## cr1864 ## Source details **Canonical URL:** [cr1864](https://www.imf.org/-/media/files/publications/cr/2018/cr1864.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1864.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1864.pdf.json) --- ### Revenue Trends and Composition - Between 2011 and 2017 consolidated government revenues fell from 17.7 percent to 5.1 percent of GDP due to a sharp decline in oil revenues. - Non-oil revenue remained about 3 and 4 percent of GDP between 2011–2017, with accelerating decline in 2016–17. - Corporate income tax (CIT) decelerated by 0.1 percent of GDP and value added tax (VAT) by 0.2 percent of GDP relative to 2011. - Nigeria raised 5.3 percent of GDP in revenue in 2016, versus the sample’s 22 percent of GDP average. - Recent empirical threshold: a minimum tax-to-GDP ratio of 12 ¾ percent is associated with significant acceleration in growth and development. - Estimated non-oil tax capacity for Nigeria: 16 to 18 percent of GDP → implies space for additional tax collection of 12 percent of GDP. - Authorities’ target: raise non-oil revenue to GDP ratio to 15 percent by 2020. Recommendations and short-term measures - Implement a broad-based and comprehensive tax reform program to: - broaden bases of income and consumption taxes; - close loopholes from corporate tax holidays and tax expenditures; - create incentives for sub-national tiers to raise own-source revenues. - Strengthen Large Taxpayers Offices (LTOs): - cleanse taxpayer data in the LTO; update taxpayer ledgers in ITAS and deactivate dormant taxpayers; - strengthen audit and enforcement capacity via recruitment and mentoring; - fully use ITAS for collection and audit functions. - conduct a comprehensive independent review of ITAS deployment and functionality. - Large-scale data analysis and cross-matching using TIN and UTIN; develop repeatable data matching methodology supported by legislative, policy, and capacity development. - Recover tax arrears: - stock of arrears as of mid-2017: N 1.4 trillion — N1.2 trillion attributable to large taxpayers. - staff estimates additional minimum revenue yields of N150 billion could be generated in 2018 from recovery and validation measures. - Improve filing and payment compliance via outreach to dormant registered taxpayers and timely bulk reminders. - Improve customs integrity and management controls; minimal measures could yield N15 billion in additional revenue in 2018. Tax administration diagnostics (2016) - PIT — registered: 761,057; active: 14,823; percent active: 1.95 - CIT — registered: 1,003,010; active: 56,329; percent active: 5.62 - VAT — registered: 1,505,831; active: 77,082; percent active: 5.12 - Data: International Survey on Revenue Administration (ISORA) - Filing/payment compliance for VAT generally believed to vary between 15 and 40 percent; current compliance rate cited later as 25 percent. ### Value-Added Tax (VAT) and Excise Taxation VAT performance and structural weaknesses - VAT revenue: 0.9 percent of GDP. - Comparator VAT collection: ECOWAS peers 3.8 percent of GDP; emerging and developing economies average 3.6 percent of GDP; lower-middle income countries average 4.4 percent of GDP; SADC member states average 4 percent of GDP. - Current VAT statutory rate: 5 percent; ECOWAS regional average statutory rate: 16.8 percent. - VAT revenue productivity: 0.16 percent (compared to 0.4 percent in relevant comparators). - One percentage point increase in the VAT rate could raise on average 0.4 percent of GDP in VAT revenue (worldwide experience). - Potential scenario: a 5 (10) percent VAT rate could collect 2 (4) percent of GDP only if compliance (currently at 25 percent) is significantly improved. Structural issues - Nigerian VAT disallows credit on capital goods and services → functions as a gross product VAT (de facto turnover tax) and penalizes investment. - No VAT registration threshold combined with a large informal sector → very large number of potential VAT taxpayers. - Extensive exemptions (commercial vehicles; all farming inputs including capital equipment; all medical and pharmaceutical products; some services; educational material; basic food items) narrow the VAT base. - Absence of input tax credits encourages lobbying for exemptions. VAT reform objectives and measures - Allow input tax credits for intermediary inputs and capital expenditures. - Introduce an annual turnover threshold for VAT registration (example proposed: US$40,000). - Establish a comprehensive base with only a few, well-targeted exemptions; introduce a single positive rate with zero rate on exports. - Suggested single rate range: 10–15 percent. Excise taxation: current status and reform options - Excises currently contribute less than 2.3 percent of total tax revenue or about 0.04 percent of GDP in Nigeria. - Comparator: excise duties contribute on average 12.3 percent of total tax revenue or 3.2 percent of GDP. - Federal excise base limited to tobacco products and alcoholic beverages taxed at 20 percent. - Recommended reforms include converting ad-valorem excises to specific indexed rates; examples: - tobacco proposal: NGN 100/pack of cigarettes of 20 over a three-year period; - environmental charge: waste packaging charge of NGN 5 per plastic bag; - fossil fuel charge: NGN 10/liter on all fossil fuels; - additional motoring fuel duty: NGN 10/liter on leaded gasoline and diesel, NGN 5/liter on unleaded gasoline (kerosene could be exempted); - introduce low charge on mobile phone use (airtime). - Apply excise duties equally on domestic and imported goods; cease subsuming excise on foreign goods into import duty. - Ensure VAT is imposed on excise- and import-duty-inclusive value of excisable items. Revenue potential from excise reforms - Gradual excise increases at prevailing ECOWAS levels could yield 2.5 percent of GDP in the medium term and about 4 percent of GDP in the long run. ### Rationalization of Tax Incentives and Tax Expenditures - CIT yielded 1 percent of GDP in 2016; statutory CIT rate: 30 percent. - CIT efficiency measures: 0.03 with respect to non-oil economy only; 0.06 when compared to total economy GDP. - ECOWAS average CIT productivity: 0.07; emerging and developing economies average: 0.13. - Preliminary estimate (Inter-Ministerial Committee): between 2011 and 2015 government conceded N1 trillion, or 1.28 percent of GDP, to four types of incentives (import duty waivers/concessions/grants; VAT waivers/concessions/grants; pioneer status). - Largest share: import duty waivers (almost half of total cost of incentives). - Estimates exclude incentives where data were unavailable → total likely larger. Recommended approach - Conduct systematic review of tax expenditures accompanying the annual Budget to quantify costs and identify recovery options. - Improve corporate taxpayer-level data availability. - Use cost-benefit analysis; prefer investment tax credits and accelerated depreciation over tax holidays and income tax exemptions. - Target incentives at export-oriented sectors and mobile capital; avoid incentives for domestic-market-oriented sectors and extractive industries. - Consolidate rules-based granting of incentives under Minister of Finance authority. - Short-term recommendation: place a moratorium on new profit tax incentives. - Medium-term: rationalize existing tax expenditures and gradually align CIT toward international average of approximately 25 percent for non-extractive industries. Sub-national revenue mobilization - Key instruments for states and local governments: property tax and personal income tax. - Property tax potential: could help raise [0.5] percent of GDP in revenue in the medium term as cadaster and valuation structures are developed. - Personal income tax coverage: Joint Tax Board reports 10 million registered for PIT; 4.6 million (46 percent) registered with LIRS; implies only 13 percent of potential taxpayers registered (labor force reference: 77 million (2015)). Medium-term revenue potential (staff estimates) - VAT reforms: 3.4 percent of GDP. - Excises: 1.6 percent of GDP. - Rationalization of tax expenditures: 2.1 percent of GDP. - Efficiency gains and property taxation at sub-national tiers: 0.9 percent of GDP. - Aggregate outcome: measures would allow Nigeria to approach its true tax potential and help meet development objectives. ### Distributive Impact of Fiscal Reforms — Main Findings and Scenarios Motivation and data - Objective: assess whether fiscal reforms (increases in VAT collection, excises, electricity tariffs) are progressive and their impact on poverty. - Main simulated results: - Most measures are progressive (reduce income inequality). - Most measures increase poverty rates and poverty gaps to varying extents. - Generated revenue would allow compensatory social transfers to offset adverse impacts. - Data: Nigeria General Household Survey (wave 3), 2015/16 (5,000 households); 2010 supply-and-use tables; 2015 fiscal accounts. - Analytical approach: partial, static incidence analysis using an “accounting approach”; assumes inelastic demand and full pass-through of indirect tax changes via production structure. VAT reform scenarios (six scenarios summarized; figures and panels referenced in source) - Scenario 1: Double VAT rate to 10 percent. - Outcome: would double VAT revenue from 2015 level; slightly reduce income inequality. - Poverty: poverty headcount rate increases by 2¼ percentage points; poverty gap increases by 1 percentage point. - Scenario 2: Increase VAT compliance from 25 percent to 70 percent at 5% VAT. - Outcome: revenue increase similar to Scenario 1; slightly more progressive. - Poverty: poverty rate rises by 1¾ percentage points; poverty gap rises by ¾ percentage points. - Scenario 3: As Scenario 2 but lift current exemption on basic foodstuff (all food items taxed). - Outcome: almost doubles revenue impact from increased compliance. - Poverty: poverty headcount increases by almost 4 percentage points; poverty gap increases by almost 2 percentage points. - Inequality: relatively unaffected. - Scenario 4: 70 percent compliance at a 10% VAT rate. - Fiscal impact: could generate Naira 2.1 trillion. - Inequality: reduce income inequality by almost one point on the Gini scale. - Poverty: poverty headcount increases by +6 percentage points; poverty gap increases by +2¾ percentage points. - Heterogeneity: poverty rate impact higher for urban than rural households; poverty gap rises more for rural households; impacts on female-headed households less than half of male-headed households’ impact. Social safety transfer compensations - Targeting via proxy-means testing (PMT) using state dummies, rural/urban, ownership of refrigerator, car, and electricity expenditures. - Scenario 5: Hold poverty gap constant via lump-sum to households below extreme poverty line. - Required scale up: social transfers need scaling up by some Naira 400 billion (about one fifth of the revenue gain). - Scenario 6: Hold poverty headcount constant via lump-sum to households below poverty line. - Required transfers: Naira 1,100 billion (about half the revenue generated by VAT measure) — significant revenue would remain even after ensuring poverty rates do not rise. Excise simulations (alcohol and tobacco) - Doubling excise on alcohol (column (1)): - Change in Inequality (Gini, points): -0.01 - Change in Poverty headcount (percentage points): 0.07 - Change in Poverty gap (percentage points): 0.00 - Revenues (Billions of Naira): -71.8 - Doubling excise on tobacco (column (2)): - Change in Inequality (Gini, points): -0.03 - Change in Poverty headcount (percentage points): 0.25 - Change in Poverty gap (percentage points): 0.08 - Revenues (Billions of Naira): -14.1 - Interpretation: doubling existing excise rates on alcohol and tobacco appears to have only minor revenue impact in simulations due to under-reporting of such expenditures. Electricity tariff simulations and mitigation - Power generation reached 5100MW in the grid at end-2017. - Tariff increase of 60 percent in 2016 moved prices closer to cost recovery. - Residential tariff increase by 30 percent: - Fiscal space: about Naira 100 billion (assuming government pays implicit subsidy going forward). - Poverty: poverty headcount increases by around ¼ percentage point (static). - Inequality: reduces income inequality slightly. - Residential tariff increase by 69 percent: - Fiscal space: about Naira 200 billion. - Poverty: poverty headcount increases by around ½ percentage point. - Inequality: reduces income inequality slightly. - Lifeline tariff scenarios: - Replace existing charges with N4/kWh up to 50 kWh/month (scenario 5) or up to 40 kWh/month (scenario 6); then raise current class 2 tariff by 69 percent above lifeline threshold. - These are roughly budget neutral and decrease poverty headcount by ¼ percentage point. Expanding social safety nets (NASSP) - Current registry: 100,000 households listed. - Envisioned expansion: 250,000 households in 2018; 1 million households in medium term (approx. 