August 08, (THEWILL) – The deepening slump in foreign investment in Nigeria signals a bad omen for the economy and should worry those in the position to halt the adverse trend. While the inauspicious development has severe implications on every sector, it could reverse the gains of the various tax policy reforms initiated in the past five years to boost non-oil revenue.
It is on record that the reforms brought remarkable changes to the tax space with robust gains in revenue, increase in the number of taxpayers and reduction in compliance gap.
For instance, the tax amnesty initiative under the novel Voluntary Assets and Income Declaration Scheme (VAIDS) introduced in July 2017, allowed more Nigerians to pay taxes by not punishing them for tax evasion. According to the Federal Inland Revenue Service (FIRS), the government recorded N17 billion through the scheme while the existing 14 million tax payers doubled during the two-year period of the scheme.
The Stamp Duties (Reform) Act, Personal Income Tax, Value Added Tax, among various initiatives (now upgraded in the 2020 Finance Act to boost tax revenue) yielded the desired results. Data from FIRS showed that tax revenue grew from N3.3 trillion in 2016 to N4 trillion in 2017. The growth trajectory continued in 2018 when tax revenue hit an all-time high of N5.32 trillion, then dropped slightly to N5.26 trillion in 2019. The figure for 2020 was N4.9 trillion which was affected by the COVID-19 lockdown.
Effectively, tax revenue at the federal level recorded an increase of 48.49 percent in the five-year period when investment inflow also recorded a significant increase: Investment grew from $5.12 billion in 2016 to $12.22 billion in 2017, a jump of 138.65 percent. It rose further by 37.49 percent to $16.81 billion in 2018, before hitting an all-time high of $23.99 billion or 42.7 percent in 2019. The incidence of COVID-19 and other macro-economic challenges pulled the level of investment southwards to $9.68 billion or 60 percent. As of H2 2021, total investment inflow for the year plummeted significantly to $875 million or 90.96 percent.
While there has been a quantum leap in Nigeria’s non-oil revenue arising from the introduction of the various tax reforms, the sharp decline in foreign investment inflow witnessed in the first six months of 2021, could halt the trend and scuttle the voluntary compliance culture. This is because an investment deficit has implications for development, employment, revenue and income growth with ultimate effect on GDP. This explains the concern by industry experts and other stakeholders over the rapid slide in investment in the economy.
WORRYING SIGNS
The first wailing voice was raised by the Nigerian Investment Promotion Commission (NIPC), a government establishment created to encourage, promote and co-ordinate investments in the Nigerian economy. The agency in a recent report (July 2021) revealed that investment announcements in Nigeria declined by a whopping 80 percent in the second quarter, which suggests that foreign investors have decided to look the other way.
According to NIPC, investment inflow fell to $1.69 billion in the second quarter from $8.41bn in the first quarter. The report had also revealed that the total value of investment interests in the first half of this year fell by $1.57 billion to $10.11 billion, compared with the value recorded in the second half of the previous year.
In a similar report, the National Bureau of Statistics (NBS) showed that investment into Nigeria slumped to the lowest level in four years as of the first six months of 2021. The statistics bureau in its report entitled ‘Nigerian Capital Importation (Q1 & Q2 2021)’ released on July 28, 2021, showed that the total amount of foreign investment in the nation’s economy was $2.78 billion in the review period. This was against $7.15 billion recorded in the corresponding period (second half) of 2020, a shortfall of 62 percent.
While the first quarter of 2021 recorded total investment inflow of $1.905 billion, the figure dropped to mere $875 million in the second quarter representing a decrease of 54.06 percent compared to first quarter of 2021. It also represents 32.38 percent decrease compared to the second quarter of 2020 when $1.29 billion investment came to the economy.
Although the picture of total investment inflow is painted in gloomy colours, of greater concern is the deepening slump in Foreign Direct Investment (FDI) which has a greater impact on the economy to propel growth and expand job opportunities. This is against the impact of Foreign Portfolio Investment (FPI) which largely comprises investments in stocks and shares with limited linkage for job creation. Over the years, the boost in investment inflow has been propelled by FPI, which paints an unrealistic picture of the health of the economy.
