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The Fiscal Policy Partner and Africa Tax Leader at PricewaterhouseCoopers, Mr Taiwo Oyedele, shares with TUNDE AJAJA his thoughts and the practical solutions to the high exchange rate, low revenue, rising interest rate, inflation and other economic challenges hurting the nation
Many Nigerians are deeply troubled by the high exchange rate, at about N650 to a dollar in the parallel market, because it not only affect manufacturers and other legitimate demands for FX, it has also led to a rise in the cost of almost every item. How can this steady decline be halted?
Unfortunately, there is aspiration and there is reality. Of course, the aspiration of many of us is for the Naira to be strengthened and stable, but if you have supply and demand imbalances and you are not looking for a sustainable way to address it, then you have this kind of outcome. Essentially, what has happened over the years and even more so in the past few months is that government is pushing more demand into the parallel market and reducing the supply in the official market. The reduction of supply in the official market is partly because the Central Bank of Nigeria is not supplying enough dollars, but even the bigger one is that the CBN’s foreign exchange policy is not encouraging the private sector to supply dollars, whether you are talking about foreign investors, foreign direct investments, Diaspora remittances and even private companies that do export. So, the CBN introduced RT200, which is essentially just creating two additional windows. The initiative says if you have foreign currency and you bring it in and you want to use it, you get N35, but if you want to bring it in for others to use, you get N65. Even if you give me N65 on top of the official rate (about N418) and I know that black market is now N650, why would I want to use the official channel? That way, we are not getting an independent supply of foreign currency.
Some people have tried to absolve the CBN from playing a role in the tragic depreciation of the naira but many people insist that the FX regime has been badly managed. What do you think?
From the government side, I know the CBN does not print dollars, but you also think about the fact that we can’t even meet the quota set for us by the Organisation of Petroleum Exporting Countries especially at this time that crude oil is around $100 per barrel. We are under-producing by about 600,000 barrels per day. On the other hand, we have a subsidy that is getting out of control. Also, the Nigerian National Petroleum Company Limited has not remitted anything to the Federation Account Allocation Committee in a while, which means we are not getting the dollar we should be getting. Those are the issues affecting supply in the official market. In the parallel market, the first problem is that the CBN has a long list of things not eligible for FX, even though those things are not illegal if you to import them. On the other hand, you have things that are not restricted but people can’t get FX for them. Take diesel as an example; the marketers say they only get 30 per cent of the FX they need to import diesel and that is why diesel is very expensive. If you speak to manufacturers, some of them say they get five per cent of what they need, and some of them need to import raw materials. People want to travel abroad but they can’t get FX and if they do, they only get a small amount. What we are doing is pushing all of those people to the parallel market, which would increase the demand. And the logical thing in economics is that if demand is a lot more than supply, prices would go up. Added to this is that politicians were buying dollars to pay delegates, which even complicates it further.
It’s disturbing that politicians get it for the wrong reasons and people who need it for business and other legitimate concerns don’t have access to it, how can Nigeria get out of this mess?
I don’t think it’s a big problem to solve but I don’t think the government is willing to solve it. The politicians didn’t use their hard-earned money to buy dollars to be able to bribe people; those were stolen money. If somebody stole N100m, they don’t care if it is N700 per dollar. They would buy. The problem we have created is that we have pushed people who are doing legitimate business to go to the same market as the politicians and even drug dealers who are buying dollars with corrupt money. It doesn’t make sense for manufacturers to go to the same market with such people with illicit funds. What we need to do is to move all legitimate activities to the official market and allow powers of demand and supply to determine the rate. With this, you won’t heat up the FX market and people with illicit funds would go to the parallel market. If you do that, people who have dollars abroad will bring it and the value of naira will increase. What you do is that, for items like toothpick that you want to discourage their importation, you impose higher import duties.

The rate of borrowing is another problem people are worried about, and one of the things fuelling it is low revenue, a perennial problem. Why is Nigeria unable to generate enough revenue?
