Redeemers’ Men Fellowship Inspiration Conference 2020, Themed: Galvanized For Geometric Growth
SPEECH BY HIS EXCELLENCY, PROF. YEMI OSINBAJO, SAN, GCON, VICE PRESIDENT OF THE FEDERAL REPUBLIC OF NIGERIA, AT THE INSPIRATION CONFERENCE 2020, THEMED: GALVANIZED FOR GEOMETRIC GROWTH, ORGANIZED BY THE REDEEMERS’ MEN FELLOWSHIP ON THE 25TH OF JANUARY, 2020
Let me say first, how greatly inspired I was by the fantastic speech made by Dr. Akin Adesina. I must say and I mean this from the bottom of my heart, that it was tremendously inspiring for me and I am sure it was for you as well. The part I liked the most was when he said that the best entrepreneurs come from the age of 50 – 60 or thereabout. That was very encouraging for me, I am beginning to think a career in politics perhaps might not be the way to go, maybe I should be an entrepreneur.
I thank Dr Adesina for an excellent presentation but most importantly, for the way in which he inspired us, showed us the great possibilities that are here and those that lie ahead of us.
It is a special privilege and honour to have been invited to participate in this Inspiration Conference 2020 of the Redeemed Christian Church of God Men’s Fellowship, Lagos Regions.
The Redeemers’ Men Fellowship deserves our commendation for this timely and relevant conference with its theme ‘Galvanized for Geometric Growth.’
My task has been made quite easy, I think a lot has been said already by Dr. Adesina, in particular the aspects of which are inspirational. I would concentrate in providing some fiscal and macro content for the various contributions that may follow.
I think it is important for us to understand things possibly from the perspective of the Federal Government, and I think our star-studded faculty for this conference will then expatiate on some of the issues which I will lay down.
So, I will just briefly refer to some of the latest developments in the Nigerian economy and some of our thoughts and plans going forward.
Very recently, an article featured in Newsweek Magazine entitled “Black China: Africa’s first superpower is coming sooner than you think”. That Africa’s superpower is Nigeria.
The essential point made in the article is that despite our challenges, Nigeria is the ‘last major open market on earth’ and that like China and India, its population and economic size will enable economies of scale and attract international investment.
We are at a point in our history where everything is working in our favour, and if we take the opportunity today, things can only grow geometrically as has been suggested.
Just this week, the Spur Group, an IT company from China indicated that it will be establishing a computer hardware manufacturing plant in Nigeria.
Much earlier than this, in the course of last year, the Mara Group of Ashish Thakkar had also indicated that it will set up a manufacturing plant for Mara Phones in Nigeria. Microsoft is setting up its Africa Centre here in Nigeria.
All of these investors are pointing in one direction, the direction of the incredible prospects that our country offers.
It is not difficult to see why Nigeria remains an attractive destination for investments. Even the insufficient 2.5% growth rate predicted by the IMF for the Nigerian economy in 2020 comes to about $10 billion dollars which is bigger or just about the size of some of the economies to which Nigeria is often compared in Africa.
In other words, the scale of the Nigerian economy in African terms is such that our relatively low growth is bigger than several African economies.
The point then is that what happens here in Nigeria will fundamentally affect the rest of Africa and everyone is looking to what will happen here.
It is easy to underemphasize this point, I just want to make this point so that in making our comparisons, we are better informed.
Rwanda, to which we are compared sometimes, has a GDP of $8.7billion (as at 2018). The FCT’s GDP is $29.2billion, Akwa Ibom State’s GDP is $14.2billion, Bayelsa State GDP is $8.8billion, Lagos State GDP is $90billion, Rivers State GDP is $14.2billion, and Delta State GDP is $11.2billion.
So, there are a number of individual States in Nigeria that are bigger in terms of GDP than the whole of Rwanda. Even Ghana to which we are sometimes compared is $65.5billion (2018) which is less than that of Lagos.
So, I have found that in making comparisons we are better off looking at countries that have the sorts of challenges and attributes we have; size and diversity like India, Brazil and China. These are the countries that have the size, the diversity and the challenges that Nigeria has.
Perhaps more significant from a national perspective is that the growth rate of 2.5% is about equal to our population growth rate which means we have the problem right there because we need to make sure that our growth rate is well in advance of our population growth rate. At the moment, they are roughly the same.
But the bright side of that is the era of negative growth in per capita income will soon end, so we can put this distraction behind us and focus on our ambitions of a higher growth rate.
Another often over-looked part of the Nigerian population story is our large diaspora.
