

Growth Will Rise In 2017, But No Quick-Fixes

The report forecasted that there will be a real GDP growth in the nation’s economy in 2017, which will strengthen to 4.7%.

It said: “We project a further acceleration to 5.5% by 2018 as the expansionary budget is implemented and a pick-up in global oil prices improves Nigeria’s fiscal and current account position.

‘‘We forecast an average real GDP growth rate of 4.3% over the next 10 years, compared to an average 6.8% over the previous decade, and 7.2% the decade before that.

“President Buhari’s efforts to diversify the economy away from an overreliance on oil will see little success in the near term, given the quick-fixes his policies have concentrated on. In order to see a meaningful advance in economic diversification, a more concerted effort to improve the business environment is needed.”

Dangote Refinery Will Aid Recovery

According to the report, Nigeria’s current account deficit will be the widest recorded since 1998 as, according to its forecasts, the country struggles with a slump in global oil prices exacerbated by plunging oil output. It added that continued pipeline attacks in the Niger Delta has dimmed production forecasts, such that it now anticipates output of 1.70mn barrels per day (b/d) in 2016, down from our original target of 2.30mn b/d which represents a decline of 21.5%

‘‘In 2017, there will be a modest recovery in the country’s goods export growth, as a rise in oil prices from a projected $46.5 per barrel (/bbl) in 2016 to $57.0/bbl, coupled with a 10.6% rise in production, contribute to the current account deficit, narrowing to 3.2% of GDP.

‘‘Looking further ahead, we expect that the development of a massive refinery by the Dangote Group will lead to a sharp improvement in the current account deficit from 2018 onwards. The refinery will have an annual capacity of 600,000 barrels per day which will cater for Nigeria’s domestic needs and curb growth in imports. Partly due to this development, we project that the current account deficit will fall to 0.4% of GDP by 2020.

The report also states that Nigeria will endure an economic contraction in 2016 as external and domestic challenges, exacerbated by a series of controversial monetary and fiscal policy developments, have led to a fall in manufacturing activity, declining oil production, a delayed implementation of an expansionary budget and reduced inflows of investment.

“We believe that the economy bottomed out in the second quarter of the year. However, despite some limited improvement ahead, any positive growth over the next two quarters will not be sufficient to offset the poor H1, and we forecast a 0.8% real contraction this year as a result.

‘‘In 2016, Nigeria’s current account deficit will be the widest recorded since 1998, according to our forecasts, as the country struggles with a slump in global oil prices exacerbated by plunging oil output.

‘‘The Central Bank of Nigeria will enact a further 200 basis points of hikes over the next six months in a bid to encourage a return in international investment. High structurally driven inflation will keep real interest rates negative, but the tighter monetary policy will be a strong signal to investors. While we believe that the security risks Nigeria faces on a number of fronts will eventually be contained, if the situation significantly deteriorates into a more intense level of conflict, this would potentially affect investment, exports, and growth. Power sector reforms are crucial for long-term productivity gains. If these are slowed or stalled, this would lead to lower long-term trend growth than we currently expect.”

Manufacturing Activities Slow Down As Economy Shrinks

Also, similar report by the apex bank indicated that the nation’s economy slowed down its rate of decline in July this year.

Nigeria’s manufacturing sector declined faster in August 15 of the 16 subsectors that recorded decline according to the Purchasing Managers Index released by the CBN yesterday.

Data from the apex bank showed that the Manufacturing Purchase Managers’ Index (PMI) dropped to 42.1 index points last month, compared to 44.1 which was recorded in July. Production level, new orders, employment level, raw materials and work in progress inventories, quantity of purchases, business outstanding/backlog of work and stocks of finished goods all recorded faster decline reflecting the receding state of the economy.

In the manufacturing sector, only electrical equipment remained unchanged as non-metallic mineral products, transportation equipment, petroleum and coal products, fabricated metal products, furniture and related products, cement, appliances and components, printing and related support activities, paper products, computer and electronic products, food, beverage and tobacco products; primary metal; textile, apparel, leather and footwear; plastics and rubber products; and chemical and pharmaceutical products all recorded faster decline.

At 40.5 index points, the production level index for manufacturing sector declined for the eighth consecutive month while employment level index in the month of August 2016 stood at 40.4 points, having declined consecutively for 18 months.