Yes, we have revenue problem, spending problem and debt problem. But first on the revenue problem, we have a structural problem, in terms of our tax system. No country can become rich by taxing poor people. That’s how our tax system is structured today. This was even said by the vice president (Prof Yemi Osinbajo) when they were launching VAIDS (Voluntary Asset and Income Declaration Scheme) a few years back and that story has remained, dramatically. The bulk of the personal income tax being paid in Nigeria is through Pay As You Earn. I don’t know of any other country where that is the case. Look at the way politicians paid N100m and all manner of ridiculous amount to buy forms, and many of them have not paid N1 in income tax. So, they were given a list to pay a certain amount as tax, depending on the position they were vying for, to get tax clearance certificates. These are people who have never paid taxes before that you should convict so that they cannot contest offices. You then give them a nominal amount to pay so they can contest. That tells you we have people with a lot of resources, whether those monies are legal or illegal is not the business of the tax law, but they are not paying tax. The second thing is that government agencies are, in my view, some of the biggest tax evaders in Nigeria and we all know it. They collect PAYE from their staff and Value Added Tax from their contractors and even withholding tax but they don’t remit. You then wonder why the heads of the agencies can’t be sacked. It should not be that complicated. The other problem is the proliferation of revenue agencies. Almost every agency wants to collect taxes. About 60 Ministries, Departments and Agencies were identified by the National Assembly and they were setting revenue for them. The problem with this is that all of them are squeezing the individuals and the business community, and because of the multiplicity of agencies, the cost of collection would go up and leakages would multiply. Some of them are collecting revenues that are not going to the government, so you have a situation where people pay so much but government collects so little.
How best can we address that?
That is the reason why many countries, even in Africa, have only one revenue agency, including the collection of fees for other MDAs. But here, some hire consultants, which they pay ridiculous commission and then they share the money afterwards. These are some of the reasons why we are not making progress. The biggest one is that we are not using data and intelligence for tax administration. Even people who are in the tax net are not complying 100 per cent. They could pay a tax of N10,000 in a year and their income that year is more than N1bn. You can’t do that in several countries because the tax authorities know the money in your bank account, they know when you buy things at the mall, when you buy FX to travel, when you buy land, when you buy a car and register it. You need to connect those dots through intelligence and technology to know people’s economic activities and reconcile them with their tax record.
The solution you proffered seems achievable, why is it so difficult for the authorities to adopt it?
When Nigeria is ready to raise revenue, it will be like magic. The revenue could go up by 200 to 300 per cent in less than three years. We have seen Kaduna State do something like that. By just harmonising the dots, their revenue increased by 300 per cent in less than five years. Also, in Ondo State, they cut off consultants and their revenue increased by about 200 per cent. But at the centre, we are doing the opposite. The National Assembly keeps introducing new taxes, but we said we should have fewer taxes to collect more, not the other way round. We shouldn’t have more than 10 taxes and we need to restructure it so our tax system is focused on the middle and upper classes.
Does it mean that with the volume of money in circulation, if the right taxes are paid Nigeria shouldn’t be having revenue issues and huge debt?

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Yes, we should have a surplus, actually. We should not even borrow at all. If the amount of money we have in the system is being taxed properly, we will not have any need to borrow, based on our spending profile. So, the whole deficit by the Federal Government and all the states combined is less than N10tn. If Nigeria’s tax-to-GDP ratio moves from six per cent to about 18 per cent, which is like the average for Africa, South Africa is doing 26 per cent, let’s say we are not getting to that. At 18 per cent, that is 200 per cent increase and it would be more than enough to cover our budget deficit. The good thing when you make sure people pay their taxes based on their income is that it can also help you to prevent crimes like kidnapping, terrorism and other things like extortion.
How will that work?
 If we have a system that works, it will ensure that any money you spend, the intelligence within the system would capture it. If we look at your tax record and we cannot reconcile it, it becomes a target for investigation because you need to explain the source of that money. That is why countries like the United Kingdom have Unexplained Wealth Order, which Nigeria should have introduced, because it was a treaty signed in Ethiopia and Nigeria was a party to it, but we never introduced it. If we introduce it and tie it to taxes, we can solve not only the revenue and deficit problems, but also check criminal activities.
There have been concerns over the rising debt and there have been arguments on whether or not the country is on the right path with the way it is accumulating debt. Is Nigeria in a debt crisis?
