Low Tax Collection Limits Nigeria’s Fiscal Flexibility -Report
A very low tax collection has been pointed as the largest constraints on Nigeria’s fiscal flexibility, a report from the American credit ratings agency, Standard & Poor’s said. The ratings firm predicted that Nigeria’s gross domestic product (GDP) will expand by 1.9%.
In a related development, the credit ratings firm predicted that Sub-Saharan Africa (SSA) is likely to be the World’s slowest region post-lockdown.
S&P economists said the expected recovery of the global economy and commodity markets, as well as easing of Covid related restrictions will cause the economic outlook for 2021 to be slightly more favorable.
In line with S&P Global Ratings’ oil price assumptions, improving crude prices in 2021 should support the Nigeria economic recovery, with GDP growth rebounding from -18% to 1.9% in 2021 and averaging 2.3% in 2022- 2024.
Thanks to stronger export earnings, S&P said the current account deficit will fall to 1.2% of GDP in 2021 from 3.2% in 2020, shifting to a modest surplus of about 1.7% in 2023-2024.
On the fiscal side, it explained that the rise in oil prices will help the consolidated general government (center and states) fiscal deficits to narrow to 5.0% in 2021 from 5.5% in 2020 and to about 4.2% in 2022-2024.
On the downside, S&P believes that external financing gaps could emerge if economic assumptions weaken or if funding from official lenders or other sources is not as forthcoming as expected.
“Fiscal and external pressure will remain high over the next few years as myriad of security risks also persist”, it added.
In addition, the American credit ratings, Nigeria’s fiscal flexibility is constrained by very low levels of revenue, even by regional standards, and a high interest bill as a percentage of general government revenue.
“A tightly managed exchange-rate regime and high inflation limit the effectiveness of monetary policy transmission and constrain growth, while the banking sector remains vulnerable to asset quality problems, especially in the oil and gas sector”, the report said.
It highlighted further that Nigerian government increased its dependence on the central bank loans to fund the fiscal deficit due to low earnings.
MarketForces Africa reported that the Central Bank of Nigeria has however halted Ways and Means funding channel to Federal Government.
“One of the largest constraints on Nigeria’s fiscal flexibility is very low tax collection, with general government revenue as a percentage of GDP averaging around 7% GDP”.
“This highlights the limited tax-generation capacity, partly due to the high level of informal economy and the two-tiered federal and state-level tax system.
“Nonetheless, we note the authorities’ recent endeavours to increase revenue streams, especially non-oil ones. Nigeria’s established democratic and federal system helps distribute wealth and power, but makes reform implementation and tax collection more difficult”. S&P concluded.
Low Tax Collection Limits Nigeria’s Fiscal Flexibility -Report
