World Bank Advises Nigeria on Tax Reforms to Address Economic Crisis

The World Bank has advised Nigeria to seriously reform its tax system to address economic challenges being faced in the country.

John Litwack, Lead Economist of the World Bank, gave the advice recently in Abuja at the launch of the bank’s third Nigeria Economic Report (NER).

He said the country should build a tax system that was not dependent on oil.

``A lot of the problem is tax administration and if the government is collecting all the taxes that it should be collecting, then we won’t have this type of crisis.

``So the approach is not simply increase in tax rate, but bringing people under the tax net and probably using incentives to get people to pay taxes.’’

The lead economist said the bank would not influence Nigeria’s decision on the issue of fuel subsidy, adding that it could only point out the costs and benefits.

``We did not make any recommendations on fuel subsidy because precisely we don’t think it is our place to do that; we understand this is a difficult decision for Nigeria.

``There are implications that should be considered but we think Nigeria will ultimately decide; so what we are trying to do is to inform the debate by pointing out the cost implications.

``The costs quite frankly look very high and the benefits for the ordinary Nigerian does not look that high,’’ he said.

Litwack said that although fuel subsidy appeared to have very modest benefits for the majority of Nigerians, the cost implications were quite high.

He noted that the annual spending on fuel subsidy in the country accounted for about one-fourth of all budgetary spending.

According to him, this is significantly greater than the entire federal capital budget and greater than all federal spending on education and public health combined.

He, however, said that weak enforcement of administrative prices of petrol and kerosene had in no small measure reduced the benefits of fuel subsidies to Nigerians.

The World Bank representative noted that uncertainty about the fuel subsidy had strongly discouraged investment in domestic oil refining.

``Allegations of corruption and fraud surrounding the implementation of the fuel subsidy were costly to the reputation of the government.

``Subsidy related fuel shortages have repeatedly disrupted economic activity and imposed serious welfare costs on Nigerian households.’’

Litwack further noted that the 35 billion dollars cost of fuel subsidy from 2010 to 2014 accounted for why Nigeria was unable to accumulate a fiscal reserve in the Excess Crude Account (ECA).

He said an accumulated ECA fiscal reserve could have protected the country from the recent oil price shock.

Masami Kojima, Lead Energy Specialist of the bank, said although Nigeria boasted of being the ninth largest natural gas reserve in the world, it suffered from chronic shortages.

This, she said was evident in the amount of gas flared as against the amount used for power generation.

Kojima said that although successive administrations were aware of the need to provide sound regulatory and commercial conditions for natural gas development, progress made in modernising the sector had been limited.

She listed some issues affecting a robust natural gas sector in the country as lack of proper design of institutional framework for regulating the sector and the lack of clarity for some regulations and regulators.

She said others included incomplete or missing regulations, low pricing policy, payment delays and inadequate transparency that stood as major obstacles to investment in Nigeria’s natural gas sector.

Kojima advocated the establishment of a domestic gas aggregator, announcement of annual domestic gas demand and allocation of domestic supply obligation to licensed petroleum producer at the beginning of each year.

She also said that a dedicated gas bill for the midstream and downstream should be considered.

Kojima said Nigeria should renew licences promptly and fully implement roadmap for power sector reform to ensure prompt and full payment.

``Realising the vast potential of Nigeria’s natural gas sector will demand a bold new strategy that includes revisiting the pricing policy and regulations from 2008.

``With a new administration in place and the recent announcement by NNPC of its change agenda, there is a historic opportunity to transform the gas sector,’’ she said.

The report examined issues bordering on fuel subsidy and the natural gas sector.

NER is a series of report produced to inform public debate on some of the macroeconomic opportunities and challenges of the country.