“The largest amount of capital importation by type was received through Portfolio investment, which accounted for 62.97% ($551.37m) of total capital importation, followed by Other Investment, which accounted for 28.13% ($246.27m) of total capital imported and Foreign Direct Investment (FDI), which accounted for 8.90% ($77.97m) of total capital imported in Q2 2021”, the latest NBS report stated.
The FDI figure of mere $78 million in Q2 2021 from $148.59 in Q1, a decline of 47.53 percent, has a direct link with job losses and low revenue which affects corporate and personal income tax levels. Unemployment rate jumped from 13.4 percent in 2016 to 33.1 percent in 2020, an increase of 197 basis points.
Further analysis of the NBS report revealed a sharp decline in the sectors that mostly attract FDI and which have the propensity to create jobs and boost economic development and growth. These include Agriculture, Production, Oil & Gas, Telecos, Construction and IT Services.
FDI in Agriculture in Q2 2021 decreased to $28.9 million from $66.40 million in the previous period of Q1, a decline of 56.47 percent, while Production which recorded $182.19 million in Q1 2021 nosedived to $68.03 million, representing 62.66 percent drop. In the same sliding trajectory, Oil & Gas sector attracted a total FDI of $57.25 million in Q1 2021 only to drop by 80.22 percent to $11.32 million in Q2 2021.
The Teleco sector received FDI totaling $56.28 million in Q1 2021, but dropped to a terrible level of $.34 million or 99.4 percent. FDI in Construction recorded zero inflow in Q1 2021 as against $1.50 million in Q2 2021 as FDI in IT Services trickled to $0.03 million in Q1 2021 compared with $1.60 million in Q1 2021.
UNEMPLOYMENT ANGLE
This, rightly, explains the concerns generated by the World Bank report which suggests that Nigeria’s unemployment crisis in recent times is the worst in the nation’s history. According to the research paper published in July 2021, Nigeria’s expanding working-age population combined with scarce domestic employment opportunities is creating high rates of unemployment, particularly for the youth. This situation has also been worsened by the pressures of the COVID-19 pandemic.
“Between 2010 and 2020, the unemployment rate rose five-fold, from 6.4 percent in 2010 to 33.3 percent in 2020. The rise in unemployment rates has been particularly acute since the 2015-2016 economic recession and has further worsened as COVID-19 led to the worst recession in four decades in 2020,” the report said.
Industry experts unanimously blamed unfriendly investment climate, intractable security challenges and acute infrastructure deficit, among other institutional and structural problems as the core factors responsible for the historic nosedive in the flow of FDIs into the economy.
Expressing obvious concerns with these declining FDI flows, the immediate past director-general of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf, pointed out that diverse institutional, regulatory and structural challenges had eroded investors’ confidence in the Nigerian economy.
“It is investors’ confidence that drives investment, whether domestic or foreign. Investors are generally very cautious and painstaking in taking decisions with respect to Foreign Direct Investment (FDI).
“Universally, FDIs are often long term and invariably more risky, especially in volatile economic and business environments. Uncertainties aggravate investment risk. Investors in the real sector space are grappling with structural problems especially around infrastructure.
“Investors’ confidence has also been adversely affected by the worsening security situation in the country. Meanwhile, our domestic economy is still struggling to recover from the shocks of the COVID-19 pandemic. These are the likely factors affecting investment decisions,” Yusuf said.
TAX GAINS AND PAINS
The 2020 Finance Act introduced radical tax reforms that have impacted the economy tremendously since it came into effect in 2021. The changes in both Company Income Tax and Personal Income Tax will affect corporates and individuals in various ways with implications. For instance, the upward review of VAT from 5% to 7.5% , amendment to Stamp Duty Act, introduction of the FGN Electronic Money Transfer Levy have increased tax receipts and boosted non-oil revenue.
The Nigerian Communications Commission (NCC) disclosed recently that Nigerians spent about N1.77 trillion on national calls and short messages in 2020. This translates to a 7.5 percent VAT revenue of N4.23 billion during the period. The telecos are examples of FDI. They generate a high volume of direct and indirect employment and tax revenue.
