Reviewing the structure and capacity of the Nigerian economy for improving Government Revenue Dr. Yemi Kale Statistician General of the Federation/ CEO National Bureau of Statistics 08/05/2015 BudgIT Symposium: Options and possibilities for government revenue growth and efficiency- Options, Opportunities and Possibilities
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Reviewing the structure and capacity of
the Nigerian economy for improving
Government Revenue
Dr. Yemi Kale
Statistician General of the Federation/ CEO
National Bureau of Statistics
08/05/2015
BudgIT Symposium: Options and possibilities for government revenue growth and efficiency- Options, Opportunities and Possibilities
OUTLINE…
i. Introduction
ii. What is GDP?
iii. What GDP is not
iv. Structure of the
Economy: Output
approach
vii. Structure of
government
revenue
viii. Conclusions
v. Structure of the
Economy:
Expenditure
approach
vi. Opportunities for
further growth
A
A
A
A
INTRODUCTION
SECTION A
UEFA CHAMPIONS LEAGUE AND NIGERIA’S GDP
Q1: From these
statistics, can we tell
which team (left or
right) won the
match?
Q2: Does having a
higher ball possession
rate, or covering
more distance mean
that a team would
ALWAYS win the
match?
ENGLISH PREMIER LEAGUE AND NIGERIA’S GDP
Q1: From these
statistics, can we tell
which team (left or
right) won the
match?
B
B
B
B
What is GDP?
SECTION B
“Very few people indeed trully understand how the
regularly published GDP figures are constructed” Diane
Coyle
Domestic private savings
GDP Defined
Rest of world
Firms Households
Product
Markets
Factor
Markets
Government Save/Invest
Factor
cost
Sales
revenues
Wages
& rents
Private
cons.
Gov’t
exp.
Invest.
exp.
Transfers
Import payments
Export receipts Foreign savings
Taxes Gov’t savings
Domestic demand for final goods
Intermediate
demand Leakages and
withdrawals
Injections
Budget deficit
Current account
balance
Absorption
= C + I + G
GDP (market price)
= C + I + G + X – M
GDP (factor cost)
= L+K
Circular Flow of Income
The Gross Domestic Product (GDP) is the market value of all officially recognized final goods and services produced within
a country in a given period
Output/Production approach
Value of Sales of goods and services – Intermediate Consumption in producing those goods and services.
Expenditure Approach
GDP = C + I + G + (EX – IM)
Income Approach
Wages+Rent+Interests+ profits+ adjustments
What is GDP?
Methodology
Four major methodological pillars
The System of National Accounts (SNA 2008 version),
The International Standard Industrial Classification
(ISIC Revision 4),
The Central Product Classification (CPC version 2)
The development of a Supply and Use Table/matrix
(SUT)
Then NBS conducts sector surveys
Formal sector from company audited reports from FIrS,
SEC etc
Informal sector from HH surveys.
Data also collected from various MDAs, Federal
and States
9
Measuring GDP
Background and Key Milestones The SNA 2008: The SUTISIC 3.1 to 4
10
ISIC Rev.3.1
A Agriculture, hunting and forestry
B Fishing
C Mining and quarrying
D Manufacturing
E Electricity, gas and water supply
F Construction
G Wholesale and retail trade; …
H Hotels and restaurants
I Transport, storage and communications
J Financial intermediation
K Real estate, renting and business …
L Public administration …
M Education
N Health and social work
O Other community, social, personal …
P Activities of private households
Q Extraterritorial organizations and bodies
ISIC Rev.4
A Agriculture, forestry and fishing
B Mining and quarrying
C Manufacturing
D Electricity, gas, steam …
E Water supply; sewerage, waste …
F Construction
G Wholesale and retail trade; …
H Transportation and storage
I Accommodation and food service activities
J Information and communication
K Financial and insurance activities
L Real estate activities
M Professional, scientific and technical activities
N Administrative and support service activities
O Public administration …
P Education
Q Human health and social work activities
R Arts, entertainment and recreation
S Other service activities
T Activities of households …
U Activities of extraterritorial organizations …
10
C
C
C
C
What GDP is Not
SECTION C
UEFA CHAMPIONS LEAGUE AND NIGERIA’S GDP
Q1: From these
statistics, can we tell
which team (left or
right) won the
match?
Q2: Does having a
higher ball possession
rate, or covering
more distance mean
that a team would
ALWAYS win the
match?
UEFA CHAMPIONS LEAGUE AND NIGERIA’S GDP
Real Madrid qualified
for the Finals by
beating Bayern
Munich 4-0
Nearly all the stats
would indicate the
opposite
...the problem with
aggregates
...knowing what each
statistic measures
...focusing on data
not ideology!
ENGLISH PREMIER LEAGUE AND NIGERIA’S GDP
Q1: From these
statistics, can we tell
which team (left or
right) won the
match?
ENGLISH PREMIER LEAGUE AND NIGERIA’S GDP
Manchester City
practically won the premier league
because of this
match, beating Aston
Villa 4-0
Nearly all the stats
would point to the
likelihood of such a
result
GDP growth isn't synonymous with development
…but is required for Development
Rising output Increase in tax revenue development infrastructure (public goods) higher output
GDP not necessarily Significantly job creating Either
What is the nature of the growth?