We are not yet in a debt crisis but we are very close. You get into a debt crisis when you don’t have any other choice but to keep borrowing to service your debt, pay salaries and fund infrastructure. At that point, the cost of borrowing would keep going up to the extent that nobody would want to give you a loan. Then, you start printing your local currency and you end up with the Zimbabwe scenario of few years ago. Their currency became entirely useless. So, we are not at that point but we are not far away. Now, on one hand, debt to GDP ratio was still low as at the end of the first quarter. It was N41.5tn. Based on CBN report, ways and means is about 18tn. If you add them up, it’s about N60tn. If you divide that by 200 million people, it means the per capita amount we owe is about N300,000. If you compare that with the United States, which owes about $30tn in borrowing and you divide that by about 330 million people in the US, you would get about $90,000. It means the amount we owe per person in Nigeria is not even up to $1,000. But it doesn’t mean it’s okay to keep borrowing. Why? because we are poor. If you are a billionaire and you owe N100m, you can go to sleep and still go on vacation, whereas if you are worth N10,000 and you owe N100,000, you can’t sleep. So, it’s not about the size of the amount you owe, it’s about the ability and capacity to service that debt and pay back as and when due. In the first four months of the year, the Federal Government spent more than the entire revenue just to service debt. The debt service cost to revenue ratio was about 119 per cent. This is what should give us a lot of concern. Nigeria has to think of raising its revenue and improve the efficiency of spending so that the cost of servicing debt does not swallow all the revenue. What it means technically in the first four months of the year is that government borrowed all the money it used to pay salaries, overhead and capital expenditure, in addition to borrowing part of the amount used to service debt; not pay back the debt. That is clearly not sustainable. If you look at it from that angle, our debt portfolio is reaching a crisis level and it’s very close.
The Minister of Works and Housing, Mr Babatunde Fashola, said in a recent interview that if government must provide infrastructure like roads, it has to borrow, but Nigerians are no longer comfortable with the borrowing even though they want the infrastructure. How do we reconcile the two?
It’s not difficult. I think sometimes, people in government are lazy to put in the intellectual work. You know thinking doesn’t come by default. You have to apply yourself. So, all over the world, people need roads, rail, airports, seaports, healthcare facilities, education, etc. About 80 to 90 per cent of those things, the private sector will do far better than the public sector. So, what government needs to do is to identify infrastructure that can be self-financing and give it to the private sector while it focuses on those that are not self-financing. Why is government borrowing to build refineries? The private sector does that easily. The private sector will run the rail system efficiently and they will make money and pay taxes to the government. Look at those things that the private sector can do and create a framework and the right policy and let them run it. It is simple mathematics, and you won’t have to borrow so much. So I think they are not just ready to do what they are supposed to do.

The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, said during the MTEF-FSP briefing recently that government would either pay N6.72tn for full year subsidy in 2023 or it would retain subsidy till May 2023 and pay N3.36tn. What is the best approach?

I don’t subscribe to any of the options. I think those options are not necessary. Of course, the right thing to do is to remove subsidy, but it would be naive to say it’s very easy to do that, especially at this time. But there are other things you can do. There are two broad solutions that government can embrace. First is to remove the inefficiencies. If you check the global wholesale price of diesel and petrol per litre, it will give you about one dollar, which means whether you are importing from Ghana, Cote d’Ivoire or Europe, you would get it at about one dollar wholesale. If you add the freight, clearing, financing cost – let’s say you borrow money to do the importation – it should be less than 10 cent per litre. If you go to Benin Republic, you would see that diesel sells for a little over one dollar. You know we cannot say diesel is being smuggled from Nigeria to Benin Republic, because diesel is more expensive here, so it’s petrol you can smuggle. So, how is Benin Republic that is next door to Lagos getting diesel at about one dollar but Nigeria is getting it at about two dollars? The inefficiency causing that is also embedded in petrol, because diesel is not subsidised. The fact that we can see inefficiency in diesel means there is a lot of that in petrol.
What are some of the inefficiencies?