The overseas remittances into Nigeria were estimated to be $25 billion dollars from formal sources although some students of the Nigerian economy think it could be as high as $40 billion dollars if informal flows are taken into account.
The diaspora of course, does not only bring money but it is also a source of ideas, innovation and investment. The example of Kobo360, a Nigerian start-up that recently featured in the Financial Times is salutary.
Kobo360 which was one of the start-ups in a group that I led to Silicon Valley in July 2018 aggregates end-to-end haulage operations and raised $30million in a Series A round led by Goldman Sachs and Nigerian commercial banks not too long ago. The founders of the company, two young Nigerians, Ife Oyedele II and Obi Ozor exemplify this spirit of fitting into a globalised world.
They were working abroad but came back home and proceeded to fill a gap in the logistics sector specifically the haulage industry.
Using technology, Kobo360 has made it possible for providers of haulage services to find cargoes for their trailers on return journeys, in effect bringing down the cost of the transportation of goods by half.
The potential of the Nigerian economy is also being boosted by investments in agriculture, manufacturing, technology and the creative industries.
The story of increased rice production in Nigeria is well known with the production of paddy rice in 2019 estimated at 7.3 million metric tonnes compared to about 5million metric tonnes in 2015. That is just scratching the surface, our potential is several times more than that. The basic difficulty we have is in milling and a lot more investments is coming into milling, with more milling, we can actually become self-sufficient in rice production.
A little noticed phenomenon taking place in agriculture is the use of technology to attract crowdfunding into the sector.
These programmes (there were up to 17 of them at the last count), enable a wide variety of people to invest in agriculture without actually having to engage in farming or manage farms.
Given the huge interest in agriculture and the relative ease of investing through such platforms, we have seen a huge increase in investment in agriculture and subsequent increases in agricultural output across the value chain.
Companies like Farmcrowdy, FarmAlly, Thriv-Agric, raise funds electronically through their digital platforms for farmers and for farms. People like you and I who don’t want to go to the farms invest on the platforms, become owners of the farms and take dividends and profits from the farms.
This is an incredible new way of investing in agriculture in Nigeria and we are seeing geometric growth in this respect.
The Manufacturing Purchasing Managers Index is used to get a feel of activities in the manufacturing sector and outlook for the future. It stood at 60.8 index points in December 2019, which was the highest level since November 2018, but perhaps more significant is the fact that all the component parts such as inventories, employment level, supplier deliveries, new orders, production levels reported positive growth.
This positive outlook for the manufacturing sector can be seen from the Leventis Group which for instance continues to make substantial investments in the Nigerian manufacturing sector through its subsidiaries; the Nigerian Bottling Company and Beta Glass.
The Nigerian Bottling Company will soon be commissioning its Asejire Plant which has taken a substantial part of a recent $500milion dollar investment in Nigeria while Beta Glass which makes the bottles for the pharmaceutical sector and for beverages like Coca-Cola and Star Beer has invested another $30million to expand its furnace capacity.
The Nigerian technology sector continues to hold out great promise. Just as Dr. Adesina said, we are looking forward to a $500million facility to encourage technology entrepreneurs and innovation in that sector.
Recent reports show that Nigerian start-ups attracted $122million out of the $492m in funding to the African start-up sector in 2019. Perhaps more compelling is the increasing use of e-payment channels within the economy.
The value of point of sale transactions (POS) is reported to have reached over N3.2trillion in 2019 as compared to N2.3trillion in 2018, an increase of 38%, while the volume also increased by 153 million transactions to a total of 438 transactions in 2019. With the registration of payment service banks and the increase in the minimum level at which stamp duty is payable from N1000 to N10,000, we are set to see more quantum leaps in the use of electronic transactions with the attendant positive effect on the economy.
Our creative industry and tourism are also a source of encouragement about our economic prospects. The quality of offerings from our film industry, Nollywood has greatly improved with films like Wedding Party and Wedding Party 2, Chief Daddy, King of Boys, attracting large audiences and reaping huge rewards.
In terms of quantity, Nollywood is the second-largest film industry in the world producing about 50 movies a week. The interesting thing is that the quality of such offerings has improved greatly.
Air traffic passengers (which is an indication that shows the kind of movement into the economy) into the Murtala Mohammed International Airport in Ikeja increased by nearly 7% in 2019.
This increase could be partly ascribed to more friendly visa on arrival regulations and can be further boosted by arrangements to improve the visitor experience especially with regards to transportation and hotel connections from the airport for business visitors and religious tourists.