10 percent of the poor) in 24 states. - Simulation transfer baseline: Naira 5,000 per household per month; alternative simulations use Naira 60,000 per household per year. - Fiscal cost examples: - Covering 100 percent of the poor with N60,000 per household per year could: - reduce poverty headcount rates by 3¼ percent; - reduce poverty gap by almost 3 percent. - Expanding coverage up to Naira 600 billion (excluding administrative cost) is feasible but resource-intensive. - Administrative caveat: administrative cost of social transfers in Nigeria estimated at 30 percent. Caveats and limitations - Static simulations do not model behavioral responses, second-round growth impacts from increased development spending, nor fully account for targeting errors (inclusion/exclusion) — inclusion error about one fourth. - Underreporting of expenditures (especially alcohol/tobacco) could understate revenue potential from excise increases. Overall conclusion on distributive impact - Proposed fiscal measures yield substantial revenue gains and reduce income inequality but increase poverty rates and gaps; compensatory social transfers and lifeline tariffs are recommended to shield vulnerable households. - Using fiscal space to increase expenditures in education and health (not captured in simulations) could improve progressivity and reduce estimated negative impacts. ### Gender Gaps, Human Capital, and Policy Recommendations Education and health indicators - Gross primary enrollment: almost 100 percent. - Secondary enrollment: more than doubled for boys and girls; still nine girls enrolled for every ten boys at secondary level. - Tertiary level: seven women enrolled for ten men (vs. eight in 1999). - Regional variations: in North East and North West about two-thirds of women are without education. - Fertility and adolescent birth rates: - 5.6 children per woman (range: 4.3 in South-South to 6.7 in North-West). - About 110 births per 1000 girls aged 15 to 19. - 48 percent of girls without education are mothers or pregnant by age 19; 9 percent with post-secondary education are mothers or pregnant by 19. - Maternal mortality and child health: - More than 800 maternal deaths per hundred thousand live births. - Infant mortality at almost 7 percent. - Undernourishment above 25 percent. - Prevalence of anemia among children under 5 at almost 7 percent. Macroeconomic losses and potential gains from gender equality - Decomposition exercise (panel of 115 economies, 1990–2014) indicates: - Growth in Nigeria could be higher by more than 1¼ percentage points annually on average if gender inequality reduced to peer levels. - Removing gender inequality could reduce the Gini coefficient by 6½ points. Policy recommendations (selected) - Strengthen and enforce legal rights and national strategies to grant women same economic opportunities; raise awareness. - Implement and update national gender strategy and gender policy; revise laws and penal codes to protect women’s and children’s rights. - Enforce civil law where customary law contradicts non-discriminatory policies, with attention to property and inheritance rights. - Work with traditional leaders to translate legal rights into wider coverage. - Invest in education, electricity, sanitation facilities for schools; allocate at least 1 percent of the consolidated revenue fund to health to operationalize Abuja declaration. - Expand gender-responsive budgeting (reinvigorate G-WIN), create Ministry of Finance committee to monitor gender allocations, and strengthen gender-disaggregated data. ### Corruption, Governance, and Anti-Corruption Measures Public experience and incidence - 2016 Corruption Survey: almost 33,000 completed interviews. - One third of people that had contact with a public official (about half the population) has paid or been asked to pay a bribe. - Purpose of bribes (shares): - 32 percent: speed up procedure - 18 percent: avoid payment of a fine - 13 percent: avoid cancellation of public utilities - 10 percent: make finalization possible - 4 percent: receive preferential treatment - 8 percent: no specific purpose - Services linked to bribery: public utility services ~20 percent; administrative certificates/licenses >13 percent; medical services almost 7 percent. - Bribery by government function (likelihood and average amounts): - Law enforcement: almost every second contact results in bribery (average ~4,000 Naira). - Prosecutors: about every third contact (average ~10,000 Naira). - Judges/Magistrates: about every third contact (average almost 19,000 Naira). - Customs officers: about one in four cases (average Naira 88.5 thousand). Reporting and consequences - One in five Nigerians confronted with bribery refuses to pay. - Less than 4 percent of bribery cases get reported. - Of reported cases, 43 percent reported exclusively to official institutions; in one third of reported cases there is no follow-up. - Reasons for not reporting: "pointless, nobody would care" 32 percent; "common practice" 31 percent; "do not know to whom to report" 6 percent; "fear of reprisals" 6 percent; other reasons 25 percent. Quantifying costs and macro impacts - Nigeria’s public revenues about 5 percent of GDP; low tax revenue mobilization constrains fiscal space. - Cross-country evidence: a one-unit increase in ICRG corruption index (0–6) may raise per capita GDP growth by about 1 percent. - Estimated real GDP growth gains for Nigeria if corruption lowered: - +½ percentage points if set to Mongolia level. - +1 percentage point if set to Malaysia or South Africa. - +1½ percentage points if lowered to Morocco level. - IMF (2016) panel: a 0.4 percentage points increase in tax-to-GDP ratio if transparency increases by 10 points on Transparency International CPI (0–100). - Applying to Nigeria implies: - 0.4 percentage points higher tax revenue-to-GDP if corruption lowered to Morocco or Mongolia levels; - 0.9 percentage points higher if set to Malaysia; - 1.4 percentage points higher if lowered to Botswana level. - Public investment efficiency: lowering control of corruption to South Africa level could reduce Nigeria’s efficiency gap by 12 percentage points. Institutional and legal reforms recommended - Priorities: criminalization and enforcement; asset declaration; transparency of beneficial owners; AML tools. - Improve criminalization to align with UNCAC, including illicit enrichment. - Strengthen coordination among anti-corruption agencies; consider designating a single independent agency for high-level corruption cases. - Digitalize and strengthen asset declaration framework; require declaration of beneficially owned assets; publish declarations of senior officials online. - Establish public register of beneficial owners in extractive sector by January 2019 and central beneficial owner register for all legal persons by December 2019. - Strengthen NFIU independence and capacity; enact legislation to transform NFIU into independent agency; prioritize NRA action plan. - Strengthen CBN AML supervision and oversight of BDC sector; address resource constraints (unit of 10 staff for >4500 non-bank financial institutions, including 3432 BDCs). Judicial and asset recovery measures - Courts take "a few years" to hear corruption cases; backlog contributes to low convictions. - A bill to establish a special court for corruption submitted to parliament. - Asset recovery: memorandum signed December 2017 to enable repatriation of $321 million illicitly acquired by family of late former President Sani Abacha from Switzerland (to be supervised by World Bank). Complementary governance measures - Increase use of e-filing and data matching in tax administration; intensify risk-based tax audits focusing on large taxpayers. - Improve transparency in public financial management, procurement, and public investment efficiency; strengthen governance and fiscal transparency of revenue agencies and state-owned enterprises (including NNPC). ### Yield Curve Dynamics, Nelson‑Siegel Analysis, and Monetary Policy Implications Yield curve observations (2012–2017Q2) - Data: monthly observations, 2012–2017Q2 (66 observations) across maturities 3M, 6M, 1Y, 3Y, 5Y, 7Y, 10Y. - Term structure movements: - declined: 2012 to 2013; - increased: 2014 to 2015; - slightly inverted: 2016–17. - Notable events: sharp decline in oil prices late 2014; oil production fall due to sabotage; delisting of Nigerian government bond from JP Morgan index in October 2015; large inflation swings. Nelson‑Siegel model findings - Yield-only NSM fit: model fits term structure; measurement residuals mean and standard deviation negligible across maturities. - Yield-macro NSM: - Short-term rates (≤ 1 year): about 50 percent of variance explained by macro factors (mostly inflation and oil price). - Long-term maturities: macro factors explain about 30 percent of variance. - Level factor drives long-term rates: explains 30 percent of variance at 3-year maturity and 60 percent at 10-year maturity. - Table (Yield-Macro NSM Variance Decomposition, 60 months): - 3 Months: Level 0.1076; Slope 0.1037; Curvature 0.2714; MPR 0.0649; Inflation 0.2759; Liquidity 0.0149; Oil Price 0.1616 - 6 Months: Level 0.1088; Slope 0.0624; Curvature 0.3370; MPR 0.0642; Inflation 0.2329; Liquidity 0.0304; Oil Price 0.1641 - 1 Year: Level 0.1230; Slope 0.0433; Curvature 0.3563; MPR 0.0708; Inflation 0.1945; Liquidity 0.0503; Oil Price 0.1618 - 3 Years: Level 0.2808; Slope 0.0355; Curvature 0.2683; MPR 0.0655; Inflation 0.1513; Liquidity 0.0547; Oil Price 0.1439 - 5 Years: Level 0.4372; Slope 0.0324; Curvature 0.1838; MPR 0.0515; Inflation 0.1215; Liquidity 0.0518; Oil Price 0.1218 - 7 Years: Level 0.5295; Slope 0.0305; Curvature 0.1366; MPR 0.0425; Inflation 0.1019; Liquidity 0.0518; Oil Price 0.1071 - 10 Years: Level 0.6033; Slope 0.0289; Curvature 0.1004; MPR 0.0350; Inflation 0.0850; Liquidity 0.0529; Oil Price 0.0944 - Interpretation: non-macroeconomic factors (risk premia, liquidity, investor preferences) are main drivers of the level and explain counterintuitive yield movements. Policy implications for debt management and monetary policy - Short-term rates are prone to shocks → reducing government exposure to short-term securities may lower costs and risks. - DMO announced intention to reduce T-bill stock and issue Eurobonds ($3bn) to retire T-bills and skew issuance toward medium- to long-tenor securities conditional on deepening liquidity. - FGN bonds liquidity low: observed turnover-to-outstanding ratio ~1.17X for FGN bonds (rule-of-thumb target ~10X); T-bills observed 16X. - Role of MPR: - With stable short-term rates, policy rate changes more likely to be reflected in banks’ deposit and lending rates → aids monetary transmission. - Allowing market rates to deviate from announced policy rates creates distortions; interbank rates often better reflect true stance. - Need for robust short-term liquidity forecasting and coordination with government cash management. - Suggest moving primacy to price stability objective and use MPR as effective anchor rather than exchange rate. - Enhance CBN communications: inflation objective rationale; monetary policy strategy; expected trajectory of key policy rate. Appendix notes - Appendix presents model fit charts for maturities 3M–10Y and yearly term structures 2012–2017 comparing observed and estimated yields (percent axes). *Source: cr1864 (IMF staff).* ### 1. Revenue Trends and Composition ______________________________________________________ 5 ### 1. Revenue Trends and Composition ### A. Options for Revenue Mobilization in Nigeria - Low non-oil revenue mobilization is affecting the government’s objectives to expand growth-enhancing expenditure priorities, foster higher growth and employment, and comply with its fiscal rule which limits the federal government deficit to no more than 3 percent of GDP. - There is significant revenue potential from structural tax measures; a broad-based and comprehensive tax reform program is needed in the short and medium term to: - broaden the bases of income and consumption taxes; - close loopholes and leakage created by corporate tax holidays and the widespread use of other associated tax expenditures; - create incentives for the sub-national tiers of government to raise their own source revenues. ### B. Current Tax Effort — key findings and statistics - Between 2011 and 2017, a sharp decline in oil revenues led to consolidated government revenues falling from 17.7 percent to 5.1 percent of GDP. - During this period, non-oil revenue stayed relatively stable at about 3 and 4 percent of GDP, although with an accelerating decline in 2016–17. - The corporate income tax (CIT) decelerated by 0.1 percent of GDP and value added tax (VAT) by 0.2 percent of GDP relative to 2011. - Nigeria raised the least revenue of all comparators and at 5.3 percent of GDP in revenue in 2016 was significantly below the sample’s 22 percent of GDP average. - In most comparator countries, excises alone raise 3.6 percent of GDP. - Recent empirical work indicates a tipping point in the relationship between tax capacity and growth: a minimum tax-to-GDP ratio of 12 ¾ percent is associated with a significant acceleration in the process of growth and development. - Estimates of tax potential suggest a non-oil tax capacity of 16 to 18 percent would be optimal for a country with Nigeria’s economic structure and per capita income levels; this implies space for additional tax collection of 12 percent of GDP. - The authorities have made raising the non-oil revenue to GDP ratio to 15 percent by 2020 a key development objective. - The ERGP and the draft 2018 Budget emphasize this revenue target and propose achieving it through tax administration initiatives (improving tax compliance, broadening the tax net, employing appropriate technology) combined with tax policy reforms (strengthening tax legislation, introduction of tax on luxury items, and other indirect taxes). ### C. Tax Administration Reforms — observations and measures - Very low tax collection rates reflect weaknesses in revenue administration systems and a high level of systemic noncompliance. - Despite registering a large number of taxpayers, expected revenue gains have not materialized: - Over 530,000 new corporate registrations were made during the first quarter of 2016 — a 67 percent increase. - Of 1.5 million registered corporations, only 522,000 could be matched (as of May 2016) to any type of data available within the Federal Inland Revenue Service (FIRS). - Only 77,000 filed VAT returns in 2016 — suggesting an active taxpayers’ population of only 5 percent. - For CIT, the active taxpayers were 5.6 percent of the registered taxpayers, while for personal income tax (PIT) they were less than 2 percent. - Data on payment compliance is incomplete, but it is generally believed to vary between 15 and 40 percent for VAT. - Table of registered taxpayers (2016): - PIT — No. of registered taxpayers: 761,057; No. of active taxpayers: 14,823; Percent active (percent total): 1.95 - CIT — No. of registered taxpayers: 1,003,010; No. of active taxpayers: 56,329; Percent active (percent total): 5.62 - VAT — No. of registered taxpayers: 1,505,831; No. of active taxpayers: 77,082; Percent active (percent total): 5.12 - Source: International Survey on Revenue Administration (ISORA) - Recent and