Widening Nigeria’s tax base to drive non-oil economy

Nigeria is Africa’s largest oil exporter and the world’s 10th largest oil producer. The Nigerian economy is heavily dependent on the oil sector, which accounts for over 95 per cent of export earnings and about 40 percent of government revenues, according to the International Monetary Fund. With so much dependence on crude oil export revenue to finance the national budget, the sharp drop in oil prices in the international market deals a huge blow to government balancing acts on its fiscal regime.

In addition to the slide in crude oil prices, the issue of glut in oil supply is a source of concern. International crude oil traders are said to have shunned the country’s export of sweet crude making it difficult for the country to find buyers for the product.

Nigeria’s once highly desired, easy-to-refine sweet crude has become hard to sell, making the country to embark on discounted sales just to get the cargoes off the high seas. The bulk of the oversupply in the Atlantic Basin crude market is composed of Nigerian crudes. Asian and European demand for Nigeria cargoes has been slow so far, due to the availability of cheaper crude oil at the international market. Asian countries, which Nigeria turned to when the United States stopped buying Nigeria’s crude oil due to the shale boom, now, prefer Angolan grades. China especially, which became a large buyer of Nigerian crude oil, has reduced importation due to heavy build-up of its products. The country also now prefers Angola’s crude grades. Low European refinery demand amid weak gasoline and naphtha margins has put pressure on Nigerian light sweet crude.

At the home front, Nigeria is finding it difficult to utilize its crude oil resources.  The country has four refineries with a combined installed capacity of 445,000 barrels per day (bpd). At optimum capacity, the output of the refineries will be 18 million litres daily. The combined capacity of these four refineries is insufficient to satisfy the domestic consumption of refined products, which is largely premium motor spirit (PMS), estimated at 30 million litres daily.

Nigeria’s refineries are currently operating far below their installed capacities due to inadequate funding for their routine maintenance and sabotage of oil facilities by militants. The demand shortfall for petroleum products is, therefore, met through importation. It is estimated that demand and consumption of petroleum in Nigeria grows at a rate of 12.8 percent annually.

As of 2014, Nigeria’s petroleum industry contributes about 14 percent to its economy. Thus, the petroleum sector remains a small part of the country’s overall diversified economy. The oil and gas industry has, therefore, failed to catalyse the rapid growth of industries and related businesses.

One of the ways the government can diversify its revenue is to widen tax base and raise its revenue particularly from the non-oil sectors of the economy in the face of dwindling receipts from crude oil. According to PricewaterhouseCoopers (PwC) report, Nigeria currently has one of the narrowest tax bases in the African sub-region.

There is an urgent need for government to restore fiscal credibility by widening its tax base to help Nigeria wriggle out of her present economic crisis emanating from the drop in crude oil prices and stranded cargoes.

Deepening of their tax bases does not necessarily mean increasing tax rates. Instead, taxes must be applied to different economic activities, from the extraction industries to personal income, while exemptions must be systematically eliminated.

Nigeria should deepen its tax base to collect more revenues to finance development, build state institutions and improve national dialogue and, more generally, deepen the social contract with citizens. Taxation is a core governance function. It has the potential to shape relationship between state and society in significant and distinctive ways.