One, we don’t know the quantity we consume daily. The National Assembly said we seemed to be consuming more than the daily importation of NNPC, which is the sole importer. We need to identify the leakages where we have fictitious consumption. We also need to address the inefficiencies in the landing cost. There are all manners of government agencies with their own levies and charges and not all the money is even remitted to the government, which complicates the problem. So, we have to address the inefficiencies.
What other approach can we use to tackle the subsidy problem?
The second thing we have to do is that government has to restructure the subsidy regime. Today, the subsidy regime is not only shrouded in lack of transparency, we are also subsidising for the wrong people, because the subsidy is at the point of importation. If you import today and you dump the fuel in the lagoon, the subsidy payment would have been made already because the fuel has already been imported into Nigeria. What we can do is to change the subsidy from the ports to the pump (at the filling station). With that, you would only subsidise for the poor people. How? It would essentially be for those who use public transportation, especially the vehicles that use petrol engine. So, the government would identify those it wants to subsidise for and give them a fuel card as part of their driving licence and vehicle renewal. The card would have a chip embed into it. The way it works is that when they get to the filling station, they would pay the subsidised amount and the balance is taken from that card, which is funded by the government. You then put control so they don’t buy and resell. You already would do an analysis of their average monthly consumption, like the danfo drivers in Lagos, for example. When you do that, you can tell the whole world that you are subsidising for the poor people and that would help. In my view, that would reduce the subsidy amount by about 90 per cent. I think government can do a lot more than throw these figures at us.
The Minister of State for Finance, Budget and National Planning said at the briefing that the landing cost of petrol would have been around N700, can Nigerians afford to pay that amount, given the calls for total removal of the subsidy?

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I can tell you that the landing cost cannot be N700 unless there is inefficiency. First, the NNPC uses our dollars, meaning they get it at official rate of about N420 per dollar. N700 is like one dollar 80 cents. Every country around us sells petrol at a little over one dollar. In fact, many countries around the world have tax on petrol but Nigeria does not, so at the official exchange rate that NNPC uses to import, it should be much lesser than that.
If Nigeria continues this subsidy regime the way it is implemented currently, will it not ground the economy some day?
Yes, it will. Just put it in context; that N6.72tn is more than all the non-oil taxes collected by the FIRS and the 36 states’ Internal Revenue Service and all manner of levies, charges and taxes collected by all the 774 local governments. What happened in Sri Lanka is due to bad policies. So, it’s not difficult to predict where this will end up for Nigeria. If we continue with this subsidy regime with this current format, it will collapse the Nigerian economy and everybody will be worse off. It’s in our enlightened interest individually and collectively to find a solution to this problem urgently.
Before Major General Muhammadu Buhari (retd.), became the President, he described the payment of subsidy as a fraud, but under his regime, Nigeria has been spending trillions on the same subsidy and he has invariably pushed the task of removing it to the next government. Most of the frontline presidential candidates are also promising to remove it, how best should Nigerians engage them on this issue?
Politicians are often not sincere. These candidates would say whatever they think people want to hear just to get into power. I think that responsibility would rest with the media and then the rest of us. So, people have to on their own try and understand the problem without any sentiment and emotion, so they can have meaningful engagement with these politicians who want to lead us come 2023. When you keep interrogating them, you get them to a point where they start thinking, because some of them are not thinking. They just say whatever comes to mind and they get away with it. That interrogation is important around what the social implications will be. What stops the government from saying if allowed to remove fuel subsidy, it would negotiate with the Labour Union and increase salaries by 20 per cent. You know what would happen? The labour people would support the government; only their leaders would say they don’t want it because they (workers) know the impact on them would be less than 20 per cent. That 20 per cent of increasing salaries is a tiny fraction of what we are paying in subsidy. Do that and phase out the subsidy removal in stages. If you do N5 a week or N1 a day, the impact would be less, because another problem is that when you remove fuel subsidy, it always comes with scarcity, which creates a bigger problem than even the price increase. People would be hoarding it so they can sell at a higher amount. But if you phase out the subsidy and increase the price at the pump at N1 a day, no marketer will hoard it because N1 is not enough for them to cover their overhead. So, you need to find a smart way to negotiate with labour and find a systemic way that is not too counter-productive to phase out the subsidy. We need to have these conversations with those candidates.