ongoing IT and administrative initiatives: - FIRS implemented online portals for assessment and payment of stamp duties (e-stamp), automated processing of tax clearance certificates (e-TCC), and automation of withholding tax remittances by MDAs. - The Integrated Tax Administration System (ITAS) project has been completed following its deployment in a majority of tax offices; a major test for success is active use for compliance management. - FIRS expanded the taxpayer register, created a specialized collection enforcement function, improved audit process integrity, and continued to improve staff capacity and infrastructure. - Reliance on one-off initiatives (such as the Nigerian Voluntary Asset and Income Declaration Scheme, VAIDS) may not be effective in delivering higher revenues sustainably. ### D. Short-term revenue-productive measures recommended / expected yields - Strengthen the Large Taxpayers Offices (LTOs): - Protect investments in taxpayer segmentation and allow LTOs to focus exclusively on large taxpayers. - Measures include: cleansing taxpayer data in the LTO; updating taxpayer ledgers in ITAS and deactivating dormant taxpayers; strengthening audit and enforcement capacity through recruitment and mentoring; and fully using ITAS for collection and audit functions. - A comprehensive independent review of ITAS deployment and functionality is recommended. - Initiate large scale data analysis and cross matching using the Taxpayer Identification Number (TIN) and the Unified Taxpayer Identification Number (UTIN) as part of a broader compliance management framework. - Develop a repeatable data matching methodology for deployment and support it with legislative, policy and procedural changes, capacity development, and integration into risk assessment and operational processes. - Recover tax arrears and validate debt: - The stock of arrears as of mid-2017 stood at N 1.4 trillion — N1.2 trillion of which were attributable to large taxpayers. - Early wins could be made by targeting large and medium taxpayers for migration into ITAS, fully utilizing the debt management module, and implementing a well-resourced collection and enforcement compliance improvement plan. - Staff estimates that additional minimum revenue yields of N150 billion could be generated in 2018 only from these measures. - Improve filing and payment compliance via outreach to dormant registered taxpayers and timely bulk reminders; use data analysis to identify taxpayers with active economic activities. - Improve integrity and management controls in customs: - Stakeholders report widespread “irregular practices and payments” that negatively affect revenue flows and investor confidence. - Implementation of a comprehensive integrity strategy anchored in a strategic plan would help improve ease of doing business and improve revenue. - At a minimum, these measures could yield N15 billion in additional revenue in 2018. ### E. Short- and medium-term tax policy direction (summarized) - In the short term, the tax reform package should include: - broader use of revenue-productive excises (such as alcohol, tobacco products, fossil fuels, and mobile phone air use); - placing a moratorium on new business tax holidays. - In the medium term, decisive steps are recommended to transition toward: - a broad-base consumption VAT at a higher rate; - an all-embracing rationalization of expenditures; - a reform of personal income and property taxation. *Source: IMF staff* ### 8. The VAT in Nigeria raises 0.9 percent of GDP in revenue, which is notably smaller than ### 8. The VAT in Nigeria raises 0.9 percent of GDP in revenue, which is notably smaller than ### Value-Added Tax (VAT): current performance and structural weaknesses - Key metrics and comparisons: - VAT revenue: 0.9 percent of GDP. - ECOWAS peers VAT collection: 3.8 percent of GDP. - Emerging and developing economies average VAT collection: 3.6 percent of GDP. - Lower-middle income countries average VAT collection: 4.4 percent of GDP. - SADC member states average VAT collection: 4 percent of GDP. - Current VAT statutory rate: 5 percent. - ECOWAS regional average statutory rate: 16.8 percent. - Filing compliance levels: suggested between 15 to 40 percent. - VAT revenue productivity in Nigeria: 0.16 percent (compared to 0.4 percent in relevant comparators). - Current compliance rate cited later: 25 percent. - One percentage point increase in the VAT rate could raise on average 0.4 percent of GDP in VAT revenue (worldwide experience). - Potential revenue if compliance improves: a 5 (10) percent VAT rate could collect 2 (4) percent of GDP only if the compliance rate (currently at 25 percent) is significantly improved. - Structural characteristics and problems: - The Nigerian VAT disallows credit on capital goods and services, functioning as a gross product VAT (de facto a turnover tax). - This design penalizes investment and reduces competitiveness of Nigerian manufacturing and related sectors. - No VAT registration threshold combined with a large informal sector implies a very large number of potential VAT taxpayers, complicating monitoring and control. - Extensive and growing exemptions (commercial vehicles; all farming inputs including capital equipment; all medical and pharmaceutical products; some services; educational material; basic food items) have substantially narrowed the VAT base. - Exemptions plus very low compliance contribute to low VAT revenue productivity. - Absence of input tax credits encourages continuous lobbying for VAT exemptions. - Objectives for VAT reform: - Transform VAT into a system that generates revenue predictably and efficiently, and grows with consumption as the economy develops. - Embed features of a modern VAT: - Allow input tax credits for intermediary inputs and capital expenditures to restore neutrality and reduce lobbying for exemptions. - Introduce an annual turnover threshold for VAT registration (example proposed: US$40,000) to exclude small and micro businesses. - Establish a comprehensive base with only a few, well-targeted exemptions (exemptions limited to public non-commercial goods/services or technical cases where credit-invoice VAT is infeasible). - Introduce a single positive rate with zero rate on exports; suggested single rate range: 10–15 percent (still below ECOWAS average of 16.8 percent). ### Quantitative scenarios and revenue implications for VAT - Empirical and scenario figures cited: - Worldwide experience: one percentage point increase in the VAT rate → average 0.4 percent of GDP additional VAT revenue. - Scenario: 5 percent VAT rate could collect 2 percent of GDP; 10 percent VAT rate could collect 4 percent of GDP — conditional on significant improvements in compliance (current cited compliance: 25 percent). ### Excise taxation: current status and reform options - Current performance and comparators: - Excises contribute less than 2.3 percent of total tax revenue or about 0.04 percent of GDP in Nigeria. - Comparator average: excise duties contribute on average 12.3 percent of total tax revenue (more than 5 times higher than Nigeria) or 3.2 percent of GDP. - Conclusion: on a comparative basis, excise collections could potentially be tripled or quadrupled in Nigeria. - Current excise base and rates: - Federal government taxes only tobacco products and alcoholic beverages (independent of alcohol content) at a rate of 20 percent. - Petroleum products are not taxed at federal level; states tax motor vehicles. - Non-alcoholic beverages, fruit juice, and telephone recharge cards previously had a 5 percent excise before removal in 2009. - Nigeria subsumes excise on imported excisable goods into import duty (British tradition), rather than levying excise at import stage. - Recommended excise reforms and illustrative measures: - Convert ad-valorem excises on alcohol and tobacco to specific (and higher) rates indexed for inflation. - Example proposal for tobacco: NGN 100/pack of cigarettes of 20 over a three-year period (with equivalent duty for other tobacco products). - Alcohol excises linked to alcohol content (beer, wine, spirits) and increased in value; doubling the excise duty on beer would align with the current Kenyan excise burden. - Introduce environmental consumer charges to increase resource efficiency and revenues: - Example: waste packaging charge of NGN 5 per plastic bag. - Impose a low-rate excise charge to compensate for global air pollution: - Example: NGN 10/liter imposed on all fossil fuels (gasoline, diesel and kerosene). - Internalize road transport externalities via fuel duties: - Example: additional motoring fuel duty of NGN 10/liter on leaded gasoline and diesel fuel, NGN 5/liter on unleaded gasoline; kerosene could be exempted. - Improve progressivity via higher excises on luxury goods and airtime: - Increase excise duties and motor vehicle license fees on cars (new and imported). - Prepare to introduce a low charge on mobile phone use (airtime) on call minutes and SMS. - Apply excise duties at equal rates on domestically produced and imported goods; cease subsuming excise on foreign goods into import duty. - Ensure VAT is imposed on excise- and import-duty-inclusive value of excisable items. - Rationale for specific-rate excises: - Specific duties correct externalities independent of product sale price and avoid valuation disputes. - Specific duties are administratively simpler (counting/measuring) and can be indexed annually for inflation to preserve real value. - Revenue potential from excise reforms: - Gradual excise duty increases at prevailing ECOWAS levels could yield: - 2.5 percent of GDP in the medium term. - About 4 percent of GDP in the long run. ### Rationalization of tax incentives (Corporate Income Tax and tax expenditures) - Current performance and metrics: - CIT yielded 1 percent of GDP in 2016. - Statutory corporate income tax rate: 30 percent. - CIT efficiency measures: - 0.03 when calculated with respect to the non-oil economy only. - 0.06 when CIT revenue is compared to total economy GDP. - Comparator averages: - ECOWAS average CIT productivity: 0.07. - Emerging and developing economies average: 0.13. - These low values indicate erosion of the corporate tax base by tax expenditures. - Nature and scale of tax incentives: - Types of incentives: tax holidays (3 to 5 years for pioneer industries), complete exemption for companies under the free zones regime, waivers and reductions by presidential decree, preferential sectors embedded in the CITA. - Overlap and redundancy: without coordination, incentives may overlap and be redundant. - Quantified preliminary finding (Inter-Ministerial Committee partial estimate): - Between 2011 and 2015, government conceded N1 trillion, or 1.28 percent of GDP, to four types of incentives: import duty waivers/concessions/grants, VAT waivers/concessions/grants, and pioneer status (separately for non-oil and oil companies). - Largest share of incentives: import duty waivers (almost half of the total cost of incentives). - Estimates exclude incentives granted under existing laws where data were unavailable, suggesting total expenditures are likely larger. - Recommended approach to rationalize incentives: - Conduct a systematic review of tax expenditures, ideally accompanying the annual Budget, to quantify costs and identify options to recover revenue and improve fairness. - Improve availability of corporate taxpayer-level data to enable evaluation. - Use cost-benefit analysis to determine which incentives provide net economic benefit. - Prefer mechanisms such as investment tax credits and accelerated depreciation over tax holidays and income tax exemptions for better investment per dollar spent. - Target incentives at export-oriented sectors and mobile capital; avoid incentives for sectors producing for domestic markets or extractive industries where impact is limited. - Ensure enabling conditions (good infrastructure, macroeconomic stability, rule of law) and good governance and transparency of incentives. - Consolidate rules-based granting of incentives under the authority of the Minister of Finance. *Source: IMF staff chapter on Nigeria (excerpts provided).