“DFI boosts employment and tax revenue. With the various reforms, government tax revenue has increased substantially both through corporate and personal income taxes. When the job is there and employment is guaranteed, people would not wish to cut corners to dodge from paying their taxes as and when due. Voluntary tax compliance becomes a seamless culture,” said Kazim Adeleye, a Tax Consultant.
A recent investigation by THEWILL showed that over 60 percent of internally generated revenue (IGR) of the states and the Federal Capital Territory (FCT) constitutes deductions from employee emoluments under the PAYE (Pay-As-You-Earn) tax system.
PAYE tax also accounts for over 70 percent of total taxes realised by the states, according to data from the NBS. This is against the widely held thinking that the states (or sub-nationals) have grown their IGR through more creative efforts. The report further revealed that the exponential growth in the states’ IGR in recent years did not occur from the sub-nationals becoming ingenious in finding alternative revenue channels beside federal allocations. While there is a marginal increase in other revenue sub-sectors, the investigation revealed that the states’ IGR has grown exponentially on the back of PAYE tax deductions.
In the past five years, states’ IGR increased remarkably – from N823 billion in 2016 to N1.306 trillion in 2020, a jump of 58.7 percent. Further analysis of the reports showed that the states’ PAYE tax revenue increased in the same trend from N403.87 billion in 2016 to N851.73 billion in 2020, or 110.8 percent increase. This excludes 2017 without available PAYE information. Total PAYE tax realised in 2018 was N669.21 billion, hitting N809.3 billion in 2019. The tax deductions from workers’ income also boosted the states’ IGR in 2018 and 2019 from N1.168 to N1.334 trillion respectively.
Professor of Accounting & Finance at Nasarawa State University and immediate past president, Association of National Accountants of Nigeria (ANAN) Mohammed Mainoma, said that the drop in investment would have adverse effects on economic development beyond negative impact on tax revenue. He however stressed that it would not affect the machinery for accelerated tax drives that the government has put in place.
“The drop in foreign investment may not necessarily reduce the tax drive since there are genuine efforts through the Finance Act to expand the tax base and also to block leakage and ensure prompt collection of tax revenue.
“It is however not a thing of joy since it will affect employment and production. In the long run we shall still have issues in the aggregates since tax is not the only issue. Other matters of development particularly human development be it education or health might be seriously affected,” Mainoma said in a note to THEWILL.
Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC observed that virtually all tax heads are under-performing in Nigeria and that PAYE and other taxes would increase if the states embark on an aggressive tax drive. He said in a note to THEWILL that personal income tax (including PAYE tax) is the number one source of tax revenue in many countries and that it is not unusual if 60 percent of states’ tax revenue in Nigeria consists of employee income tax.
This suggests that drop in investment opportunities will ultimately affect employment, income and tax revenue.
The World Bank has said that Nigeria has the potential to generate about N10 trillion as tax revenue in the next three years. To this end, the bank admonished the federal government to focus more on revenue-yielding avenues to achieve substantial gains, while growing its tax-to-GDP ratio to about seven per cent. This, it said, would allow the government to generate about N10 trillion revenue in the next three years.
In its recently released report tagged: “Resilience through Reforms; Nigeria Development Update” the World Bank advised the Nigerian government to increase ‘sin taxes’. These are excise taxes placed on certain goods perceived to be either morally suspect, harmful, or costly to society. Examples include those on cigarettes, alcohol and gambling. It also recommended charging fees for electronic money transfers, rationalising tax expenditures, removing loopholes in tax laws, and improving tax compliance with a more disciplined revenue culture.
The bank pointed out that the COVID-related economic slowdown and the steep fall in oil prices in 2020, brought into clear focus the need to increase non-oil revenue in Nigeria, even when investment, jobs, and growth also needed to increase.
According to the bank, “this calls for a carefully calibrated set of policy and administrative measures that can grow revenues without discouraging investment. In the longer term, fundamental reforms of the tax system will be necessary to stimulate post-pandemic investment and economic growth.”
Industry experts believe that the environment must be conducive for investment as no one would be willing to invest in a hostile environment. They argue that investment drought reduces employment opportunities, ignites illegal revenue collection and kills the economy by instalment.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
