With a more transparent budgeting process, Nigeria is likely to be assigned a better sovereign credit rating with lower risk premiums. Late last year, Fitch Ratings affirmed Nigeria's long-term foreign and local currency IDRs and senior unsecured bond ratings at 'BB-' and 'BB' respectively. The global rating agency had also stated that the country's outlook remains stable. Fitch had also affirmed Nigeria's short-term foreign currency IDR at 'B' and the country's ceiling at 'BB-'. According to Fitch, although Nigeria's Gross Domestic Product (GDP) growth slowed to 6.4 per cent in the first half of 2013, the country's economic indicators showed resilience in the face of exogenous shocks from the severe flood in 2012 which hit agricultural output; security problems especially in the north; and increased oil theft and vandalism; as well as the consequent repair shutdown which caused oil output to contract for the second year in a row. Nigeria's non-oil sector slowed, but still grew by 7.9 per cent in 2012 and 7.6 per cent in the first half of 2013. Fitch predicted that: "Non-oil growth should pick up in the second and third quarter of 2013, as normal weather has resumed and the authorities have responded to security problems. Reforms to the electricity and agriculture sectors could start to boost potential growth. Inflation has been in single digits all year, the lowest in five years and the longest stretch of single digit inflation since 2008, with policy rates unchanged." It also stated that the Central Bank of Nigeria (CBN) had the aim of achieving single-digit inflation and maintaining exchange rate stability, adding that public finance had remained comfortable. "Fitch estimates a general government deficit of around 1.8 per cent of GDP this year and next. Both oil and non-oil revenues are under-budget and the Excess Crude Account (ECA) has been tapped to compensate. Capital spending also remains under budget. "The draft 2014 budget plans ambitious fiscal consolidation, with lower oil production and benchmark oil prices and lower spending than the 2013 budget. "However, Fitch expects that oil production will likely fall short again, and the final budget that emerges from the National Assembly (NA) is likely to be more expansionary," the global rating agency declared. Nevertheless, Fitch expected that general government debt would remain stable at just over 20 per cent of GDP, barely half that of Nigeria's peers. Continuing, Fitch said: " Nigeria's sovereign and overall external balance sheets, current account surplus, debt service ratio and external liquidity are all stronger than 'BB' category medians. "Foreign reserves rose steadily in early 2013 but have been falling since May due to reduced oil output, prompting ECA draw-down, and global market turbulence, which has reduced foreign appetite for Nigerian paper (though net inflows have continued). "However, the Petroleum Industry Bill (PIB) remains stalled in the National Assembly . Strong vested interests will make structural reform a continual struggle, especially with elections in 2015. " Nigeria's ratings remain constrained by weak governance, low per capita income and vulnerability to oil price volatility. The government is responding to the Boko Haram insurgency mainly with security measures." The Missing Link Why the federal government was quick to hail the rating as a sign of its economic management ability, analysts believe Nigeria's ratings may improve in the years ahead if its budgeting process can be more open, transparent and less politicised. The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala , admitted this why commenting on Fitch's rating. According to her, "What's important about the rating is that while acknowledging all the 'challenges' the economy faces, it points to and applauds the strengths such as progress in the power sector, increased focus on agriculture, strong investment in local manufacturing and other areas." In its annual survey to examine the relationship between budget transparency, sovereign rating and investors, the International Budget Partnership (IBP), noted that the most direct channel through which budget transparency impacts the financial markets is through provision of more fiscal information and reduced uncertainty around that information. The International Budget Partnership collaborates with civil society around the world to use budget analysis and advocacy as a tool to improve effective governance and reduce poverty. Specifically, the IBP noted that reduced uncertainty is likely to result in lower risk premiums thus lower cost of borrowing. "But this is assuming that more information is necessarily favourable information, which may not always be true. For example, in an attempt to become more transparent, a country may do a stock taking of all of its debt and if the result of the analysis reveals that the consolidated debt of the government is much higher than previously reported, the higher transparency could very well increase the risk premium and thus the cost of borrowing. It is plausible that the governments are aware of this trade-off and are likely to make rational decisions regarding their level of transparency," IBP noted. The IBP also stressed that another way to look at the impact of transparency on financial markets is to consider two countries with similar economic fundamentals but different budget transparency levels. They added: "We argue that investors are likely to rate the more transparent country higher than the one with low transparency. This is not because markets attach an intrinsic value to transparency but because given that governments are rational, engaging in non-transparent practices implies that government perceives a gain from those practices. This in turn suggests that the information provided by the government needs to be discounted and the economic fundamentals are likely to be worst than reported." They also stressed that it is also possible that government may have a preference for opaqueness (particularly in non-democratic regimes) in which case the government may be reporting actual numbers without providing any assurances of accuracy. Similarly, financial market impact of