On Thursday, September 12, 2019, news broke that the Federal Executive Council (FEC) had approved plans to increase Value Added Tax (VAT) from 5% to 7.5%; representing a 50% increase. It is worthy of note that the current 5% VAT regime has been in existence for over 25 years (Since 1994).
Although the development is still subject to National Assembly Approval, which may take several months, it is important to analyse how this new development may impact the livelihood of majority of Nigerians; particularly the over 60% that currently live at the bottom of the pyramid.
On the contrary, VAT is imposed on all goods and services sold in Nigeria, including imports; as stipulated under section 4 of the VAT Act, except for items that are VAT exempt.
What this means for Nigerians
Every Nigerian will either directly or indirectly affected by the whopping 50% increase in VAT.
Another implication of this is that even if you transact only in the informal sector, that is largely outside of the tax net, other items such as clothing, processed food items, shoes, etc. are VAT-able and will be charged.
The Nigerian minimum wage had been at a paltry ₦18,000 ($50 – using current exchange rate) since the year 2010, following series of negotiations with the Labour Union, under the then President, Dr. Goodluck Jonathan. Despite the devaluation of the Naira, for a little above nine (9) years, the minimum wage remained the same while other macroeconomic indices that impacted average cost of living increased.
This further negatively impacted the condition of livelihood of the average Nigerian. Below is a graph showing how the minimum wage declined and then flatlined over the last four years, despite an increase in inflation rates and naira devaluation.
Inflation was at single digits in 2015 when the minimum wage was at $82, whilst in 2019, the proposed $83 minimum wage will compete against double-digit inflation and higher VAT.
Following the devaluation of the Nigerian currency in 2016, the minimum wage in dollar terms dropped to $51 and has since flat-lined between 2016 to 2018. The newly approved new minimum wage of $83 (₦30,000) is a 67% increase on the current $50. Although yet to be implemented, this increment is just a dollar higher than what the average Nigerian earned in 2015 (4 years ago) yet has to compete with double-figure inflation.
VAT, on the other hand, had remained at 5% for over 25 years. In the Federal Government’s effort to increase its revenue generation and reduce its revenue to debt service ratio, it has introduced a 50% increase in its VAT to 7.5%. This, at the minimum, is a lazy approach to increase government revenue. According to the Urban-Brookings Tax Policy Center, there are at least three ways to increase government revenues:
Modify Existing Tax Policy:
The government could scale back or eliminate some of the tax breaks/reliefs that exist in the current laws: A thorough assessment can be done to ascertain the impact of these reliefs on citizens’ willingness to pay taxes. But again, the Nigerian government will rather go the easier route.
The government could apply existing taxes more broadly:e. expand the tax net. Out of the total VAT received across the Federation, 55% of it comes from Lagos only, 20% comes from the FCT, while the balance of 25 per cent is generated from the remaining 35 states of the federation, according to the data released by the Ministry of Finance. What this means is that the VAT increase will essentially be imposed on a few states, whose citizens/residents will be made to now pay more for others. Devising new ways of increasing VAT collections in other states may also increase government revenue, rather than burdening those already paying with more taxes. It could also devise new ways of incorporating the large informal sector into the formal sector, develop some sort of tripartite agreements between federal, state governments and road transport unions to formalize the huge levies being made from those channels, which are funneled into private pockets, as against the government’s; religious organisations can be taxed on their business-related activities; several of which are done under the guise of religion to evade taxes. This has been done several times in the UK.
The government could strengthen enforcement: The former Finance Minister, Kemi Adeosun was quoted as saying that VAT compliance rate is about 12%. According to National Bureau of Statistics (NBS), the number of people in the tax net is only 13%, when compared to the labour workforce of about 80 million. Total tax revenue collected in the Federation as at 2018 in Nigeria stood at N5.3trillion ($17billion, using CBN official exchange rate of N306/$1), this is a paltry sum when compared to South Africa’s US$ 88.2 billion for the 2017/18 fiscal year, a country with a smaller economy and only a third of Nigeria’s population. It is also worthy to note that Nigeria’s VAT revenue of about N1.1trillion in 2018 is still about 1% of Nigeria’s GDP of about N120trillion, while total tax to GDP ratio is about 4%, showing that a huge gap still exists if government pursues innovative ways to increase enforcement of the current tax regime as opposed to increasing the rates.
The government could increase the tax rates that apply to selected taxes – the obviously easiest approach which our government has adopted.
Enact New Taxes
The government could also boost revenues by introducing new taxes: There are countless social issues bedevilling Nigeria that could be discouraged via new taxes, for example, gas flaring can be taxed at a flat fee of say 80% of the total value of gas flared, etc. This will increase government revenues, have zero impact on the wallet of the ordinary Nigerian, and discourage oil companies from flaring gas.