* ### 22. While the justification for tax incentives is to change relative prices, profits and costs to ### 22. While the justification for tax incentives is to change relative prices, profits and costs to ### Tax incentives and CIT alignment - Policy rationale: Tax incentives aim to change relative prices, profits and costs to steer investment in a desired direction. - Efficiency concern: If incentives are granted almost to all sectors, their efficiency is diffused and make little difference in attracting investments. - Short-term recommendation: Place a moratorium on the introduction of new profit tax incentives. - Medium-term recommendation: Rationalize granted tax expenditures. - Corporate income tax (CIT) alignment: Expansion of the tax base would afford the gradual alignment of CIT rates to the current international average of approximately 25 percent for non-extractive industries. - Expected effect: Aligning CIT rates toward 25 percent would help reduce pressures for tax incentives from the business community. ### G. Revenue Mobilization at the Sub-National Tiers of Government - Objective: Federal tax reform initiatives need to resonate at subnational level to raise own revenues from well-designed taxes. - Key instruments at states and local government level: Property tax and personal income tax. - Benefits of relying more on these taxes: - Raise revenue and redistribute wealth. - Create space to reduce the multiplicity and cascading of small charges at state and local government level that impede business competitiveness. - Streamlining and simplifying small taxes would reduce the cost of doing business and increase efficiency of revenue mobilization by allowing subnational revenue services to focus on more productive taxes. ### Property taxation - Rationale: - Property taxation could provide a stable revenue base for local governments. - Well-designed and properly administered property taxes are considered fair because they are imposed on property owners whose properties appreciate due to local improvements funded by enhanced collections. - Property tax is progressive in incidence and may induce more efficient land use. - Property taxes are good local taxes because they are levied on an immobile tax base: payers live in the jurisdiction receiving services. - Staff revenue estimate: - Property taxes could help raise [0.5] percent of GDP in revenue in the medium term, with gradual wins as the underlying cadaster and property valuation structure are gradually put in place. ### Personal income taxation - Potential: Personal income taxation could make a greater contribution to Nigeria’s tax effort. - Minimum modernization and simplification requirements: - (i) Consolidate personal allowances into a single tax-free threshold to simplify the system, improve distributional fairness and progressivity, and reduce compliance burden. - (ii) Simplify the list of exclusions from employment income and streamline exemptions to broaden the base. - Need for compliance strengthening: Compliance efforts would need to be significantly strengthened. - Registration and base indicators: - According to the Joint Tax Board, 10 million people are registered for PIT purposes in all the states of the federation including the Federal Central Territory of Abuja. - Of these, 4.6 million or 46 percent are registered with the Lagos State Internal Revenue Service (LIRS). - This indicates that only an average of 153,000 or 1.5 percent are registered in each of the remaining states. - Labor force reference: 77 million (2015). - Coverage implication: Only 13 percent of potential taxpayers are registered. ### H. Conclusions - Medium-term revenue potential from tax policy reforms and strengthened administration (staff estimates): - VAT reforms: 3.4 percent of GDP. - Excises: 1.6 percent of GDP. - Rationalization of tax expenditures: 2.1 percent of GDP. - Efficiency gains and taxation of property at the sub-national tiers of government: 0.9 percent of GDP. - Aggregate outcome: These measures would allow Nigeria to approach its true tax potential and help meet its development objectives. *Source: cr1864 - 22. While the justification for tax incentives is to change relative prices, profits and costs to (IMF staff text excerpt).* ### DISTRIBUTIONAL IMPACT OF FISCAL REFORMS IN NIGERIA — Chapter overview ### Motivation and main findings - Objective: Assess whether fiscal reforms to generate fiscal space (increases in VAT collection, excises, and electricity tariffs) are progressive and their impact on poverty. - Main simulated results: - Most measures are progressive (reduce income inequality). - Most measures increase poverty rates and poverty gaps to varying extents. - Generated revenue would allow compensatory social transfers and expansion of the social safety net to offset adverse impacts. - Short-term mitigation: Lifeline electricity tariffs and higher spending on health and education needed to shield vulnerable households. - Caveat: Simulations do not take into account the positive impact from increased development expenditures enabled by fiscal space; thus simulated increases in poverty rates could be overstating actual impact. ### B. Background: High Poverty and Inequality; Large Development Needs - Inequality and poverty status: - Income inequality in 2016, as measured by both the Theil and Gini Index, has decreased from its 2013 level but remains above levels observed more than a decade ago. - Income concentration: Almost one third of income in Nigeria belongs to the 10 percent at the upper end of the income distribution, while less than three percent goes to the 10 percent at the bottom. - Poverty headcount: 62.6 percent of the population living below the poverty line (HNLSS 2010). - State heterogeneity: Poverty rates reached above 80 percent in one quarter of states in 2010. - International comparison: - Nigeria ranks last among 152 countries assessed on Oxfam’s 2017 Commitment to Reducing Inequality Index. - Development gaps: - Infrastructure: Access to electricity reaches three out of five people; less than two fifth of the population are connected to the grid in the North of Nigeria; about one third have access to improved sanitation facilities. - Health: Infant mortality at almost 7 percent and 8 in 1000 mothers dying giving live birth; undernourishment above 25 percent; every sixth child under the age of 5 is malnourished; more than 10 percent of children die before reaching age 5; only about every second child being vaccinated against major diseases; prevalence of anemia among children under 5 at almost 7 percent exceeds the sub-Saharan Africa average. - Health spending: Expenditures on health, both in percent of GDP and per capita, are much lower than peer countries and have stagnated. - Education: Net enrollment rates particularly low in several geographical zones; less than one in two children enrolled in primary education in the North East (less than one third in secondary education); in the North East only about one in two men, and one in four women, is literate. ### C. Approach and Data - Incidence analysis framework: - Uses an “accounting approach” measuring impact on each household’s budget, starting from an income concept (e.g., consumable income) and allocating expenditures and transfers to households. - Assumes inelastic demand for consumption items; expenditures on items increase proportionally when prices change. - Considers indirect effects where price increases on intermediate products are passed through to consumers using the economy’s production structure. - Analysis is partial: for most simulations it analyzes revenue and transfer measures separately and does not take into account beneficial impacts of development expenditures enabled by fiscal space. - Data sources: - Nigeria General Household Survey (wave 3), 2015/16, capturing 5,000 households across all states — provides household consumption patterns. - 2010 supply-and-use tables (SUT) — used to estimate effective rates for indirect taxes passed through the production structure. - 2015 fiscal accounts — used to scale revenues derived from the household survey to actual collections at the time of the survey. - Three central questions addressed: - Efficiency: How much revenue is likely generated? - Inclusiveness: What are the implications for households’ available income, poverty rates and income distribution? - Mitigation: To what extent would existing transfer schemes need to be expanded and scaled up to offset adverse impacts and reduce poverty rates? ### D. Scenario Analysis: Increasing Fiscal Space - Focus: Increasing revenues from VAT (scenario header; detailed scenario results and figures follow in subsequent text). ### 8. The literature on the distributive ### 8. The literature on the distributive impact of VAT is mixed ### VAT distributive evidence and Nigeria-specific findings - Existing literature: VAT is generally regressive in advanced economies (IMF 2017a); results for developing countries are more ambiguous (Bastagli and others 2012). - Exemptions or lower VAT rates on consumption items that constitute a larger share of the poor’s than the rich’s consumption basket tend to be progressive. - Nigeria: plotting estimated VAT payments against household income percentiles suggests the share of VAT payments is larger in higher-income households—pointing toward a likely progressive impact from raising VAT revenue in Nigeria (Figure 5). ### Simulated VAT reform scenarios — revenue, inequality, and poverty (six scenarios summarized) - General note: Figure 6 (panel 1 and 2) reports impacts from 6 scenarios that combine increases in VAT rates and compliance rates. Without compensating measures: - Scenario 1: - Policy: Doubling existing VAT rate to 10 percent (increase in “indirect taxes on activities and commodities” as implied by supply and use table). - Impact: Would double VAT revenue from its 2015 level, and slightly reduce income inequality. - Poverty: Poverty headcount rate increases by 2¼ percentage points; poverty gap increases by 1 percentage point. - Scenario 2: - Policy: Increase VAT compliance from an estimated 25 percent to 70 percent at the 5% VAT rate. - Impact: Increasing VAT compliance to 70 percent is estimated to increase revenues by a similar order of magnitude as Scenario 1. - Distributional effects: Slightly more progressive than Scenario 1. - Poverty: Poverty rate rises by 1¾ percentage points; poverty gap rises by ¾ percentage points. - Scenario 3: - Policy: As in Scenario 2 but current exemption on basic foodstuff is lifted (all food items taxed). - Impact: Almost doubles the revenue impact from an increase in VAT compliance. - Poverty: Poverty headcount rate increases by almost 4 percentage points; poverty gap increases by almost 2 percentage points. - Inequality: Income inequality remains relatively unaffected. - Mechanism: High poverty impact due to larger shares of income spent on food in low-income households, despite a large share of food being self-produced in lower-income households. - Scenario 4: - Policy: 70 percent compliance at a 10% VAT rate (i.e., increasing compliance and doubling the VAT rate). - Fiscal impact: Could generate significant additional revenue (Naira 2.1 trillion). - Inequality: Reduce income inequality by almost one point on the Gini scale. - Poverty: Poverty headcount increases by +6 percentage points; poverty gap increases by +2¾ percentage points. - Heterogeneity under Scenario 4: - The impact on the poverty rate is higher for urban than for rural households. - The poverty gap rises more strongly for rural households than for urban ones (driven by larger share of people below the poverty line in rural areas). - Impact on poverty rate and gap for female-headed households is less than half the size of that for male-headed households (possibly due to relatively larger average household income for female-headed households in the sample). ### Social safety transfers as compensatory measures - Targeting mechanism: - Households selected via proxy-means testing (PMT) based on predicted household expenditure from a regression on verifiable variables: state dummies, rural vs. urban location, ownership of a refrigerator, ownership of a car, and electricity expenditures. - Illustration using Scenarios 5 and 6 (Figure 6 / Figure 8): - Scenario 5: Hold the poverty gap constant by transferring a lump-sum payment to all households with a PMT score below the extreme poverty line. - Required scale up: social transfers would need scaling up by some Naira 400 billion (about one fifth of the revenue gain). - Scenario 6: Hold the poverty headcount constant by transferring a lump-sum to households with a PMT score below the poverty line. - Required transfer expenditures: Naira 1,100 billion (about half the revenue generated by the VAT measure), implying significant revenue gains would remain even after ensuring poverty rates do not rise. ### Increasing excises on alcohol and tobacco - Previous studies: Increasing excises on alcohol and tobacco can be desirable for efficiency (negative externalities) and may be progressive in developing countries (IMF 2017; Bastagli and others 2012). - Simulation results (Table 1): - Doubling excise on alcohol (column (1)): - Change in Inequality (Gini coefficient, points): -0.01 - Change in Poverty headcount (percentage points): 0.07 - Change in Poverty gap (percentage points): 0.00 - Revenues (Billions of Naira): -71.8 - Doubling excise on tobacco (column (2)): - Change in Inequality (Gini coefficient, points): -0.03 - Change in Poverty headcount (percentage points): 0.25 - Change in Poverty gap (percentage points): 0.08 - Revenues (Billions of Naira): -14.1 - Interpretation and caveat: - Doubling existing excise rates on alcohol and tobacco appears to have only a minor impact on revenue generation in Nigeria; income inequality largely unaffected; poverty rates increase only moderately. - Reason: Very low shares of excise payments in households’ reported consumption; households tend to under-report expenditures on alcohol and tobacco, so these results may understate the true revenue impact. ### Increasing electricity tariffs and compensating measures - Progress under the Power Sector Recovery Plan (PSRP): - Power generation reached a record high of 5100MW in the grid at the end of 2017. - Tariff increase of 60 percent in 2016 brought electricity prices closer to cost recovery. - Simulated tariff increases and impacts: - Residential tariff increase by 30 percent: - Fiscal space: increase by about Naira 100 billion (assuming government pays the implicit subsidy going forward). - Poverty: increase in poverty headcount by around ¼ percentage point (static simulation). - Inequality: reduce income inequality slightly. - Residential tariff increase by 69 percent: - Fiscal space: increase by about Naira 200 billion. - Poverty: increase in poverty headcount by around ½ percentage point (static simulation). - Inequality: reduce income inequality slightly. - Rationale: Less than 10 percent of total expenditures on electricity are made by households at the bottom 50 percent of the income distribution; higher-income households disproportionately benefit from the current implicit subsidy. - Compensation packages modeled: - Scenarios 3 and 4 (built on 69 percent tariff increase) quantify expenses needed to keep either the poverty gap (scenario 3) or poverty rate (scenario 4) constant; fiscal space remains positive in both scenarios despite compensation. - Lifeline tariff expansion scenarios (5 and 6): - Replace existing electricity charges with a lifeline structure: N4/kWh up to 50 kWh/month (scenario 5) or up to 40 kWh/month (scenario 6); then current class 2 tariff raised by 69 percent for kWh above the lifeline threshold. - These scenarios are roughly budget neutral and decrease the poverty headcount by ¼ percentage point. ### Expanding social safety nets (NASSP) — scale, cost, and impacts - NASSP background: - Under NASSP, currently 100,000 households are listed in the registry of poor and vulnerable households. - Envisioned expansion: 250,000 households in 2018, and 1 million households (approximately 10 percent of