Next For Buhari: Naira/Yuan Swap And Tax Reforms. | Independent Newspapers Limited
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Next For Buhari: Naira/Yuan Swap And Tax Reforms.

Posted: Jul 4, 2016 at 2:00 am   /   by   /   comments (0)

By Magnus Onyibe.
Upon president Muhammad’s Buhari’s return from a state visit to China a few months ago, song and dance were made of a business scoop, which goes by the name Naira/Yuan swap which the high powered presidential entourage to China struck with their Chinese counterparts.
The deal was meant to assist in easing the pressure on Nigeria’s foreign exchange, fx reserve which has been declining rapidly from a peak of over fifty billion dollars, $50b during former president Olusegun Obasanjo’s era barely a decade ago, when crude oil was selling at about $100s per barrel, to the present low fx treasury of about $27b as oil price now hovers around $50 per barrel.
keep in mind that being an oil/gas dependent economy, since the sharp drop in the international price of the commodity which responsible for nearly 90% of the country’s FX income, the Naira is being pummelled.
In trying to keep up with the unrelenting demand for the dwindling fx in her treasury, Nigeria’s hitherto robust finically base has nearly buckled under the pressure due to the imbalance in demand and supply of foreign exchange into her giant size economy- $570m GDP.
With the flexible naira exchange regime which proponents are optimistic would open the door for a flood of inward bound investments to Nigeria now taking hold, it would be wise to reinforce and consolidate the rebounding economy by triggering the yuan/naira swap which also has the capacity to enhance the benefits accruable from both Western and Asian investors’ confidence.
For the sake of clarity, Yuan/Naira currency swap is not a myth as some pundits have made it seem.
If it were a ruse, the people’s bank of China would not have Yuan swap arrangements with 28 countries worldwide, including financially sound nations like the United Kingdom of Great Britain(maybe not so great anymore in the wake of Brexit ) and Australia.  Basically, the currency swap would allow Nigeria to borrow Yuan and lend naira for purchases from China by simply short circuiting the process of converting the Nigerian currency to dollar before further conversion of the dollar to Yuan.
In that regard, the currency swap would help douse the tension on the naira because apart from the dollar trading block comprising of the U.S and Western Europe, there is also the second major trading block of Asia, represented by China.
While the large Western countries promoted corporations rely on the dollars for their trade, the merchants dealing in basic goods imported from China prefer the Yuan. So pressure on naira from both ends could be eased if both policies/measures-floating the naira and swapping it with Chinese currency- are activated in tandem. Amongst other benefits, this would accelerate the strengthening of the naira so that it could exchange for not more than N250-$1, which is the initial anticipation and an improvement on the current exchange rate of N280+ to the $1.
Curiously, the successful currency swap with over a quarter (28) of the countries in the world has made the Yuan the alternative to the dollar for global trade and finance. According to Bloomberg report, while the lMF tends to demand reforms aimed at stabilizing a country’s economy in exchange for loans, analysts speculate that China’s terms are more focused on securing its interests in resource rich countries like Nigeria, which in my view is pragmatic.
With the high number of swap arrangements so far secured, experts believe China is cutting into the lMF sphere of influence by becoming the new go-to-financier for governments in distress. A cursory look at the list of Yuan swap beneficiary countries would confirm the assertion that without China, none of the countries listed below would received any financial help from the IMF or world bank because they are either under global economic sanctions or debt defaulting countries. (A) Russia -$24b (B) Argentina-($11b) (C) Venezuela-($4b).
As evidence of the powerful influence of the Chinese currency, when the Russian/Chinese currency swap was announced in October 2014, the Russian currency, the rubble gained 10% in value. Similarly, when Argentina entered into currency swap with China, her foreign exchange reserve rose to a 13 month high from being kept out of international capital markets since defaulting on foreign obligations in 2001. Venezuela whose economy has been in tatters even before oil prices plummeted also saw her currency gaining some momentum when a Yuan swap arrangement that involved $4b gave the economy a badly needed lift, although the boost was temporary.
Given the positive antecedents of Chinese Yuan swap with other currencies, it is very likely that operationalising the Naira/Yuan swap agreement with the Chinese would give naira the desired bounce, so the earlier Nigeria seize’s the opportunity, the better.  As stated earlier, most of the countries that China engaged in currency swap with are resource rich countries which are in the Chinese strategic interests and as a resource endowed country, Nigeria/China currency marriage could be a wedlock made in heaven, if consummated timely.
In other jurisdictions like the UK, their national income is not mainly derived from natural resources like Brent grade crude oil sourced from the North Sea of England. Unlike Nigeria, the Uk also has oil in abundance, but the country does not depend on it solely for her sustenance. Rather, regular taxes like personal income tax and corporate taxes from individuals and corporate bodies constitute the bulk of funds used in providing infrastructure and rendering other social services such as affordable health care , education and housing services.