A lot has been said about cutting waste in governance, to what extent would this boost our revenue base?
We can save a lot from that. That was why I said earlier that we have a spending problem. We are not spending like a country that is struggling financially. We spend money like we are the richest country in the world. When you look at the priority of our spending, it calls for interrogation. You see government officials travelling abroad for training when all the attendees and facilitators are Nigerians. So, why not do it here? Just look at the breakdown of the budget and see a lot of waste. I do think we can cut waste, even though that will not be where we solve all our problems but it will be part of the solutions.

To what extent would the Dangote Refinery solve our energy issues?
It will help significantly with the supply side and it will help to remove a lot of the inefficiencies. Also, you won’t pay freight, demurrage and other charges. It should help to a large extent with smuggling. Now, we will be dealing with a private sector person who we can make to account for all the people taking products from there and then you can track it. I think it will solve that problem. The problem it will not solve is that Dangote will not finish refining petrol and sell at N165 per litre. We may still continue to pay subsidy but the amount should come down. That should be a step forward towards full price deregulation that we so much desire.
The scarcity of Jet A1 has almost grounded the aviation sector, what is the way out?
There is also an inefficiency problem with Jet A1. You would remember that the airlines said if the government could give them a licence they would import the fuel by themselves. Recently also, manufacturers said if government could give them a licence they would import diesel themselves. What does this tell you? It shows those people could tell that the price is inefficiently inflated. If you address the inefficiencies, the price of Jet A1 will come down and supply will increase. However, that won’t solve all the problems. You also need to allow the airlines to charge commercial amount. If you are going to fly anywhere in the world, most likely local flights for one hour is more than $200. So, why are you forcing them to charge N30,000 when they say they cannot cope. That was why Aero Contractors suspended flight operations. Dana Air was struggling and government said it had to suspend operations. How many more do you think would stop? If most of the airlines can no longer operate, it will be a bigger problem for the country than if you allow them to charge commercial prices. Government has to ensure that this idea of trying to artificially reduce the price of everything, from electricity to petrol and airfare, doesn’t make sense. Allow the system to work and only regulate so they don’t take advantage of people, but you cannot force them to operate at recovering less than their cost. They cannot survive it.
There are also the issues of rising inflation and interest rate, how can this negative trend be reversed?
If you address all these issues around subsidy, inefficiency, oil theft and foreign exchange policy, etc., more dollars would flow into Nigeria, foreign reserves would increase and therefore naira would stabilise and it can actually appreciate. If naira appreciates to about N350 in the official market and it’s stable and available, the price of everything will come down, because most of those things are driven by imported inflation.
Governments often tie this economic situation to global trends, how can Nigerians manage in this face of this prevailing difficulty?

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Inflation is driven by mostly two or three factors; one of them is FX. If you are importing things from anywhere in the world and prices are going up in those other places, the UK has almost record inflation and the US has its highest inflation in 40 years, which is close to 10 per cent. It means you will need more dollars to buy the same goods as before. With that, you are converting at a higher naira rate. Definitely, the price will go up. So, FX is a big component of inflation. The second component is the supply problem. You are having issues with the supply of food, which partly has to do with Ukraine and Russia for the things we import. And locally due to insecurity, people can’t go to the farm. When you don’t have enough supply, especially of food, the price would go up. I don’t think the solution is for the Monetary Policy Committee to keep increasing rates. That is why the 150-basis point they did before did not have much impact. This is not a problem caused by excess money supply. It is caused by a lack of supply of goods. I don’t think increasing the interest rate is good for us; it’s affecting the amount government is spending to service its debt and the cost of finance for the private sector, which means many of them cannot fully utilise their capacity and they have to start thinking of rationalisation or even sacking people. So, we need to moderate our interest rate to what is good for economic growth. Whereas, for inflation, we need to address the FX problem and support production, while improving the security system. I think the biggest win for Nigeria or where we can start is import substitution; the things we are importing that we can produce locally. Once we start doing that, you find that there will be less imported inflation in the country. But in principle, it is correct to say rising inflation is a global phenomenon but it is affecting us more than it is affecting the average countries around the world.
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