the poor) in 24 states in the medium term. - Simulation transfer size baseline: Naira 5,000 per household per month (used in some simulations). - Stand-alone increase in social safety transfers (simulations using Naira 60,000 per household per year): - Scenarios modeled (Figure 12 note): - 20 percent of the poor get transfer of N60,000 per year per household. - 50 percent of the poor get transfer of N60,000 per year per household. - 100 percent of the poor get transfer of N60,000 per year per household. - Transfer budget implied by scenario 3, transferred as universal income (lower transfers but to all households). - Fiscal cost and impact: - Expanding coverage to cover 20 percent, 50 percent, and 100 percent of poor households is feasible but would require significant resources (up to Naira 600 billion, excluding administrative cost). - Covering 100 percent of the poor (as identified by PMT) with N60,000 per household per year: - Poverty headcount rates could drop by 3¼ percent. - Poverty gap could drop by almost 3 percent. - These reductions more than offset the increase in the poverty gap from VAT, excise, and electricity reforms in the chapter. ### Caveats and limitations of simulations - Behavioral responses not modeled: - No changes in individual behavior are assumed (e.g., excise increases may induce shifts away from alcohol/tobacco; electricity price increases combined with more reliable energy could change off-grid energy consumption). - Static simulations: - Do not capture second-round impacts (e.g., higher public infrastructure investment financed by additional revenue could raise growth and improve outcomes for vulnerable households). - Static approach may overstate short-term poverty impacts. - Targeting errors: - PMT targeting is bound to have inclusion and exclusion errors; inclusion error in these simulations is about one fourth. - Feasibility constraints: - Scaling up social safety nets to fully compensate for adverse impacts of reforms is likely unfeasible in the short term, calling for carefully designed reform packages with mitigation measures. - Administrative and reporting issues: - Administrative cost of social transfers is relatively high (30 percent in Nigeria), so total cost could be higher than shown. - Underreporting of expenditures (especially on alcohol and tobacco) could lead to underestimation of revenue potential from excise increases and affect distributional consequences. _International Monetary Fund — content unit: cr1864 - 8. The literature on the distributive impact of VAT is mixed._ ### 19. The proposed fiscal measures yield substantial revenue gains and reduce income ### 19. The proposed fiscal measures yield substantial revenue gains and reduce income ### Fiscal measures and their distributional effects - Proposed fiscal measures: VAT reform, an electricity tariff increase, and an increase in the excise rate on alcohol and tobacco. - These measures are described as yielding substantial fiscal space ("substantial"). - These measures "by themselves are also expected to decrease income inequality." ### Poverty impacts and compensating measures - In all scenarios, "poverty rates would increase" as consumable household income shrinks in response to larger expenses. - "Poverty gaps and rates would likely rise significantly in response to these measures and call for compensating measures." - Simulations indicate that expansions of social safety nets (increased transfer amount and increase in covered share of the population) can, "if efficiently run, could compensate for the negative impacts" from the reforms. - Short-term scalability constraint: "As social safety nets may not be immediately scalable to the desired extent in the short term, a package of other measures will be needed to compensate for the adverse impact on the most vulnerable." - Specific compensatory measure recommended: "imposing a lifeline tariff for electricity will be needed." - Additional use of fiscal space recommended: "Using gained fiscal space to increase expenditures in education and health, not captured in the simulation, could improve the progressivity of the suggested measures and decrease the likely increase in poverty." ### Dynamic considerations and potential overestimation of harms - The chapter notes that "estimated transfers and poverty gaps may overestimate the impact on the poor—provided that additional expenditures are efficiently used." - Redistributing generated tax revenues (and savings in subsidies) into public expenditures "in itself would generate additional growth benefits, therefore increasing income, including for the poor." - Because the chapter does not capture these dynamic impacts, "the sizes of estimated social measures to compensate for negative impacts could be overstated, so that 'compensatory' transfers could actually deliver a reduction in poverty levels." *Source: cr1864 - 19. The proposed fiscal measures yield substantial revenue gains and reduce income* ### 8. Gender gaps in education have narrowed but remain at higher levels and have increased ### 8. Gender gaps in education have narrowed but remain at higher levels and have increased ### Education access and attainment - Enrollment rates at all levels of education have increased, and gender gaps have shrunk in primary and secondary education. - Gross enrollment rates in primary education are at almost 100 percent. - Secondary enrollment rates have more than doubled for both boys and girls. - In contrast to other lower middle-income countries, still only nine girls are enrolled in school for every ten boys at the secondary level. - Gender gaps have increased at the tertiary level, with now seven women enrolled for ten men (vs. eight in 1999). - Large regional variation across the country’s six geographical zones: - The share of the population without education is high for both men and women in the three northern zones. - In the North East and North West, about two-thirds of women are without education. - In seven states, less than one third of women aged 15–24 are able to read (National Demographic and Health Survey 2013; NBS 2016). - Infrastructure and facility gaps: - Insufficient access to electricity and water increases women’s time burden for household activities. - In almost 12 percent of households, one trip to access clean water takes longer than 30 minutes, implying less time for productive activities, including school. - Lack of sanitation facilities at school exposes girls disproportionately to risks. - Reported corporal punishment for non-payment of levies and charges is an obstacle; more than 70 percent of girls age 10–14 have experienced corporal punishment in the past month (UNICEF 2014). ### Health and social determinants affecting education - High fertility and adolescent birth rates reduce educational opportunities: - 5.6 children per women—ranging from 4.3 in the South-South to 6.7 in the North-West. - About 110 births per 1000 girls aged 15 to 19. - 48 percent of girls without education are mothers or pregnant by the age of 19, but only 9 percent with post-secondary education. - Child marriage and early childbirth pose health and long-term cognitive risks for children. - About one in six women reports an unmet need for family planning. - Maternal and infant health indicators: - More than 800 maternal deaths per hundred thousand live births; progress to decrease it has stalled over the past decade. - Only about every third child birth is attended by skilled staff in Nigeria (compared to more than 50 percent in sub-Saharan Africa, and more than two-thirds in low-and middle-income countries). - At almost seven percent, infant mortality rates are significantly higher than in low-income countries or sub-Saharan Africa. - Social norms affecting health and education: - Almost two-fifths of women do not participate in household decisions regarding their own health care. - Only every sixth woman participates in that decision in the North-West, but about three out of four women in the South-West. ### Gender-based violence and legal protection - Female genital mutilation/cutting: - One in four women aged 15–49 and about every sixth girl aged 0–14 has undergone female genital mutilation or cutting. - Less than one-fourth of women who have heard about the procedure think that the practice should continue. - Physical and sexual violence: - 28 percent of Nigerian women have experienced physical violence since the age of 15; experiences vary by region (as high as 52 percent in the very South). - More than one in ten women has experienced physical violence in the past 12 months. - Five percent experienced physical violence during pregnancy. - Seven percent of women have been subjected to sexual violence. - Institutional gaps and attitudes: - Only a fraction of Nigerian states enacted laws against domestic violence or genital mutilation. - Law enforcement and security agency responses at local and state levels are often insufficient and ineffective. - As a result, most women do not seek formal or informal help after experiencing violence; only two percent seek help from the police. - Attitudes: 35 percent of female survey respondents (almost 50 percent in the North East) agreed there were reasons that justify a husband beating his wife (examples: going out without telling the husband, 25 percent; burning food, 14 percent). - Trafficking: - In 2015, more than 700 women have been trafficked—about half of them for sexual exploitation. ### Financial access and constraints - Women are less likely to have an account and to save or borrow at a financial institution than men, with larger gaps than in sub-Saharan Africa on average. - Gender gaps in borrowing persist at higher levels of education, while rates for informal borrowing are roughly equal for women and men. - Women are more likely to work in the informal sector; when in the formal economy, women and men are equally likely to save. - Women assign more relevance than men to most factors inhibiting access to formal financial services; the cost of services is cited as the main impediment. - Varying application of legal rights (inheritance, property) limits women’s access to collateral. - Discriminatory practices (e.g., requirement of the husband’s signature for acceptance of collateral) impede financial access. ### Ongoing initiatives - Programs to eradicate female genital mutilation/cutting: training of more than one hundred champions for house-to-house visitation; health worker training on prevention and management. - Women’s engagement in peace and security: capacity building workshops for MDAs on implementation of the revised National Action Plan (NAP); a specific gender policy for the Nigeria Police sector; gender desks in designated police stations in the six geo-political zones. - HeForShe Campaign launched nationally in March 2017; over 150 men in higher-level positions declared support; expected state-level launches over the next couple of years. - Medical and Financial Assistance to Women and Girls on Obstetric Fistula in partnership with the ECOWAS Gender Development Center. - Central Bank of Nigeria’s Financial Inclusion Strategy targets reducing the proportion of women who are financially excluded to 20 percent by 2020. - Micro, Small and Medium Enterprises Development Fund targets 60 percent of loans from microfinance banks and institutions for women and women-owned enterprises. - Introduction of a registry for movable property this year can help increase financial inclusion by women. - National Women Empowerment Fund (NAWEF) and Government Enterprise and Empowerment Program (GEEP) aim to provide funds to young men and women. - Civil society programs, often with development partners and at the state level (example: Women Advocates Research and Documentation Center published a minimum standard guideline on safety and security of schools used in pilot schools such as in Bauchi State). ### C. Macroeconomic losses and future potential ### Estimated impacts of gender inequality on growth and inequality - Decomposition exercise (Panel of 115 economies, 1990–2014) links Nigeria’s differences in average real GDP per capita growth rates to gender inequality determinants (labor market, political representation, educational attainment, female health outcomes, legal rights) as captured by the UN Gender Inequality Index (GII). - Estimated effects: - Growth in Nigeria could be higher by more than 1¼ percentage points annually, on average, if gender inequality was decreased to levels of countries at similar levels of development in the region. - Lowering gender inequality to the same benchmark will likely boost growth by more than 1¼ percent in states with high gender inequality but less so in more developed and more gender-equal states. - Income inequality and diversification: - Removing gender inequality (as measured by the GII) could reduce the Gini coefficient of income inequality by 6½ points. - Reducing gender inequality could yield significant gains in economic diversification, contributing to the sustainability of growth and Nigeria’s Economic Recovery and Growth Plan’s main goals. ### E. Policy Recommendations - Strengthen and enforce legal rights and national strategies to grant women the same economic opportunities, and raise awareness on existing rights. - Equalize legal rights and implement existing rights and strategies by: - Implementing the 2006 national gender strategy and 2015 gender policy, and accelerating the update of the former. - Revising laws and penal codes at the national and state level to include key principles to protect women’s and children’s rights. - Re-submitting a revised “Gender and Equal Opportunities Law” to the Senate to place the CEDAW and African Union Protocol of women’s rights into national law. - Enforce institutionally granted non-discrimination rights based on gender by enforcing civil law when customary law contradicts non-discriminatory policies, with particular attention to property and inheritance rights to improve financial inclusion and access to productive resources. - Work with traditional leaders and local governance systems to ensure legal rights translate to a