In what sectors and are they high labor intensive sectors?
GDP Growth vs. Development vs Employment vs Poverty
GDP may not reduce poverty
High inequality (Gini coefficient worsened)
Rapid population growth: May fall but slower
Base effect: Depth of poverty
2003-04 2009-10
Percent
change since
2003-04
National 0.3898 0.4161 6.8
Rural 0.3727 0.4070 9.2
Urban 0.3835 0.4100 6.9
Inequality increased
both in rural and
urban areas.
Larger increase in
rural areas.
GDP Growth vs. Development vs Employment vs Poverty
Socio Economic Ratios
5/9/2015 18
1419.54 1479.07 1517.41 1539.39
2281.14
2490.05
2683.98
2908.08
3,128
2010 2011 2012 2013 2014
Income per capita (US$)
Old Series (%) New Series (%)
19
Rebasing/Re-benchmarking of GDP
GDP and GDP per caita of top 10 economies, 2013, IMF
Rank Country GDP USD trn$ Rank Country GDP US$
1 United States 16.79 1 Qatar 98,814
2 China 9.18 2 Luxumbourg 78,670
3 Japan 4.9 3 Singaporre 64,584
4 Germany 3.63 4 Norway 54,947
5 France 2.73 5 Brunei 53,431
6 United Kingdom 2.53 6 Unites States 53,101
7 Brazil 2.24 7 Switzerland 46,430
8 Russia 2.11 8 Canada 43,472
9 Italy 2.07 9 Australia 43,073
10 India 1.87 10 Austria 42,597
26 Nigeria 0.5 121 Nigeria 2,689
Countries with the highest GDP are
not necessarily the same countries
with the highest per capita GDP ...Except for the US
D
D
D
D
Structure of the
Economy: Output
Approach
SECTION D
Macro Economic Summary
Real GDP Growth: Slower yet
strong
5/9/2015 21
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
2011 2012 2013 2014
Real GDP Growth (%)
Old Series (%)
New Series (%)
Old Series (N, Million, Current Prices) 2010 2011 2012 2013F
Crude Oil And Gas Revenue Petroleum Profit Tax (PPT) Gas Revenue
Resource Curse
The Voracity Effect/ Institutional
Impact
Volatility in Commodity Prices
Dutch Disease
Hausman and Rigobon (2002) summarise what we know now: “The
concern that natural resource wealth may somehow be immiserating is
a recurring theme in both policy discussions and in empirical analysis.
The empirical regularity seems to be in the data but understanding its
causes has been a much harder task.”
Challenges of dependency on oil revenue
Resource Curse Channels
Institutions/ Voracity
Effect
Natural Resources
Generate Rents
Distorted Political
Economy
Hamper Growth
Commodity Prices
Boom in Oil prices
People feel wealth
Increase in fertility
Ultimately drags growth
Dutch Disease
Boom in Oil prices
Real exchange rate over
appreciates
Contraction in Tradable
sector
Drag on growth
Beyond Oil- What is the Hitch?
Its all about Incentives: Yes, Democracy Now, but :
balance of power between citizens and public officials, including those at state and local government levels, is inordinately skewed in favor of the latter by virtue of their easy access to oil revenues. This perpetuates politics, even democratic politics, as patronage
Thus there are no right incentives for governance, incentives that are now sorely missing, and would contribute to reduce corruption and the rest of the problems that affect the Nigerian institutions today.
For 2014, Oil Revenues accounted for Roughly 67.12% of all FGN revenues
As such, the government has little incentive to provide services efficiently because the discipline exerted by the need to tax the public is largely absent: oil revenues are manna from heaven and keep flowing regardless of what the public sector delivers.
The Nigerian experience provides telling confirmation of this aspect of natural resources. Waste and
corruption from oil rather than Dutch disease has been responsible for its poor long run economic
performance.
Beyond Oil- There is hope!
Natural resources appear to have negative
effect on growth by impairing institutional
quality.
But it could be Managed:
Once institutions are properly controlled, the
effect can even be positive!.
In particular, it is fuel and minerals—that typically
generate rents.
