In presenting the 2015 Budget to the national assembly, the Minister of Finance and Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, noted that the 2015 Budget is structured for the diversification of the economy. Her words indeed echo the thoughts of President Goodluck Jonathan, who when responding to questions on the decline of crude oil prices, in relation to Nigeria’s revenue targets, said the time is ripe for the diversification of our economy from crude oil.
This brings about the question, what exactly are the ‘Diversification’ objectives of the Nigerian government.
Diversification as a concept, is generally taken as the process in which a growing range of economic outputs is produced. It can also refer to the diversification of markets for exports or the diversification of income sources away from domestic economic activities (i.e. income from overseas investment).
Economic diversification in its standard usage, either in terms of the diversity of economic activities or markets, is a significant issue for many developing countries, as their economies are generally characterized by the lack of it. When speaking of diversification of an economy, the usual practice would be to create new revenue streams that have the ability to contribute to the running of the economy. This diversification provides nations with the security and reliability that they need so that if one economic revenue stream should fail, the nation knows that they have several other options for revenue. Key word being REVENUE.
In 2014, the countries that are a part of the Gulf Cooperation Council, known as GCC, met to discuss the importance of diversification in their economic development and in the role of the state. The conference brought the countries of Bahrain, Qatar, Oman, Kuwait, the United Arab Emirates and Saudi Arabia together. Throughout the conference, international experts and academics shared their thoughts on ways that the Gulf nations could grow their economies and build sustainable, reliable, revenue streams.
The common consensus at the meeting was that these nations needed to create non-oil sectors in addition to competitive business environments in their nations in order to get the desired economic growth. Economic diversification takes the dependence on oil and low-wage expatriate labour and refocuses it on all economic activity. In fact, the researchers were able to point to empirical evidence that lists diversification as one of the primary reasons that economies are less likely to go through economic volatility.
The United States for instance, was originally a nation of farming, the major sector Nigeria seems to want to diversify to. Agriculture was the primary way to make money, to which taxes were paid and can be argued as what built the nation’s foundations. However, as the nation began to grow, the need for diversification began to become more obvious with Americans believing that the country needed to have manufacturing, so as not to remain dependent on trade with Britain. As manufacturing began to spread, new companies were built and jobs were created. Profit was made by companies and as a direct result, disposable income to citizens and taxes paid to the government, rose.
The argument of diversifying Nigeria’s economy however may raise a few more questions, as the Nigerian economy itself has long since been diversified. Prior to the re-basing, the contribution of crude oil and natural gas to the nominal GDP was 40.86 per cent in 2011, 37.01 per cent in 2012 and 32.43% in 2013. After the re-basing, the sector’s share of the GDP stood at 17.52%, 15.89% and 14.40% for 2011, 2012 and 2013, respectively. As a matter of fact, the contribution of Nigeria’s oil sector to the Gross Domestic Product is lower than that of many of the other members of the Organisation of Petroleum Exporting Countries.
If it is then true that Nigeria’s economy stands diversified from oil, the new question now emerges as to why crude oil remains the largest contributor to funding the Nigerian budget. The answer may lie in the government’s inability to effectively widen it’s tax net to better capture other sectors of the economy. Nigeria’s tax revenue to GDP ratio is about 7%, a low comparison in regards to other emerging economies and other middle-income African countries, with an average tax revenue to GDP ratio for between 20-30%; and it must be noted that a large portion of this 7% is crude oil based.
It must also be noted that the FIRS has continuously increased it’s collectable tax revenue, Year-on-Year. However, looking at the room left untaxed, there remains scope for further improvement. Nigeria needs to improve its tax revenue performance especially for non-oil tax revenues as a means of diversifying it’s revenue base.
In recent times, the Federal Inland Revenue Service has sought advice on what other countries such as Angola and South Africa had recently done to increase their tax revenues. Apparently, these nations had conducted the reputable tax consultant McKinsey & Co to conduct an analyses of tax issues within these economies and recommended specific initiatives. In this the FIRS has subsequently engaged the services of McKinsey to conduct a tax diagnostic for Nigeria, and assist in plugging tax leakages.
Over the last four years (2011 – 2014), Nigeria has failed to meet it’s revenue targets by a minimum of 11.8% (23.3% in 2011, 12.07% in 2012, 14.6% in 2013 and 11.8% in 2014), outside the already existing budget deficit included in the nation’s annual budgets. This has not allowed Nigeria to meet it’s infrastructure and developmental potentials. The countries $22.8bn, 2015 budget (which ironically is just about $4bn more than Google’s reported consolidated revenues for the forth quarter of 2014 alone), is grossly inadequate to meet the needs of the nation.
If Nigeria could widen it’s tax base and thereby generate up to 20% of it’s GDP (with the increase coming from non-oil sources) then the diversification cycle would have truly been complete. This would see Nigeria earn as much as N19 trillion annually (almost 5 times the current budget). The focus for the Nigerian government should thus be stronger on it’s revenue drive than diversification, as according to the nation’s GDP, the nation has more than enough already.