wider share of the population. - Raise awareness of legal rights by sensitizing the public on existing policies and laws and educating the population on how to seek redress in the event of rights’ infringement. *Source: cr1864 - 8. Gender gaps in education have narrowed but remain at higher levels and have increased* ### 16. Boosting infrastructure and human capital investment is essential to open a virtuous ### 16. Boosting infrastructure and human capital investment is essential to open a virtuous ### Investment priorities to close gender gaps and raise productivity - Increase education levels by investing in security and infrastructure. - Invest in electricity and sanitation facilities for schools to advance general development goals and help close gender gaps in the labor force and education. - Improve health outcomes by allocating more funds to the health sector. - Prioritize investments in reproductive health services and improved access to affordable family planning (addressing the unmet demand in contraception) to reduce maternal death ratios and address high adolescent fertility rates. - To operationalize the 2001 Abuja declaration on public health expenditures, allocate at least 1 percent of the consolidated revenue fund to health. ### Awareness, protection, and prevention of gender-based violence - Expand ongoing initiatives and outreach to end harmful traditional practices, including child marriage and female genital mutilation and cutting. - Increase the number of and access to “safe spaces” and gender desks at the national police established as part of the NAP to report incidences of domestic and other violence. - Strengthen gender units and desks at police stations across the country. - Provide training to improve capacity of designated police officers in investigation, documentation of complaints and reporting, and knowledge with respect to legal rights. - Train women health workers such as Traditional Birth Attendants who operate at the community level in provision of medical and other support to respond to gender-based violence. - Implement sensitization programs (for example, the Voices4Change Program) and programs that improve women’s access to information, involving traditional and religious institutions. ### Reinvigorating gender-responsive budgeting - Restart and expand the “Growing Girls and Women in Nigeria” (G-WIN) gender budgeting initiative introduced in 2012 (in partnership with the U.K.’s department for International Development) that comprised the Ministries of Agriculture, Public Works, Health, Water Resources, and Communication and technology. - Introduce a committee within the Ministry of Finance to monitor budget allocations and public expenditures from a gender standpoint and evaluate the impact of policies on women and men. - Provide additional training and empower gender focal persons at relevant MDAs. ### Strengthening gender-disaggregated data for policy design and monitoring - Strengthen provision of gender-disaggregated data to design actions and monitor progress in gender inclusion, in line with the sustainable development goals. - Address limited information on women’s and men’s employment in the federal and state civil service (as noted in NBS (2016)) which inhibits analysis of trends in public employment. - Ensure gender-disaggregated data go beyond male vs. female disaggregation in main indicators and offer information on opportunities, rights and resources. - Have the Ministry of Women and Child Protection publish an overview of the current state of legal rights across federal states. *Source: cr1864 - 16. Boosting infrastructure and human capital investment is essential to open a virtuous (PDF chapter).* ### Box 1. Measures Under the ERGP ### Box 1. Measures Under the ERGP ### Measures to increase transparency and governance - Involvement of: the Ministry of Justice, the Economic and Financial Crimes Commission, the Independent Corrupt Practices Commission, the Ministries of Interior, Finance, Budget and National Planning, Information and Culture, and the Central Bank of Nigeria (CBN). - Anti-corruption measures envisioned: - (i) a continuation of the anti-corruption campaign incorporating structured programs to encourage the use of hotlines, report incentives and offer whistle-blower protection; - (ii) the more effective prosecution of corruption and other crimes; - (iii) a strengthening of the capacity of anti-corruption agencies; and - (iv) an enactment of the Special Crimes Act. - Transparency in public resources management targets: - (i) the fulfillment of commitments to improve transparency under the Open Government Initiative; - (ii) the continued publication of allocations to federal, state and local governments after each Federal Account Allocation Committee (FAAC) meeting; - (iii) the publication of monthly state and local government receipts on states websites; and - (iv) the CBN to verify the accuracy/authenticity of foreign exchange sales to end users by all deposit money banks and making them available to customs and the Federal Inland Revenue Service (FIRS). ### B. Zooming in on Bribery: Public Experience and Perception — survey design - Data source: 2016 Corruption Survey by Nigeria’s National Bureau of Statistics. - Survey coverage: representative household survey based on almost 33 thousand completed interviews in all states. ### B. Key findings on incidence, purpose, and scope of bribery - Incidence: - One third of people that had contact with a public official (which is about half of the population) has paid or been asked to pay a bribe. - Prevalence varies across geographic zones; lowest in the South-East. - Men, more highly educated persons, and better-earning individuals are more likely to be in contact with bribery. - Most bribes are paid in cash. - Purpose of bribes (share of reported reasons): - 32 percent: speed up procedure - 10 percent: make finalization of procedure possible - 18 percent: avoid payment of a fine - 13 percent: avoid the cancellation of public utilities - Other listed reasons include receiving preferential treatment (4 percent) and no specific purpose (8 percent). - Services linked to bribery (selected shares and amounts): - Public utility services: every fifth case (about 20 percent). - Issuance of an administrative certificate, document, license or permit: more than 13 percent. - Medical services: almost 7 percent. - Job application or promotion in the public sector: small fraction of cases but average amount paid is almost 22 thousand Naira. - Bribery by government function (likelihood and average amounts): - Law enforcement: almost every second contact with policy officers results in a bribery incident (average bribe a bit more than four thousand Naira). - Prosecutors: about every third contact results in bribery (average bribe a bit more than 10 thousand Naira). - Judges/Magistrates: about every third contact results in bribery (average bribe almost 19 thousand Naira). - Customs officers: about one in four cases and costly (Naira 88.5 thousand average bribe). ### B. Reporting, refusal, and consequences - Refusal to pay: - One in five Nigerians confronted with bribery refuses to pay the bribe. - Refusal is often associated with negative consequences, particularly with police, public utilities officers, or teachers and lecturers. - Reporting: - Less than 4 percent of bribery cases get reported. - Of reported cases, 43 percent are reported exclusively to official institutions. - In one third of reported cases, there is no follow-up. - In one out of five reported cases the reporter receives advice to not go ahead with the report. - A formal procedure against the officer is initiated in only about one in six reported cases. - In one in seven reported cases, the problem is solved informally. - Reasons for not reporting (selected shares): - Pointless, nobody would care: 32 percent - Common practice: 31 percent - Do not know to whom to report: 6 percent - Fear of reprisals: 6 percent - All other reasons: 25 percent ### B. Public attitudes and perceptions - Acceptability of corruption: - Three out of five to two out of three people find that corruption is not acceptable. - Only 13 percent of the population classify a company asking for a bribe from a job applicant as “always acceptable.” - Acceptance rates are higher for transactions with the public sector; every sixth to every fifth person reports finding bribes in law enforcement or nepotistic recruitment into the public sector as “always acceptable.” - Perceptions of government effectiveness and awareness of agencies: - Majority consider the government to be committed and effective in dealing with corruption overall. - Less than half in the South-East and South-South think the government is committed/effective. - More than three thirds of the population in South-East and South-South perceive corruption to have increased compared to two years ahead of the survey. - Awareness of anti-corruption institutions is generally low except for the National Police Force (NPF), the Economic and Financial Crimes Commission (EFCC), and the Federal High Court (FHC). - Perceived effectiveness among those aware: - EFCC: perceived as effective in fighting corruption by almost four in five persons. - NPF: perceived as effective in fighting corruption by only less than two in five persons. - Other institutions: considered effective by about three out of five persons who are aware of their existence. ### C. Quantifying the cost of corruption — channels and empirical estimates - Channels through which corruption affects outcomes: - Reduces tax compliance and tax/customs collection through bribery and informal exemptions. - Diminishes efficiency of public spending and investment via rent-seeking, non-merit-based project selection, inflated project costs, and improper procurement. - Shrinks fiscal space and can lead to fiscal dominance, limiting central bank independence; associated with higher inflation. - Nigeria-specific fiscal context: - Public revenues are about 5 percent of GDP; low tax revenue mobilization is the main constraint to fiscal space for development financing. - Share of firms expected to pay a bribe when meeting with tax officials is higher than in peer countries. - About one fourth of firms are expected to pay a bribe to secure a government contract (compared to one third in sub-Saharan Africa). - Nigeria’s public investment efficiency is 77 percent below the “efficiency frontier.” - Growth impact estimates: - Cross-country evidence (IMF 2017b): an increase in the ICRG corruption index (scale 0 to 6) by one unit may raise per capita GDP growth by about 1 percent. - At an ICRG level of 1.5, corruption in Nigeria is higher than the sub-Saharan African average and other peers. - Estimated potential real GDP growth increases for Nigeria if corruption were lowered to peer levels (other things equal): - ½ percentage points higher if set to the level of Mongolia. - 1 percentage point higher if set to the level of Malaysia or South Africa. - 1½ percentage points higher if lowered to the level of Morocco. - Tax revenue-to-GDP ratio impacts: - IMF (2016) panel results (149 countries, 1995–2015): a 0.4 percentage points increase in the tax-to-GDP ratio if a country’s transparency increases (corruption decreases) by 10 points on Transparency International’s Corruption Perception Index (scale 0 to 100). - Applying these estimates to Nigeria implies: - 0.4 percentage points higher tax revenue-to-GDP if corruption was lowered to levels perceived in Morocco or Mongolia; - 0.9 percentage points higher if set to Malaysia’s level; - 1.4 percentage points higher if lowered to the best performer in sub-Saharan Africa (Botswana). - Public investment efficiency: - Panel regressions for sub-Saharan African countries imply that lowering Nigeria’s control of corruption score to that observed in South Africa could reduce Nigeria’s public investment efficiency gap by 12 percentage points, increasing infrastructure output per dollar invested by 12 percent. ### D. Strategies to tackle corruption — recent initiatives and policy recommendations - Priority areas for legal and institutional reforms: - (i) criminalization of corruption and enforcement; - (ii) asset declaration by public Officials; - (iii) transparency of beneficial owners; and - (iv) AML tools to detect and confiscate proceeds of corruption. - Criminalization and enforcement details: - Some acts of corruption are criminalized primarily under the Corrupt Practices and Other Related Offences Act 2000. - Improvements needed to align comprehensive criminalization with the United Nations Convention against Corruption (UNCAC). - Certain UNCAC-defined offences are not adequately criminalized in Nigeria, including embezzlement and illicit enrichment. - Absence of illicit enrichment provisions has contributed to difficulties in securing conviction where the source of wealth cannot be established. - Legal harmonization context: - Two different criminal laws—the Penal Code and the Criminal Code—apply to the northern and southern parts of Nigeria respectively, reflecting different cultural and religious traditions. *Source: cr1864 - Box 1. Measures Under the ERGP (excerpt).