Nigeria is at a critical juncture in its development journey, and the window of opportunity is narrowing. More than six in 10 Nigerians face high deprivations in clean energy, healthcare, education, and basic infrastructure, among other areas, leading to deteriorating living standards. To compound the situation, Domestic Resource Mobilisation, which holds the key to unlocking Nigeria’s potential and creating fiscal space for transformational investments in these vital sectors, and to withstand unforeseen shocks, is facing significant challenges. Now, more than ever, President Bola Tinubu must quickly fix these DRM challenges, as the nation’s prosperity and the well-being of its citizens are contingent on his actions.
DRM is critical to Nigeria’s financing needs for several reasons. First, it offers a reliable alternative to external sources of finance like the Official Development Assistance and debt, which often come with the burden of debt servicing. Moreover, the exchange rate depreciation and rising global interest rates have made debt financing less viable for Nigeria’s spending plans. The escalating debt servicing is taking up a significant chunk of government revenue, making this approach unsustainable. According to a 2023 debt report by the ONE Campaign, an alarming 91 per cent of Federal Government’s revenue was spent on servicing debt in 2021; a stark contrast compared to only 29 per cent in 2014.
Prioritising DRM in Nigeria can unlock a powerful engine for economic growth and sustainable development, ensuring greater autonomy and control over its financial destiny. However, successful domestic resource mobilisation requires overcoming significant hurdles, particularly lower tax rates and tax avoidance, which hinder the development of a robust and diversified tax base, undermining the overall tax revenue collected. For instance, while Ghana imposes a 175 per cent excise tax on tobacco, Nigeria’s rate stands at 30 per cent ad valorem (plus N4.2) per cigarette stick.
Similarly, the DRM efforts face challenges from a large informal economy, where businesses do not report their income and hence remain mostly untaxed. The government must explore ways to incentivise informal businesses to formalise their operations and be included in the tax base. One way to do that is to leverage digital platforms to establish a robust database of informal players that can serve as a decision-making tool for fiscal management of the sector.
The Federal Government’s use of tax incentives has also been ineffective and opaque, further limiting its revenue generation. While tax incentives can be beneficial for attracting investments, global best practices demand regular assessments to ensure they achieve their intended objectives. Unfortunately, there has been a significant absence of statutory evaluation and reporting of the budgetary and financial impacts of tax incentives in Nigeria. Only once, in 2019, did the government disclose the financial implications of the tax incentives issued, revealing that N1.2tn ($2.76bn) in Corporate Income Tax waivers were granted—more than double the amount spent on healthcare that year. Such lack of transparency raises concerns about the true effectiveness of these measures in achieving their intended goals. To ensure greater transparency, the president must commit to a series of policy reforms, including annual reporting of tax incentives granted and publishing studies evaluating the potential impact of these incentives.
Additionally, Nigeria faces the challenge of illicit financial flows, which involve the illegal movement of money from one country to another, resulting in a drain on government revenue. These flows are driven by tax evasion, illegal extractive activities, trade misinvoicing, corruption, and transborder financial crimes. Beyond depleting valuable resources, these illicit activities exacerbate inequality and impede the country’s overall development. The 2021 State of Tax Justice Report revealed an annual loss of $1.8bn through corporate tax abuse in Nigeria. If properly taxed, these funds could yield billions of Naira that could be spent on crucial areas such as social protection, healthcare, and education, significantly benefiting the nation’s well-being and progress.
Nigeria must also focus on improving its financial planning. Poor financial planning is one of the key factors contributing to the country’s DRM failures, resulting in underinvestment in transformational areas and heavy reliance on borrowing. Struggling to predict and achieve revenue targets and consistently falling short by an average of 29 per cent every year since 2014 highlight the urgency of addressing this issue.
Nigerians have a crucial role to play in holding their leaders accountable and demanding transparency in fiscal management. They must actively engage with the government’s initiatives, monitor the use of resources and advocate inclusive and equitable policies.
Unlocking Nigeria’s potential requires bold and decisive actions. With strong political will, effective leadership, well-thought-out policies and active citizen participation aimed at improving domestic resource mobilisation, Nigeria can embark on a path of growth and sustainable development, ultimately improving the well-being of its people.
- Gbemisola Joel-Osoba, an economist, writes from Abuja