the low or high level of transparency may be mitigated by other factors such as the appeal of the market size, contagion from neighbouring countries, global economic conditions etc. IBP however, stated that it is often difficult for the markets to determine the true nature of a county's fiscal position because the government for various reasons may engage in fiscal misreporting or creative accounting. "For example, during an election year, government may try to increase spending but will try to hide the deficit if voters dislike deficit. In other cases, the government may engage in off-budget activity to circumvent numerical rules such as deficit or debt limits. This suggests that the level of fiscal gimmickry may influence the impact of fiscal variables on ratings and spreads," according to the IBP. Perennial Budget Disputes Over the years, budget implementation has always been impeded by disagreements over transparency. The spat between the Nigerian parliament and the executive arm of government over the transparency and implementation of last year's budget is yet to die down. While the executive has allocated figures to the performance of the budget, the house of representative in particular has its own figures, which according to them represents under performance of the executive as regards implementation of the budget. However, Nigeria still enjoys favourable rating from several rating agencies based on the country's economic outlook and its debt position. This position may change soon. Reasons being that there is a link between budget transparency and sovereign rating as well as sovereign debts. In particular, more transparent countries, after controlling for various economic variables, have higher credit ratings and lower debts. Further, for countries with similar credit ratings, higher transparency is associated with lower spreads. Experts believe investors are interested in determining the default risk associated with various sovereign borrowers, which is largely dependent on a country's long term fiscal position. Often it is difficult for investors to determine the true nature of a country's fiscal position because governments for various reasons engage in fiscal misreporting or off-budget activity. Budget transparency can improve the ability of investors to assess a government's fiscal position thus its ability and willingness to service its debt obligations. It is also a fact that a country with more transparent budget processes is likely to be assigned a better sovereign credit rating and lower risk premiums for a number of reasons. The Temptation of Success Having attained a significant level of voluntary tax compliance, the Lagos State Governor, Mr. Babatunde Fashola is flirting with the idea of imposing new property and lifestyle taxes, despite complaints of multiple taxation by residents in the state, writes Nnamdi Duru Before now, many Nigerians hardly pay their taxes or pay less than what they are supposed to pay. Tax evasion and or avoidance mainly occur through connivance with government revenue officers, who see it as the best way to enrich themselves and make adequate provisions for their retirement. However, recent developments have made the three tiers of government in the country to become more aggressive with their revenue drive, extending their tax nets to capture some of the people who before now failed to pay or avoid taxes. The Federal Inland Revenue Service (FIRS), the Lagos State Board of Internal Revenue (LBIR), and the Lagos State Internal Revenue Service (LIRS) have pioneered a revolution in the nation's tax management, with significant progress recorded in the area of voluntary tax compliance. "The idea of taxation has helped us as a people. They have seen what we have done with their money and the people are watching us," said Governor Babatunde Fashola . > Also, dwindling resources have forced many states and local governments across the country to match the level of progress made by Fashola, who even said much is still yet to be done in this regard. According to him, the idea of pay taxing has become a way of life for Lagosians, adding that the state has to make it easier and more convenient to collect taxes from taxpayers and bring in more women into the state's tax net as a way of deepening taxation. Some of the areas that many taxpayers are agitated about include the imposition of series of taxes on them under the property and lifestyle taxes as well as the multiplicity of taxes. However, Fashola has maintained that multiple taxation is rather inexistent or at best minimal across the country. > Multiple Taxations Many individuals, corporations and trade groups across the country have consistently cried out over the imposition of multiple taxes on them and their members. A taxation expert identified some of the conditions that encourage multiple taxation. > "There are certain provisions in the Nigerian tax laws that may potentially create double taxation especially for individual taxpayers. For instance, itinerant workers under the provisions of the Personal Income Tax Act (as amended) are potentially liable to tax in different states in Nigeria where they work. > > "The state tax authorities in Nigeria where these workers perform their work can legitimately lay claim to the personal income tax due on the respective employees' incomes, given the provisions of the Act. This may potentially create jurisdictional double taxation," he said. > > However, the Lagos State Governor, Mr. Batunde Fashola, who defined multiple taxations as a situation where several tiers of government impose similar tax on the same individual or corporation, said there is nothing like multiple taxations in the country from his own perspective. > > According to him, what prevails in the country is a situation where different tiers of government impose different taxes on their citizens for rendering some given services, which the individual or corporation enjoys, saying this is not a case of multiplicity of taxes. > > He therefore, challenges all those people shouting about multiplicity of taxes in the country, particularly in Lagos State to come up with proofs of such and get ready to defend their