* ### 16. Some measures have been taken in the judicial system to expedite trial of corruption ### 16. Some measures have been taken in the judicial system to expedite trial of corruption cases, but significant challenges remain ### Judicial system capacity, priority measures, and special court proposal - Courts take "a few years" to hear corruption cases due to significant backlog across the federal court, contributing to a low number of convictions in recent years. - Lack of capacity and integrity concerns regarding judges impede effective handling of corruption cases. - Mechanisms were recently adopted in the court system to give trial of corruption cases greater priority, but it remains unclear how effective these will be over time. - A bill to establish a special court for corruption has been submitted to parliament. - Rationale: An independent and sufficiently-resourced court with high integrity should promote specialization and expertise and facilitate the trial of corruption cases. ### Asset recovery and non-conviction-based forfeiture - Asset recovery is high on the authorities’ anti-corruption agenda and should be vigorously pursued. - A draft crime bill is under Senate consideration to provide an effective legal and institutional framework for recovery and management of proceeds derived from unlawful activities and to harmonize seizure and confiscation provisions across statutes. - For non-conviction-based forfeiture: - Authorities, with Commonwealth assistance, developed a Guidance Note and are training prosecutors and judges to facilitate its application. - If applied judiciously, non-conviction-based forfeiture could be a useful complementary tool to deprive corrupt officials of ill-gotten assets when criminal conviction cannot be secured. - International engagement: - Authorities are actively engaging with foreign authorities to facilitate recovery of looted funds abroad. - A memorandum signed in December 2017 will, under the supervision of the World Bank, enable repatriation of $321 million illicitly acquired by the family of the late former President of Nigeria Sani Abacha from Switzerland. ### Overlaps in investigative mandates and duplication - Overlaps in mandates of investigative agencies have created duplication in investigating and prosecuting corruption cases. - Institutional roles: - The Attorney General of Justice is the national prosecutorial agency and can delegate prosecutorial powers to investigative agencies including the Independent Corruption Practices and Other Related Offences Commission (ICPC) and the Economic and Financial Crimes Commission (EFCC). - Corrupt Practices and Other Related Offences Act of 2000 establishes the ICPC and empowers it to investigate and prosecute (as delegated by the Attorney General) offences defined in the law, including certain acts of corruption. - EFCC establishment Act of 2004 mandates the EFCC to investigate and prosecute all economic and financial crimes, which is broadly defined to include corruption. - Result: duplication and inefficiency in investigation and prosecution of corruption. ### Need for legal reforms and coordination - Authorities identified lack of effective coordination among anti-corruption agencies as a key weakness. - Steps already taken: development of a protocol for information sharing in corruption cases and a manual on corruption case management. - Recommended legal reforms (in line with international best practices): - Designate one independent, capable and credible agency responsible for investigation and prosecution of clearly-defined high-level corruption cases. - Take into account the level of capacity, integrity and resources of existing institutions when designating the agency and defining case categories. - Amend the EFCC establishment Act of 2004 and Corrupt Practices and Other Related Offences Act to clearly set out each agency’s mandate and ensure their independence, integrity and resources. - Legal framework should allow for joint investigations when needed. ### Case intake drivers: petitions vs. financial intelligence - Investigations have been mostly triggered by petitions and very rarely by financial intelligence. - Petition mechanism: - Petition is commonly used by anti-corruption agencies to receive complaints from citizens. - Most investigations by the EFCC and ICPC are triggered by petitions; duplication occurs when petitions on the same matter are filed with multiple agencies. - Authorities recently launched a consolidated online platform administered by the Presidential Enabling Business Environment Council (PEBEC) to bring petitions together and avoid duplication of actions. - Financial intelligence: - Few investigations were triggered by Nigeria’s Financial Intelligence Unit (NFIU)’s disseminations. - This may be partly due to the relatively low number and quality of disseminations from the NFIU. ### Asset declaration framework: gaps and reforms needed - Nigeria has had an asset declaration framework since 2004 under the Code of Conduct Bureau (CCB) and Tribunal Act. - Declaration timing: when taking office, every four years thereafter, and at the end of terms. - Sanctions for false declaration imposed by the Code of Conduct Tribunal (CCT) include dismissal, disqualification from holding any public office for up to ten years, and forfeiture of “any property acquired in breach of the Act”. - Issues and gaps: - Unclear definition of “any property acquired in breach of the Act”; this provision has been used very rarely (there is only one case in which the CCT ordered an undeclared parcel of land be forfeited). - Declarations are shared with other anti-corruption agencies but cannot be accessed by the general public. - Implementation weaknesses: declaration forms handled manually by the CCB, making the system vulnerable to manipulation. - Very few sanctions applied (e.g., only one in 2016) despite CCB reporting compliance rate in 2016 was only 77 percent, possibly due to capacity and resource constraints of the CCT. - The CCT currently comprises of only one chairman and a handful of staff members. - Recommended legal and implementation improvements: - Require that beneficially owned assets be declared. - Prescribe proportionate and dissuasive sanctions for all types of breaches. - Mandatorily publish the declarations of senior officials online. - Enhance enforcement focus on senior officials and those vulnerable to corruption (e.g., senior officials and executives of state corporations in the extractive sector). - Digitization: With UNODC assistance, the CCB has started digitizing submission and management of declarations to enhance integrity and efficiency. ### Transparency of beneficial owners and extractive sector commitments - Lack of transparency in the extractive industry has impacted government resources; diversion of government funds in the case of NNPC reaches several billions of dollars a year. - NEITI (2017) highlights that NNPC and the Nigerian Petroleum Development Company (NPDC) owe the Federation Account more than $20 billion. - Commitments: - Under the Open Government Partnership (OGP), Nigeria committed to enhance transparency of the extractive sector including government earnings, bidding process and companies involved. - Authorities committed to establishing a public register of beneficial owners of companies involved in exploration, production and exportation in the extractive sectors by January 2019, in line with the Extractive Industries Transparency Initiative 2016 standard. - NEITI has launched consultations with stakeholders including the Department of Petroleum Resources and Corporate Affairs Commission (CAC). - Authorities committed to establishing by December 2019 a central beneficial owner register for all legal persons created in Nigeria (beyond the extractive industry), accessible to financial institutions and law enforcement agencies (including tax authorities), and to assist the CCB in verifying declarations of beneficially owned assets. - Coordination responsibility: work will be coordinated by the CAC and should build on lessons learned from the extractive sector register. ### AML tools to detect and confiscate proceeds of corruption - Targeted AML measures can be powerful tools to combat corruption and should be further pursued. - NACS emphasizes NFIU’s role in “gathering, analysis, processing and management of financial data and other intelligence sources”. - Asset declarations are an important intelligence source for the NFIU. - Additional AML measures recommended: - Requirements for identification and enhanced due diligence of politically exposed persons (PEPs) and heightened scrutiny of their transactions. - Supervisors to focus on financial institutions’ control of money laundering risks associated with corruption. - Other agencies, including the financial intelligence unit, to give priority to corruption in carrying out their AML mandates. ### ML/TF risk assessment and action plan - Nigeria completed its first national ML/TF risk assessment (NRA) in 2017. - NRA findings: - Corruption poses a high threat in generating proceeds of crime to be laundered. - Main channels for laundering include the bureaux de change (BDC), banks and the real estate sector. - Recommendation: finalize the action plan to mitigate identified risks as a high priority and ensure prompt implementation to allow prioritized policies and measures to address risks including with respect to corruption. ### Strengthening the NFIU and its role in anti-corruption - A draft bill to establish a financial intelligence agency is under consideration by the National Assembly; enactment is being pursued. - If enacted, it would transform the NFIU (currently affiliated with the EFCC) into an independent agency. - Independence would help restore NFIU’s membership in the Egmont Group (suspended in July 2017) and facilitate pursuit of full membership of the Financial Action Task Force. - NFIU operational recommendations: - Focus more on the NRA-identified risks, including conducting the long-delayed strategic analysis on corruption to identify trends and typologies associated with laundering of proceeds from corruption. - Focus operational analysis on corruption-related transactions to improve dissemination of corruption cases for investigation. ### CBN AML supervision and BDC sector risks - CBN AML supervision of banks: - CBN lacks an adequate legal basis for imposing sanctions on non-compliance with AML rules; this hinders promotion of effective controls by financial institutions over ML risks associated with corruption. - CBN expects a regulation to take effect in the first quarter of 2018 to address the issue. - CBN carries out on-site AML inspections of all banks yearly but needs to implement risk-based supervision to target banks most at risk of misuse for laundering proceeds of crime. - CBN should carry out thematic inspections on banks’ controls over politically exposed persons to improve quality of suspicious transactions related to corruption submitted to the NFIU. - BDC sector: - Urgent policy response needed to tackle possible laundering of proceeds of corruption through BDCs. - CBN oversight and BDC sector compliance with AML requirements should be strengthened and resourced. - Current resourcing: a unit of 10 staff members is responsible for AML supervision of more than 4500 non-bank financial institutions, including 3432 BDCs. - With current resources, CBN staff can only carry out basic inspections on less than 10 percent of all BDCs per year. - As BDCs are identified as a high-risk sector in the NRA, an urgent policy response is required. ### Conclusion and key policy recommendations - Build on recent government initiatives to combat widespread corruption; more measures needed across multiple fronts to reap macroeconomic dividends from improved transparency. - Recommended legislative and institutional modifications: - Clearly designate a single agency responsible for investigation and prosecution of clearly defined high-level corruption. - Improve coordination among agencies. - Review/amend legislation on corruption-related offences to align with the UNCAC, including illicit enrichment. - Streamline and strengthen legal framework to facilitate asset recovery. - Strengthen asset declaration framework and enforcement: - Require beneficially owned assets be declared. - Prescribe proportionate and dissuasive sanctions for all types of breaches. - Mandatorily publish declarations of senior officials online. - CCB should enhance enforcement among senior officials and those vulnerable to corruption (e.g., senior officials and executives of state corporations in the extractive sector). - Transparency of beneficial ownership: - Disclose beneficial owners of companies in the extractive industry in line with the EITI standard. - Consider extending such measures to companies participating in public procurement. - Establish beneficial owner register of all legal persons created in Nigeria accessible by law enforcement agencies (including tax authorities) and financial institutions. - Pursue targeted AML/CFT measures: - Finalize and promptly implement the action plan to mitigate ML/TF risks identified in the NRA. - Enact legislation to ensure NFIU’s operational independence. - NFIU should conduct strategic analysis and increase disseminations on corruption. - CBN should strengthen AML/CFT risk-based supervision of banks and tackle ML risks in BDCs. ### Complementary areas to strengthen alongside legal reforms - Tax administration: - Increase use of e-filing and data matching. - Intensify measures such as increasing number of risk-based tax audits with strengthened focus on large taxpayers. - Transparency in public financial management: - Raise public investment efficiency through better project identification and appraisal, comprehensive asset registers, formal project evaluation, and efficient procurement, including full roll-out of GIFMIs at the Federal level. - Corporate governance and fiscal transparency: - Strengthen governance, fiscal transparency and accountability of revenue generating agencies and state-owned enterprises, including NNPC. - Improve revenue accruing to the Federation account, including reconciling auditor general’s and NEITI findings on oil revenue. *Source: cr1864 - 16. Some measures have been taken in the judicial system to expedite trial of corruption cases* ### 1. Nigeria’s yield curve (and term structure of interest rates) has taken different shapes and ### 1. Nigeria’s yield curve (and term structure of interest rates) has taken different shapes and levels over the past few years ### Overview and observed dynamics - Period examined: 2012 to 2017Q2 (66 time-series observations across 7 maturities: 3-months (3M), 6-months (6M), 1-year (1Y), 3-year (3Y), 5-year (5Y), 7-year (7Y) and 10-year (10Y)). - Term structure movements during 2012–2017Q2: - Declined: 2012 to 2013. - Increased: 2014 to 2015. - Became slightly inverted: 2016–17. - Observed macro and market events linked to yield curve dynamics: - Sharp decline in oil prices beginning late 2014, carried