I want to emphasize the point that with respect to welcoming visitors to Nigeria, especially business visitors, we can do much better, the airport facilities can be greatly improved, there’s a lot more to be done in that respect. Part of the improvements made in the ease of doing business is visa on arrival.
Some people have tried to bad mouth visa on arrival policy but I want to say that when we compare ourselves with countries all over the world, visa on arrival is a basic fact of life.
Practically all African countries have visa on arrival, you apply online and when you get to the country you are given the visa. In some cases, you get the visa there are submitting your application. We must make it easier for business people to come to Nigeria.
The threats that we have are not from people coming in looking for visas, they are from those breaking the borders in other ways, the terrorists we have to contend with are not necessarily walking through the airports and showing their passports.
We should not be worried about people we can track and have a record of, we should be worried about people that we cannot see, those that don’t carry any passports but trying to walk through our borders.
One of the major challenges in growing our economy is creating and maintaining an environment favourable to business and then the second challenge is low revenues.
Our budget this year is N10.6trillion (N8.9tn in 2019). Aggregate revenue is forecast to be N8.4trillion, with a shortfall of N2.2trillion.
it is clear that we are running a fairly large deficit, the reason is that we are not earning as much as we should or could earn. The main sources of our revenues are oil proceeds and taxes.
The same rings true for the States; most States do not generate enough internally generated revenue in one year to pay their bills in one month. In 2018, Adamawa State’s internally generated revenue (IGR) was N6.2billion (N516.7million/month), In 2018, Adamawa State’s expenditure was N177.9billion (N14.8billion/month), Benue State IGR was N11.2billion (N933.3million/month), Benue State’s expenditure was N178.4billion (N14.9billion/month), and Ekiti State IGR was N6.5billion (N538.8million/month), Ekiti State’s expenditure was N98.6billion (N8.2billion/month).
I have picked 3 States randomly, and the story of most of the States is that way. And it is not because we cannot earn more, it is because everybody relies on the centre, the oil and allocation from oil.
I have spoken at various times to some of our Governors in some of the States, that in the days of the regions, all that they had was tax and agriculture, and they paid 50% of that to the Federal Government and spent the remaining 50% and they were able to do the incredible things that they did then.
Today, we have the same sources of income, better-educated people, more businesses, more taxable adults, improved technology for agriculture, and everything is better off than we were 50 years ago, yet we are earning less.
It is important for us to bear in mind that the business of growth is not just about the national economy, but the sub-national economies, each State determined to grow and chart its own economic path so that there can be growth.
The Finance Bill, the first since 1999, is the government’s fiscal response to these issues namely, a better business environment and also better domestic revenue mobilization.
The Finance Act has two main purposes with extremely beneficial effects on the Nigerian economy.
First, it addresses the issue of domestic revenue mobilization, taxation, on which Nigeria has often paraded quite an abysmal record.
However, even while achieving this objective for the public sector, the Finance Act is very carefully calibrated to encourage the second, that is, improving the ease of doing business in Nigeria and actively fostering private sector growth.
Now everyone agrees that the engine of commerce in any economy are small and medium scale businesses.
So, for us one of the most important objectives of the Finance Act is the specific incentives for small businesses.
The Act exempts small companies with a turnover of less than N25million a year from the Companies Income Tax. Medium-sized companies with a turnover between N25million to N100million a year will now pay Companies Income Tax at a lower rate of 20%.
With these in place, the Finance Act has now done away with the cumbersome procedure for computing minimum tax for companies under the Companies Income Tax Act, replacing same with a simplified base rate of 0.5%.
For insurance companies there is good news. Let me explain that. Before the Act, insurance companies were only allowed to carry forward, losses for four years, even when companies in other sectors could carry forward their losses indefinitely.
This anomaly has now been erased. Not only can they carry forward losses indefinitely, but the
special minimum tax for insurance companies has also now been abolished. In this respect, they are to be treated like any other company.
To ensure better revenues from dividends and improve capital, there are also provisions in the Finance Act to mitigate the risk of double taxation.
Before now, dividends paid out of retained earnings were liable to tax, despite the fact that such earnings would usually have been subjected to tax already. This is now no longer the case.
A similar provision has also been made in respect of franked investment income and dividends paid out of exempted profits. In other words, these sources of income will no longer be at risk of double taxation.
To encourage early payment of taxes, we have another business-friendly provision in the Finance Act is the granting of tax credits to companies for early filing of their tax returns.
Large companies will get a 1% tax credit while medium-sized companies will get a 2% tax credit.