Thats why the UK has a reputation for being the master of the policy of tax and spend.
As the UK progressed economically and London became one of the foremost financial capitals of the world, second only to New York, super profits were being raked in by banks, compelling the authorities to introduce super profit tax into the financial services sector to enable the rest of the larger society share in the good fortunes. In 1981, under the watch of Margaret Thatcher as prime minister of the U.K and George Howe as the chancellor of the exchequer, tax on excessive profits by banks was introduced and over £400m was harvested from the exercise.
As business secretary of the U.K. during prime minister, Gordon Brown’s reign, Peter Mandelson, pioneered the concept one-off tax on bank’s bonuses, which sparked a furore in the banking sector but it generated revenue for govt to sustain the provision of social services. The super tax was not restricted to bankers only as there was a time utilities firms like British airways, British Tobacco, British telecom and Powergen were taxed about £5b. In the same manner, during the period of high oil prices, bonus taxes on North Sea oil/gas amounting to about £2.4b was also raked into British treasury.
The opposite has been the case in Nigeria where tax leakages have been a bane of the economy as tax avoidance and tax evasion are the norm rather than the exception.
Back in the days, PJ owners were so visible and had such an overarching presence that ex president GoodLuck Jonathan bragged that the expanded number of private jet owners in Nigeria during his tenure was a positive testimony to the economic successes of his administration.
Indeed, Jonathan was in some uncanny way correct that the private jets were signs of the time, because the aircrafts that used to dot Nigerian skies like a swarm of swallow birds, have now migrated back to their original destinations like seasonal birds, which is a sign of the intolerance of display of excessive wealth by the govt in power.
The poor tax collection situation in Nigeria speaks to the economic development principle that the level of tax compliance in a society is proportional to how deep or shallow democracy tenets have imbibed in a given society.
When the International Monetary Fund, the lMF boss, Christine Lagarde visited Nigeria, she told her skeptical audience that she was not in the country to offer her loan but to encourage the country to adopt more flexible foreign exchange regime and assist in strengthening her tax base.
Perhaps to Madame Lagarde’s delight, a flexible foreign exchange rate has been introduced, making the next action to be taken towards fixing Nigerian economy, a review of the tax regime. The type of tax reforms that the lMF and World bank nudged Republic of Georgia to embark on may be instructive to Nigeria. This is because although Georgia has a population of about five million which is more less than the population of delta state in Nigeria, the Eastern European country’s economy, like Nigeria is about 50% controlled by the informal/parallel market. Co-incidentally, Georgia commenced her economic and tax reforms with anti corruption war like Nigeria.
Thereafter the tax reforms were carried out in three phases: 2004-7, 2007-9 and 2010-11. At the end of phase one in 2007, tax revenue moved up from about 12% to over 21%. Overall, about 15 types of taxes were eliminated thus making the economy more tax friendly and enhancing her ability to generate more tax revenue.
More details of Republic of Georgia tax reforms and gains can be found at  The positive outcome of tax reforms in Georgia should be of interest to my good friend, Tunde Fowler, the new chairman of Federal Inland Revenue Service, FIRS who may wish to check out the website to learn more about why republic of Georgia is now being celebrated globally as tax reform poster face.
Since assuming office, the new FIRS boss has been rejigging the tax system at the federal level with a view to achieving as much success as his accomplishments in Lagos state.
From an outsider’s point of view, it would appear that the focus of FIRS has been on increasing the rate of Value Added Tax, VAT and expanding the tax base to capture the middle class and the masses that are not in the tax net yet.
According to recent studies conducted by some international audit firms, including Price WaterhouseCooper’s, PWC, compared to her African peers, Nigeria charges the least VAT at 5%, but given that there are still a lot taxable of services that are yet to be pulled into the tax net, one can understand why govt may not be in a hurry to move VAT up from 5%.
Similarly, rather than retaining the ban on the 41 items earlier restricted by the CBN, prior to the introduction of the new flexible exchange regime, authorities should lift the ban on the items ranging from private jets to tooth picks and allow free market forces to determine their status.
To that end, FIRS should be empowered by NASS to apply high tax in prohibiting the imports of the 41 banned items that are not considered priority.
In conclusion, apart from the bane of poor infrastructure like unstable supply of electricity and poor road network etc, one of the reasons companies relocate from Nigeria is believed to be excessive dividends exposure.
What this means is that tax authorities have to look closely at the cause and effect of excessive dividends exposure in Nigeria with a view to fixing it. That would enable companies that took flight from Nigeria due to harsh fiscal environment, return to create employment for the teeming population of the unemployed as desired by President Buhari who reminded captains of industry that had breakfast meeting with him in also rock recently, that it is their duty to create employment.
To facilitate the speedy actualisation of that executive request, Mr President should direct the CBN to, without further hesitation, implement the Naira/Yuan swap agreement.
Onyibe, a development strategist, futurologist and former Commissioner in Delta State government