position. > > Property Tax > Related to the above is the series of taxes captured under property tax. Property owners in the country have been crying out very loud, claiming that the different taxes being imposed on them for owning a property, particularly in Lagos , Abuja and Port Harcourt are becoming unbearable. > > Some of the applicable property taxes in the country include land development levy, Certificate of Occupancy (C of O) charges, survey plan approval levy, land use charge, building plan approval charges, tenement rate, property identification tax, environmental pollution tax, generator levies, radio and television levies and many others. > > For Fashola, if a citizen has so much money as to be in a financial position to own landed property, he should be ready to pay a set of taxes captured under property taxes. > > He cited the cases of the United Kingdom , United States of America and South Africa to prove that what obtains in the country with regard to property taxes has been tested and accepted worldwide. > > He also wondered why Nigerians who own property across the world pay similar and in some cases more property taxes there and return to Nigeria to cry foul over same taxes. > > According to him, the series of taxes associated with owning a property is one of the ways governments, all over the world, redistributes income by forcing the rich in the society to contribute more into the common wealth that everybody contributes to make the society a better place for citizen and residents, both rich and poor. > > Lifestyle Tax > Another contentious tax in Lagos State is the Hotel Occupancy and Consumption Tax which imposes additional 5 per cent tax on consumption in hotels and event centres across the state. Hotel owners have been in the forefront of agitation against this law, saying it is killing their businesses as many customers for fear of the added cost, are not patronising them as much as they used to do before now. > > However, the governor asked a rhetoric question, which even those that argue against the Lagos State Hotel Tax Law could not answer. > > "If a man can spare N80,000 to buy a bottle of champagne in the club or hotel, what stops him from giving an extra N4,000 to feed those who have nothing to eat in the society? What problems do these hotels and event centres have with collecting this money on behalf of government and remitting same accordingly," Fashola queried. > > He argued that lifestyles are freely chosen by those individuals and not forced on anybody and as such if anyone chooses ostentatious living, then he should pay for liabilities associated with such lifestyles. > > According to the governor, imposition of taxes on the lifestyle of citizens is one of the ways that governments all over the world "redistributes income by taking a little more from the rich to support the poor, the vulnerable and the weak in the society." > > How to Enhance Voluntary Compliance > Some taxation professionals have suggested ways of improving on the current level of voluntary tax compliance in the country. They said tax authorities should also make it easier for taxpayers to pay up, help those facing various forms of difficulties to comply and mete out adequate sanctions to recalcitrant eligible taxpayers to serve as deterrent to others. > > According to a tax consultant, Dr. Mark Abani , government should institute a dedicated and continuous programme of taxpayer education, saying the level of tax education influences taxpayers' behaviour. > > "A critical part of taxpayer education is not only about what they need to do and when to do it, but also clear and public statements about the penalties that apply and the effect that these have on their lives. That is the second part of the 'keep off the grass notice'," he said. > > Abani also observed that communication about tax programmes should focus on promoting the benefits of paying taxes, educating taxpayers about how to comply, and increasing the perception of risks of non compliance even as this should include both institutional and initiative-specific messages. > > "It can incorporate appeals that have an emotional element, for example linking the use of tax revenue to the funding of schools or highlighting sanctions for failure to comply. Other messages, such as explaining changes to laws or procedures can be purely informative. Effective communication promotes voluntary compliance," Abani stressed. > > Another taxation expert identified the necessary conditions that encourage voluntary tax compliance in a society including a simplified tax system and a credible tax administration system. > > "There are five strategic pillars on which a voluntary tax compliance culture in Nigeria can be built. Simplified tax system, emphasises on indirect taxation, informed taxpayers, credible tax administration system, and responsible leadership." > > Tax authorities, particularly FIRS, are expected to play leading role in influencing tax policies and legislation. FIRS should regularly issue guidance notes on controversial tax law provisions to improve certainty, which will in turn improve voluntary tax compliance. > > Government must also focus more on indirect taxes including the Value Added Tax (VAT) and hotel tax in Lagos State that rely heavily on the credit mechanism, making them self-policing and discouraging tax evasion unlike income taxes which are relatively easier to evade. > > Taxation professional all agreed that tax authorities should proactively provide timely information through various channels to shore up taxpayers' knowledge on their tax obligations, while tax administrators should be fair and even-handed on the job while the leadership should be responsible on how they allocate government revenues. > > Meanwhile, tax is like a social contract between the government and the people and when citizens pay their taxes, the government is expected to put the money to good use by way of providing social amenities to improve standard of living. > To encourage voluntary tax compliance, citizens need to have assurances that the taxes they pay to the government across levels will be put to good use.
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