Furthermore, in recognition of the special impetus required for infrastructure development, withholding tax rate on roads, bridges, buildings, and power plant construction contracts is now reduced from 5% to 2.5%.
Now let’s talk about increasing government revenues. It is a well-known fact that Nigeria’s tax to GDP ratio has been very low, indeed one of the lowest in the world. This has by itself seriously constrained economic growth and limited the delivery of those public amenities which are essential preconditions for attracting investment.
The Organisation for Economic Co-operation and Development (OECD)’s revenue statistics in Africa 2019 Report puts Nigeria’s tax to GDP (Gross Domestic Product) in 2017 at 5.7%. 2018 estimates are only slightly higher at 6%, which, considering the level of economic activities Nigeria, is so low as to constitute a negative factor and serious drawback for the entire system.
This is more so, considering that the average tax to GDP ratio across 26 other African countries is still 17.2%, which is 11.5% higher than Nigeria’s.
For foreign investors, they are looking at all these indicators and asking themselves, if domestic revenue mobilization is so low, what does that say about the economy? Tax to GDP is a very important index for the health of the economy.
Another area of revenue improvement is the Value Added Tax (VAT) rate, which has been notoriously low in Nigeria has been increased. It is important to compare VAT rates to other African countries.
Just as examples, we should note that Ghana has a rate of 12.5% (recently reduced from 15%, having moved 2.5% to a National Health Levy), Cameroon is 19.25%, Egypt is 14%, South Africa is 15% and Mexico is 16%.
However, while increasing the rate of Value Added Tax from 5% to 7.5%, the Finance Act has ensured that it does not impact the poor or become a disincentive for small businesses.
The exempted class of “basic food items” is now very comprehensively defined to encompass all food necessities and avoid any ambiguities.
The new Act has sixteen (16) very clearly articulated classes of food items, all exempted from VAT.
Similarly exempted are other basic commodities and services like drugs, locally manufactured sanitary towels, pads and tampons, and tuition fees in all tiers of the educational system from nursery to tertiary is also free from VAT.
Also, as a palliative measure for micro and small enterprises, the VAT compliance threshold is now set at an annual turnover of N25,000,000. Companies which are recording lower turnover numbers are not obliged to register for VAT or render monthly returns. Also, services rendered by microfinance banks are exempted from VAT.
For businesses above the threshold, remittance of VAT will now be on cash basis, meaning that they only remit the VAT charged on sales for which they have received payment. In the case of credit sales, VAT remittance will be due when the customer pays, as opposed to when the contract was entered into.
By the same token, the business can only recover input VAT that has been actually paid against output VAT that has been collected.
This amendment helps the management of the taxpayers’ cash flows and removes the risk of businesses having to bear the VAT burden for customers who ultimately fail to pay their trade debts.
An upside of the VAT rate increase, which we must not fail to note is that it will give additional much-needed revenue to State Governments.
At the moment, the sharing formula is that the State and Local Governments get 50% and 35% of VAT revenues respectively, leaving the Federal Government with 15% only. This rate increase will, therefore, enable States and Local Governments to pay the new minimum wage and ensure that they can play their key roles as multilocational centres of economic activity across the country.
Let me also briefly mention the new provisions on Taxation of Digital Economy and Non-Resident Companies.
Before the Finance Act, only companies that had a physical presence or a FIXED BASE in Nigeria could be taxed. So most digital companies that did not have physical offices in Nigeria, made significant income from Nigeria from online activities, such as advertising, movie streaming, online gaming and e-commerce from subscribers in Nigeria, but paid no taxes.
So now we are no longer using the Fixed Base or physical address criterion. The Finance Act now provides that once you have a Significant Economic Presence (SEP) in Nigeria, you are liable to pay company tax.
Thus, Non-Residents who previously had no fixed base and no Nigerian tax liability will now be liable to tax based on the SEP criterion.
The Minister of Finance is empowered by law to issue an order defining Significant Economic Presence. Although already the OECD has given some guidelines. In effect what the tax authorities should look out for is “evidence that a digital company has purposeful and sustained interaction with the economic life of a jurisdiction via digital means.”
These factors include revenue generated on a sustained basis in Nigeria, the existence of a user base in Nigeria, maintenance of website in a local language, volume of digital content generated from Nigeria.
From the Finance Act, it will now be impossible for a digital company to do business in Nigeria, make money and yet not pay tax.
I think it is also important to note what the Central Bank of Nigeria is doing to improve credit flow to the private sector in Nigeria.