This effect is quantitatively significant, amounting
lowest VAT relative to its economic contribution, contributing 0.11% to total VAT, yet 18.45% to GDP
Professional Services contributes the highest VAT relative to GDP, with 13.69% of total VAT, and 3.69 of total GDP
Hotel and Catering, Mining, publishing, automobile assembly and pharmaceutical production are taxed almost equally to their contributions to GDP
Higher VAT
collected relative
to GDP
Lower VAT
collected relative
to GDP
-15% -10% -5% 0% 5% 10% 15% 20%
Professionl Services
Transport and Haulage …
Banks and Financial Institutions
Breweries. Bottling and …
Pharmaceutical, soaps and …
Automobiles and Assemblies
Publishing,Printing,Paper …
Hotel and Catering
Mining
Building and construction
Textile and Garment industry
Properties and investments
Commercial and Trading
Agricultural and Plantations
Percentage point difference in % contribution
to GDP and % contribution to VAT, 2013
Fiscal Ratios
5/9/2015 60
22.31 22.69 22.02
13.88 13.47
12.45
2010 2011 2012
Government Revenue to GDP
(%)
Old Series New Series
8.35
12.37 12.35 11.33
5.20
7.35 6.98 6.00
2010 2011 2012 2013
Federal Tax Revenue to
GDP
Old Series New Series
Analysis of PFCE and VAT Receipts
0.00
5.00
10.00
15.00
20.00
5% of PFCE= N1.8 Trillion
VAT RECEIPTS BY FIRS CLASIFICATION 2010= N465 BILLION
2010
0.00 2.00 4.00 6.00 8.00
10.00 12.00 14.00 16.00 18.00 20.00
5% of PFCE = 2.9Trillion VAT RECEIPTS BY FIRS
CLASSIFICATION 2013 (N481.6B) - H1 2014 (N248.5B)
2013
h1 2014
Jobs and Income Tax
Job creation survey started in 2012
Jobs are divided into three categories:
Informal: Fewer than 10 employees
Formal: 10 or more employees and registered
professional services
Public Sector
Policy relevance:
• Employment is important for growth and social
wellbeing
• Taxation of income can only be achieved in the
formal sector
Jobs Created
- 369,585 jobs in Q4 2014, with 138,026 (37.36%) formal
- In all quarters informal jobs were greatest, reaching 67.78% of all new jobs in Q3, 2013
- Formal jobs followed, whilst jobs created in public sector were fewer
- Jobs created has been growing in 2014, yet has not reached 2012 levels
Policy Implication: need to both encourage growth of the formal sector, ( higher skilled and paying jobs)as well as formalize the existing informal sector in order that incomes can be taxed and regulated
0
50
100
150
200
250
300
350
400
450
500
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2012 2013 2014
Jo
bs
cre
ate
d,
Tho
usa
nd
s
PUBLIC INSTITUTIONS
INFORMAL (Less than 10 employees)
FORMAL (10 persons above & Professional Services
employing less than 10)
Employee Compensation Vs Firm
Profitability
N’000,000 2010 2011 2012 2013 2014 Q1
COMPENSATION OF EMPLOYEES 14,626,616.12 16,068,305.93 16,630,297.15 17,124,049.41 4,266,455.09
Employee compensation depends on many factors. For instance:
- Composition of the firm (capital/labour/skills intensive)
- The size of the firm (economies of scale)
- Length of time in operation (learning effects)
- Among others
Tells policy makers about the condition of the labour market and the ability of
workers to bargain for higher compensation
Growth in COE: 5.44%
Growth in OS: 4.40%
Sources of Government revenue
Taxes
Other revenue
Intergovernmental Transfers
What makes an idea revenue structure for a government?
Broad & Diversified vs. Dependency on natural resources rents?
Predictable vs. dependency on international oil markets / crude oil prices?
Growth in line with domestic economic development vs. international demand for natural resources?
Broad-based vs. natural resources dependent?
Counter-cyclical vs. cyclical?
Determinants of ideal Tax Structure
Large Firm Case Studies
Compensation of Employees The Employee compensation component of value added:
- Varies from as low as 6.02% in Dangote Cement in 2013
- As high as 32.16% in Nestle in 2012
- Increasing in all firms, perhaps indicating increased bargaining power of employees
Corporate Profitability: Operating profit to value added:
- Ratios are generally high, reaching 77.29% in Dangote Cement Group in 2013
- Lowest proportion in Guinness in 2013 at 51.52%
- It is declining through time in all companies, perhaps indicating a squeezed profit margin
Guinness Nestle Dangote Cement Group
(N '000) 2012 2013 2012 2013 2013 2014
% Employee component of value added to value added 21.48% 23.04% 30.16% 32.16% 6.02% 7.38%
% operating Profit to Value added 56.40% 51.52% 59.17% 57.45% 77.29% 68.25%
H
H
H
H
CONCLUSION
SECTION H
Conclusion Nigeria is going through hard times Like the economists say…Never let a crisis go
to waste What we have been clamoring for since
1970s and 80s, we now have the opportunity to do…further diversify our economy
Government needs funding to do this, and this CAN be done, by expanding our tax base via incorporation of the informal sector and increasing the VAT (its is very low)
So use GDP which shows structure of the economy to compare with current tax receipts and bridge the gap by formalizing the sector
Companies currently paying taxes to pay more not by increasing tax rates but encouraging
them to expand output to meet local demand as well as export.
Intra African trade
Those outside tax system informal or formal
evading taxes or underreporting output
incentives to pay and disincentive not to pay(severe penalties).
FGN Share of VAT
FGN Independent Revenue
FGN Share of Fed. Acct. (Net)
-
50.000
100.000
150.000
200.000
250.000
300.000
350.000
JanuaryFebruary
MarchApril
MayJune
July
August
SeptemberOctober
November
December
FGN Share of VAT FGN Independent Revenue FGN Share of Fed. Acct. (Net)
Dependency on FAAC allocations vs. indirect taxes / IGR