At the non-manufacturing end, only agricultural sector recorded any improvement as it grew, although at a slower rate to 53.9 index points from 56 which was recorded in July. Other  non-manufacturing subsectors, accommodation and food services, arts, entertainment and recreation construction, electricity, gas, steam and air conditioning supply, finance and insurance, health care and social assistance, information and communication, management of companies, professional, scientific, and technical services, public administration, real estate, rental and leasing; repair, maintenance/washing of motor vehicles; transportation and warehousing; utilities, water supply, sewage and waste management and wholesale trade had all recorded reduced activities.

The Manufacturing PMI declined to 42.1 index points in August 2016, compared to 44.1 in the preceding month. This implies that the manufacturing sector declined at a faster rate during the review period. Of the 16 manufacturing sub-sectors, 15 recorded decline in the review month. The electrical equipment sub-sector remained unchanged in the review period.

 Tax Policy Review, Panacea To Dwindling Revenue -Experts

With dwindling government revenue instigated by a decline in international oil prices, experts have said the tax review commissioned by the Federal Ministry of Finance will not only assure of an increased revenue, but will also bring about stability and accountability on the part of government.

Analysts believe that when the people are made to pay taxes, they will have every civic and legitimate right to scrutinise and question government spending.

Commenting on the issue, Taiwo Oyedele, partner and head of Tax and Regulatory Services at PwC Nigeria, told LEADERSHIP that the Nigerian government has, over the years, been known for fire brigade approach to solving problems, but that tax review will see government revenue rise sustainably.

He, however, noted that the reform may not transform to immediate increase in revenue for the government as the country current economy remains in dire straits.

“It is unrealistic to expect that a single administration will solve all our tax problems within four years or so, but it is reasonable to expect good progress in key areas that is not only worth the elapsed time but also help recover lost time and missed opportunities.

“The magic formula is to close the tap of tax corruption and raise compliance level. This is the only sustainable way to keep the life blood of our nationhood flowing and secure our future devoid of over- dependence on resources that we can barely control,” he stated.

Oyedele further noted that as much as the government is bound to provide infrastructure for its citizenry, Nigerians are also obliged to pay their taxes.

“Whether there is infrastructure or not, citizens are obliged to pay their tax. When they pay tax, then they have the right to hold the government accountable. I am not justifying past governments for not providing infrastructure, but the citizen cannot decide not to pay tax because the government is not providing the necessary infrastructure.  If we have the right policy, the government will be able to get more revenue from taxation and it will also be more accountable,” he said.

In his reaction, the executive chairman of RTC Services Ltd, Opeyemi Agbaje, said due to issues of corruption, “people don’t have confidence in tax systems. The tax processes need more efficiency; technology needs to be used better.”

On his part, the registrar and chief executive of the Chartered Institute of Taxation of Nigeria (CITN), ‘Fisayo Awogbade, noted that a review of the tax policy will “encourage the government to focus on high yield taxes such as indirect taxes, value added tax (VAT), stamp duty, away from direct taxes.

“Government does not need to increase the tax rate but expand the base. In doing this, they would continually eliminate the ‘Free Rider mentality’ that has pervaded the system wherein few Nigerians pay for whatever is available to be enjoyed by everyone,” noting that the

Tax to GDP ratio for 2015 was a paltry 4.7 per cent.

“This is also capable of discouraging tax compliance among even the compliant few when they operate side by side with their non-compliant counterparts. So, government does not really need to increase the burden on already existing taxpayers but focus more on tracking and bringing in those that have not been complying,” he stated.

Awogbade, however, noted that while the institute has often called for simpler tax laws so that tax administration and the burden of the tax is fairly distributed, he said that the institute will continue to push this overarching message during this review process.

“If anything, we continue to canvass for a tax system where the responsibility of maintaining government and infrastructure needed by all is paid for by a vast majority of the productive economy as a marked departure from the way the burden had been carried by a few in times past.”

Over the past two years, the price of oil which contributes up to 70 per cent of government revenue has dropped by more than half from around $115 per barrel to $47 per barrel as at yesterday.

The situation is worsened by increased attacks by militants whose activities in the southern Niger Delta energy hub in the last few months have reduced oil output by 700,000 barrels a day, according to the Nigeria National Petroleum Corporation (NNPC).

Nigeria’s distributable revenues to the three tiers of government dropped in July to around N494 billion from N559 billion shared  in June due attacks by militants on oil facilities.

 

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