This is important because the only way business can grow is by a good flow of loans to the real sector.
On account of the reform of Open Markets Operations, OMO, and the Loan to Deposit Ratio, LDR, at 65%, interest rates have become much lower and there is increased credit flow to the private sector.
Yesterday, we heard that Cash Reserves Ratio, CRR, will be going up from 22.5% to 27.5% to control liquidity. Where we have the LDR at 65% is sufficient in terms of bringing down interest rates.
We have also seen interest rates on many of the fixed income assets dropping to about 5% to 6%.
We are seeing a situation where more money has to go to the private sector on account of the fact that there isn’t that much to earn again like we used to with double digits earned on treasury bills are no longer there. Part of the advantage of that also is reducing the debt service burden.
The downside is that at the moment current account balance is negative and there is a need to improve Foreign Portfolio Investment flows, FPI, especially to keep our reserves where they are and with low exchange rates, there is low FPI flows. We expect that the economy will improve especially with the real sector getting a boost from cheaper credit.
Also, with the signing of the Deep Offshore Bill into law, we also expect enhanced revenues from the oil sector.
We think that this will be significant in terms of improving the capacity of the national budget to fund many of its capital projects.
Finally, on infrastructure development, our economic competitiveness depends a great deal on infrastructure. It is not news that we have a major infrastructure deficit.
So, our focus in the last few years have been on investing in roads, rail, power and broadband infrastructure. We have major road projects in practically every State of the Federation.
Some major road projects scheduled for completion in ‘20/‘21 are:
- Dualization of Suleja-Minna Road
- Ilorin-Jebba-Mokwa/Bokani Road
- Nnewa-Oduma-Mpu (Enugu)-Uburu (Ebonyi)
- Yenegwe-Okaki-Kolo-Nembe-Brass Road
- Bodo-Bonny Road with a Bridge across the Opobo channel, I am sure many of us are familiar with some of the trouble around that road with some of the residents in the area insisting on not allowing the road to be built unless they are paid compensation.
It is an important road which is also a bridge going across the Opobo channel. It is a collaboration between NLNG and the Federal Government.
- Rehabilitation and expansion of Lagos – Badagry Expressway, and Lagos – Ibadan, as well as several ongoing rail projects.
One of the important things to bear in mind about the Lagos – Kano rail project is that it starts from Lagos port, which is to enable movement of cargo from Apapa ports, Tincan, out to the hinterland.
It will reduce some of the congestion being experienced at the moment, especially the gridlock in the Apapa area. We expect that to be completed this year.
But it is evident that government, by itself both State and Federal, simply don’t have the resources to build the required infrastructure across the country. Attracting private sector funding into infrastructure development is the only way.
So, we have adopted a number of innovative options, one is the Investment Tax Credit Scheme.
This is a scheme by which a private company can get tax credits or reduction in tax to the amount of money the company spends on an approved infrastructure project. It will be paid about 50% so that it can take 50% credit for the amount of money it invests in an infrastructure project.
The President brought this into effect by Executive Order #007 on the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme.
So far, 2 companies have gone through the process to receive the tax credit certificates; the NLNG for the construction of the Bonny Bodo Road with bridges across the Opobo Channel in Rivers State and Dangote Cement PLC got its for the rehabilitation of Phase II of the Lokoja-Obajana-Kabba-Ilorin Road.
10 local companies have applied for the scheme to receive 50% of expenditure in tax credits. The companies are set to invest in 19 road projects, measuring 794.4 kilometres which have been prioritized in 11 states across each of the six geo-political zones.
I believe the prospects for Nigeria’s economy and entrepreneurs are bright.
There are two things that we need to do and we are working on; one is improving the business environment, ensuring that small businesses can thrive. That is a day-by-day task, and that is why we have the Presidential Enabling Business Environment Council, PEBEC, and that portion of our work is so crucial, it is very detailed and we are going through it step-by-step to ensure that we are able to improve the business environment for small businesses.
The second is encouraging private sector investments in all aspects of the Nigerian economy, ensuring the private sector plays its part, both the small and big entrepreneurs, everybody has a part to play.
I am looking forward to the progress that we will see in the Nigerian economy in the coming months and I am sure that all of us here will participate in that progress.
Thank you very much.
Very recently, an article featured in Newsweek Magazine entitled “Black China: Africa’s first superpower is coming sooner than you think”. That Africa’s superpower is Nigeria. The essential point made in the article is that despite our challenges, Nigeria is the ‘last major open market on earth’ and that like China and India, its population and economic size will enable economies of scale and attract international investment.