into 2015, stabilizing in 2016. - Oil production fell due to infrastructure sabotage. - Delisting of Nigerian government bond from the JP Morgan index in October 2015 (announcement in September 2015). - Large swings in inflation: double digits in 2012, single digits in 2013, reverting to double digits in 2016. - Counterintuitive observations noted: - Despite higher revenue and lower expenditure in 2012 relative to 2015, the yield curve in 2012 was above the 2015 curve. - Despite JP Morgan de-listing announcement in September 2015 (which would normally raise yields), the yield curve shifted down in 2016 compared to 2015. - Between 2015 and 2017, inflation doubled but the yield curve increase was concentrated at the short end. ### Models, theory, and data - Term structure models used: Nelson-Siegel models (NSMs). Affine-Term Structure models acknowledged but NSMs selected for capturing macroeconomic factors. - Yield curve decomposition: level, slope (steepness) and curvature (humpness). - Level loading factor = 1 (affects all maturities equally). - Slope loading factor decays with maturity; slope is spread between long and short yields. - Curvature loading factor maximized at medium maturities; zero at shortest and longest maturities. - Theoretical associations: - Slope and short end closely associated with monetary policy. - Curvature mainly affected by interest rate volatility. - Level and long yields influenced by long-run macroeconomic variables and investor premia (inflation risk premia, credit risk premia, term premia, illiquidity premia, preferred habitat). - Data construction and choices: - Zero-coupon yield curves constructed from par yield curves based on primary bond auction rates (par yield rates obtained from the Nigerian Debt Management Office). - Straight line interpolation used between maturities to construct par yield curves. - Monthly data covering 2012 to 2017 Q2 (66 observations). - Macroeconomic factors included: monetary policy rate (MPR), inflation rate, liquidity (using Broad Money as proxy), and oil price. - Note: Analysis using money market rates instead of MPR found similar results; contribution of money market (call) rates to variance composition was less than MPR. ### Findings: Performance of the Yield-Only NSM - Model fit: - The NSM yield-only model fits the term structure of Nigerian yields. - Mean and standard deviation of measurement residuals are negligible across maturities. - Chi-square test indicates small differences between zero-coupon yield curve and estimated term structure. - Average yield curve characteristics: - Estimated average yield curve is only slightly upward sloping at the short end and flat for longer maturities. - Level factor is the most stable; curvature is highly volatile. - Table 1: Yield-Only NSM, Yield Curve Fitting Residuals, 2012–17 (values preserved) - 3 Months: Mean (0.081), Standard Deviation 0.111, Minimum (0.382), Maximum 0.132, SSE 92.0764 - 6 Months: Mean 0.361, Standard Deviation 0.348, Minimum (0.462), Maximum 1.287, Chi-Square 5.3905 - 1 Year: Mean (0.123), Standard Deviation 0.166, Minimum (0.474), Maximum 0.381, DF 459 - 3 Years: Mean (0.172), Standard Deviation 0.513, Minimum (1.107), Maximum 1.204, P-Value 0.000 - 5 Years: Mean (0.014), Standard Deviation 0.505, Minimum (0.989), Maximum 1.426 - 7 Years: Mean 0.020, Standard Deviation 0.041, Minimum (0.106), Maximum 0.139 - 10 Years: Mean (0.055), Standard Deviation 0.740, Minimum (2.080), Maximum 1.096 ### Findings: Performance of the Yield-Macro NSM - Model fit: - Yield-macro NSM exhibits fitness to the yield curve; estimated means and standard deviations of residuals are small for all maturities; chi-square statistics confirm goodness of fit. - Dynamics and relations with macro variables: - Dynamics of yield curve factors (level, slope, curvature) do not closely mirror macroeconomic variables. - Tenuous similarities: level with MPR and curvature with liquidity; trend of inflation and oil prices correspond to curvature over 2016–17. - Key summarized findings: - Short-term rates react significantly and quickly to macroeconomic variables; long-term rates are explained more by non-macroeconomic variables. - For maturities ≤ 1 year, around 50 percent of the variance of the yield curve is explained by macroeconomic factors (mostly inflation and oil price fluctuations). - For longer maturities, macroeconomic factors explain 30 percent of the variance. - Impulse response functions: slope and curvature react to macroeconomic shocks; level appears unresponsive except for a short-term liquidity shock. - Level factor drives yield curve dynamics and is closely associated with long-term rates, explaining: - 30 percent of variance at 3-year maturity - 60 percent of variance at 10-year maturity - Table 3: Yield-Macro NSM Variance Decomposition for 60 Months Period (values preserved) - 3 Months: Level 0.1076, Slope 0.1037, Curvature 0.2714, MPR 0.0649, Inflation 0.2759, Liquidity 0.0149, Oil Price 0.1616 - 6 Months: Level 0.1088, Slope 0.0624, Curvature 0.3370, MPR 0.0642, Inflation 0.2329, Liquidity 0.0304, Oil Price 0.1641 - 1 Year: Level 0.1230, Slope 0.0433, Curvature 0.3563, MPR 0.0708, Inflation 0.1945, Liquidity 0.0503, Oil Price 0.1618 - 3 Years: Level 0.2808, Slope 0.0355, Curvature 0.2683, MPR 0.0655, Inflation 0.1513, Liquidity 0.0547, Oil Price 0.1439 - 5 Years: Level 0.4372, Slope 0.0324, Curvature 0.1838, MPR 0.0515, Inflation 0.1215, Liquidity 0.0518, Oil Price 0.1218 - 7 Years: Level 0.5295, Slope 0.0305, Curvature 0.1366, MPR 0.0425, Inflation 0.1019, Liquidity 0.0518, Oil Price 0.1071 - 10 Years: Level 0.6033, Slope 0.0289, Curvature 0.1004, MPR 0.0350, Inflation 0.0850, Liquidity 0.0529, Oil Price 0.0944 - Interpretation: - Non-macroeconomic factors are main drivers for yield curve dynamics, helping explain counterintuitive movements. - Inflation is the most relevant macro factor, accounting for up to 0.28 (28 percent) of yield variance at shorter maturities and 0.10 (10 percent) at longer maturities. - Other macro variables (growth rates, primary balances) could have stronger links, especially with the level, but high-frequency data were unavailable. - Market maturation considerations: Nigerian government securities market is relatively nascent (first Nigerian ten-year bond issued in 2007); liquidity indicators: turnover-to-outstanding ratio rule-of-thumb ~10X, observed 1.17X for FGN bonds and 16X for T-bills. ### Policy implications - Short-term rates are prone to shocks; reducing government exposure to short-term securities may reduce costs and risks over the long-term. - Debt Management Office (DMO) actions and strategy: - DMO publicly announced intention to gradually reduce the size of T-bills, beginning December 2017. - Strategy includes issuing Eurobonds worth $3bn and using proceeds to retire T-bills as they mature. - DMO could skew issuance toward medium- to long-tenor securities, conditional on deepening liquidity along the curve. - Liquidity concern: - FGN bonds’ liquidity is relatively poor; suggested turnover-to-outstanding ratio ~10X versus observed 1.17X for FGN bonds (and 16X for T-bills). *Prepared by IMF Fund staff (chapter authors: Miriam Tamene and Marwa Ibrahim) based on analysis using Nelson-Siegel models and par yield data for Nigeria, 2012–2017Q2.* ### Appendix II. Performance Evaluation of Nelson-Siegel Models ### Appendix II. Performance Evaluation of Nelson-Siegel Models ### Fit of Yield Curve by Maturity, 2012–17 - Appendix Figure 1 presents the fit of the Yield Only Nelson‑Siegel Model (NSM) for maturities: - 3-month Yield Curve, 2012–17 (Observed Yield; Estimated Yield) - 6-month Yield Curve, 2012–17 (Observed Yield; Estimated Yield) - 1-year Yield Curve, 2012–17 (Observed Yield; Estimated Yield) - 3-year Yield Curve, 2012–17 (Observed Yield; Estimated Yield) - 5-year Yield Curve, 2012–17 (Observed Yield; Estimated Yield) - 7-year Yield Curve, 2012–17 (Observed Yield; Estimated Yield) - 10-year Yield Curve, 2012–17 (Observed Yield; Estimated Yield) - Charts are labeled in percent and span the period 2012, 2013, 2014, 2015, 2016, 2017. - Visual comparison in each panel is between Observed Yield and Estimated Yield for the stated maturity. ### Term Structure of Interest Rates, 2012–17 - Appendix Figure 2 shows the term structure of interest rates (percent) for each year: - Term Structure of Interest Rates, 2012 (3 Months; 6 Months; 1 Year; 3 Years; 5 Years; 7 Years; 10 Years — Observed Yield; Estimated Yield) - Term Structure of Interest Rates, 2013 (same maturities and pairing) - Term Structure of Interest Rates, 2014 (same maturities and pairing) - Term Structure of Interest Rates, 2015 (same maturities and pairing) - Term Structure of Interest Rates, 2016 (same maturities and pairing) - Term Structure of Interest Rates, 2017 (same maturities and pairing) - Each yearly panel compares Observed Yield and Estimated Yield across the listed maturities with percent axes (0, 5, 10, 15, 20). ### Source and Notes - Source: Fund staff estimates *Source: Fund staff estimates* ### 16. The MPR is intended to stabilize and align short-term market rates to reduce liquidity ### 16. The MPR is intended to stabilize and align short-term market rates to reduce liquidity ### Role of the MPR and short-term rates - With stable short-term rates, changes in the policy rate are more likely to be quickly reflected in changes in banks’ own deposit and lending rates thereby aiding monetary transmission. - By setting aside the MPR, as the CBN has done recently, a good opportunity to impact banks’ pricing behavior is being neglected. - More stable and predictable short-term interest rates facilitate the development of markets for securities at longer maturities, reinforcing policy transmission further along the yield curve. ### Market deviations and distortions - Allowing market rates to deviate from announced “policy” rates creates market distortions. - Interbank rates in this case often better represent the true stance of monetary policy than the MPR as they are determined by reference to actual quantity adjustments. - From a policy perspective, this creates problems of consistency, and as a result, communication of the policy stance and its links to targets and objectives becomes very challenging. - With interbank rates outside the limits of the interest rate corridor for extended periods, there is a clear inconsistency between interest rates and the target for broad money which needs to be resolved through either: - a revision of the reserve money target; and/or - repositioning of the interest rate corridor. ### Supporting measures - Robust short-term liquidity forecasting capacity is critical to help the CBN decide on how much liquidity to provide or withdraw from the market to smooth large interest rate fluctuations. - Liquidity forecasting needs to be well coordinated with liquidity needs for government cash management. - Building the analytical capacity to support a forward-looking approach to monetary policy is an ongoing task requiring inter alia continuous investment in improving data quality and availability. ### Moving away from broad money and exchange rate targeting - As monetary policy-making becomes more sophisticated, the role of money as an intermediate target may be reduced. - Analysis of monetary aggregates cannot take the place of developing an analytical framework for the transmission channels through which various shocks affect the economy, and the appropriate policy mechanisms to contain their impact on inflation. - The primacy of the medium-term inflation objective can help provide the right perspective (and flexibility) on intermediate targets on money which can then play more of an indicator role to guide policy. - The empirical analysis in this chapter suggests that the exchange rate is the de facto anchor for the monetary policy framework, with clear primacy over the price stability objective. - Managing the exchange rate without a policy framework with a clear hierarchy of objectives poses major challenges, including: - the need for a transparent way to model the equilibrium exchange rate and identify situations in which the real exchange rate deviates substantially from equilibrium; - the requirement to develop deep and liquid FX markets to facilitate exchange rate flexibility; and - enhanced capacity to manage exchange rate risk. - It seems plausible that Nigeria can target to achieve its aims to limit the impact of pass-through inflation using the MPR as an anchor rather than the exchange rate. - Countries which have transitioned to greater exchange rate flexibility have done so within the context of a clear communications strategy which emphasizes the primacy of the price stability objective and uses a unified framework within which to analyze monetary and exchange rate policy. ### Enhancing communications - The central bank communications policy is a central element in the monetary policy framework. It should include: - (i) the inflation objective and its rationale; - (ii) the monetary policy strategy— how CBN actions relate to inflation objectives; and - (iii) the expected future trajectory of the key policy rate and its relationship to the inflation target. - The CBN can improve its communications by using the monthly MPC meeting communique to strengthen the forward-looking content of communications on monetary policy, in particular by signaling the trajectory of the MPR. ### Conclusion - Successful conduct of monetary policy hinges critically on the extent to which the central bank is equipped with a clear mandate that assigns primacy to price stability, and sufficient operational independence. - Experience from other countries suggests that fiscal dominance, frequent political interference, and murky objectives severely hamper the smooth implementation of monetary policy. - Sequencing is important; clearly establishing the primacy of price stability among CBN objectives as well as the principle of independence will clear the way for progress on a broader range of macroeconomic objectives. *Source: IMF staff report excerpt (cr1864).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1864.pdf_