Towards the diversification of government revenues

With the decline of the price of oil and the consequent decline in government revenues, there have been strident calls for the diversification of the Nigerian economy from many commentators. Both the President and the Vice President also joined the diversification train. In April 2016 in Guangzhou, China, the President said his administration is taking urgent steps to diversify the Nigerian economy. He has repeated that message severally since then. Recently also, the Vice President even went further to argue that what Nigeria needs is a diversification of its economy and not restructuring as many people have been clamouring for lately.

Seeing that the oil price slump has resulted in severe forex scarcity that has virtually crippled the Nigerian economy, it is assumed that the one bullet answer to Nigeria’s problems is the diversification of the economy. And it is not without good reason. Over 90 percent of Nigeria’s foreign exchange and 80 percent of government revenues before now had come from oil.

But it is a mistaken view. The Nigerian economy is well diversified. According to the World Bank in 2014 following the re-basing of Nigeria’s GDP, Nigeria’s economy “is more diversified and complex than previously documented…the more diversified structure of Nigerian GDP and the sectoral growth rates imply a more complex story of GDP growth in Nigeria”. According to available data, as of August 2016, oil and gas accounted only for 11 percent of Nigeria’s GDP.  Services is the largest sector of the economy, accounting for about 50 percent of total GDP.

Agriculture, which used to be the biggest sector before the discovery of oil now constitutes 23 percent of GDP. Information and communication account for 10 percent of the GDP. Industry and construction account for the remaining 16 percent of GDP. It is incorrect therefore to describe such an economy as undiversified. However, it is clear that despite the diversification of the economy, the oil sector, which contributes only 11 percent to the GDP, accounts for 90 percent of forex and 80 percent of government revenue.

That is where the problem lies. It is a case of government over-reliance on one source of revenue. It also means the other sectors are not operating at optimal capacity. So, technically, all the calls for diversification are misplaced. What should be canvassed for is a diversification of government revenue and the development of the other sectors so they could perform optimally and raise the revenue profile of the government.

Of course, with the huge decline in oil revenue, the federal government has placed greater accent on payment of tax by companies and businesses operating in Nigeria and the Federal Inland Revenue Service is working round the clock to ensure that there are no cases of tax defaults or non-compliance by all companies and businesses in Nigeria. This is commendable. The romance with oil rents have made successive governments to neglect the development of its tax collection capacity. The current malaise however, has made the collection of tax and strengthening of its tax-collection capacity inevitable.

But the government must realise that taxes are paid from profits and the economic recession combined with excruciating operating environment and government’s ill-advised attempts to control the economy and businesses is making it not only difficult for companies to make profit, but survive at all. The government must, beyond mouthing the need to diversify the economy, begin to roll out policies that will help jumpstart the economy. Then, businesses will thrive and the government rake in more revenues from taxes and end its dependence on oil.