Nigeria’s Dwindling Tax Revenue: Beyond the Over-reliance on Oil Base

Over the last three quarters, Nigeria’s fiscal revenue has been weak, with implications on the ability of the Government at all levels to meet financial obligations, especially as the monthly statutory allocation dwindles. Notably, most State Governments have technically defaulted on monthly salaries of civil servants (i.e delayed payment) over the last three quarters, given strong dependence on FAAC. We highlight below the revenue picture, with a focus on non-oil revenue, especially with the consensus view on the need for a diversified economy away from oil.

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Recent GDP rebasing reinforces the inefficiency of Nigeria’s tax system, as reflected in the abysmal low tax revenue to GDP of c.4% (vs. peer country average of 17%). Though the notable size of the informal sector in Nigeria limits tax penetration, peer countries with similar economic structures achieved appreciable penetration, thus emphasizing the dire need to overhaul Nigeria’s tax system. More concerning is the weakening monthly trend in tax revenues through the first quarter of the year. Whilst the Federal Government has contracted Mckinsey and Co to work with the Federal Inland Revenue Service (FIRS) on deepening tax penetration, we use the chart below to highlight one of the obvious banes to revenue collection which need to be addressed, especially as we see notable revenue potential from brewing SME sector in Nigeria.

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