Boost Economic Activity
All things being equal, a bigger economy generates more tax revenue: the Government should be spending more time initiating policies that will drive economic activities and income levels. For example, a transformation of our power sector alone can generate thousands of jobs and change the game for investors in Nigeria. Today, the telecoms sector which was hitherto moribund, now contributes 8% to our GDP and is worth almost N10trillion. The Power sector has the potential to even do better.
Immigration reform is one way to boost economic activity: Nigeria’s immigration (naturalization) laws are amongst the most rigid in the world. The incursion of new businesses and workers into the country would expand the labor force, attract new capital; and ultimately increase tax revenue for the government. But Nigerian immigration laws make it difficult for foreigners to relocate, the bureaucracies and corruption in the Nigerian Immigration Service even make worse, the frustrations of expatriates looking to do legitimate business in Nigeria, thereby allowing the influx of unauthorized workers.
While the effort of the government to increase revenue is commendable, it is important that the government shies away from adopting lazy approaches that may further impoverish the citizens and ultimately fail to meet its objectives of revenue increase. As it stands, there is no guarantee that the benefits of increasing VAT will be worth the pain on Nigerians. One implication of the Laffer Curve (see figure 2), a principle that defines the hypothetical relationship between rates of taxation and the resulting levels of government revenue, is that reducing or increasing tax rates beyond a certain point is counter-productive for raising further tax revenue.
One implication of this increase that is certain, however, is that, despite the 67% increase in minimum wage introduced by the Government (which is yet to be implemented), the average Nigerian will now have to pay 50% higher in terms of VAT on every goods or service he/she consumes.
[READ FURTHER: NECA cautions FG on 7.2% VAT, says it’s anti-minimum wage]
When this is put in context against the devaluation since 2016 and a possible rise in inflation, the already poor average Nigerian would have effectively become poorer and may further worsen our standard of living which according to UNDP is ranked 157 among 189 countries on Human Development Index.
A 50% increase in VAT in a poverty ravished economy, is one classic example of a penny-wise, pound-foolish decision.
Ayo Bankole Akintujoye is a Strategist and Business Transformation Expert with a decade of experience working with some of the world’s largest consulting firms and leading Strategy teams in Nigeria’s financial services industry. He tweets from @AyoBankole.
Why Shoprite is “exiting” Nigeria
Shoprite’s intention to divest from its Nigerian operations appears to be anchored on these factors.
Africa’s largest retail chain, Shoprite, announced on Monday that it is considering divesting from its Nigerian retail entity, Retail Supermarkets Nigeria, the owners of Shoprite Supermarket Nigeria.
Shoprite Nigeria operates about 26 outlets across the country and employs about 2000 employees who are 99% Nigerians. A divestment means it will sell its holdings to another investor who will continue to run the business.
According to the company, it has taken a decision to leave “following approaches from various potential investors” looking to invest in the Nigerian entity. The group also said the decision is in line with its “re-evaluation of the Group’s operating model in Nigeria” one of the 15 countries where it currently operates.
Shoprite also confirmed it has initiated a formal process to sell its entire stake in the Nigerian entity or a majority stake.
Why the exit?
Shoprite’s explanation of its intention to divest from its Nigerian operations appears to be anchored on its investment expectation and operating environment. However, there could be more to it.
Firstly, Nigeria is a highly competitive space, where retail is the survival of the fittest. Following Shoprite’s foray into Nigeria in 2002, the retail chain disrupted Nigeria’s retail space giving ordinary Nigerians a taste of what it feels to shop with family and friends. But the fairy tale was not going to last forever. Previous retail outlets like Park n Shop rebranded and injected significant funds in their operations and business expansion. Park n Shop rebranded to Spar and has 14 outlets across the country. It only makes sense for them to divest having held on to the Nigerian operations for almost two decades.
Shoprite also competes with homegrown retail outlets especially in Nigeria’s commercial city, Lagos State. Retail outlets like Ebeano, Citydia, and Adiba are now household names that are expanding rapidly across the state. There are also several neighbourhood supermarkets in the nooks and cranny of Nigeria’s commercial capital piling pressure on Shoprite’s market share. Shoprite does not disclose revenues from its Nigerian operations.
Shopping is also going online as evidenced by the growth in online shopping since COVID-19 hit Nigeria. Jumia, one of Nigeria’s largest online retail outlets, revealed lower earnings in the first quarter of 2020. However, the company is optimistic of higher revenue growth in Q2, on the back of the COVID-19 lockdowns. Jumia had earlier noted that “we are seeing unprecedented demand to join the Jumia platform, especially for named brands. We believe those dynamics will help accelerate the shift toward online.”
Local competitors like Spar and Ebeano already offer online shopping experiences and deliver goods to your doorstep. Shoprite’s business model relies heavily on physical store visits.
As internet services become faster and cheaper, more Nigerians will rely on e-commerce to meet their shopping needs. Jumia has often struggled in this space and remains unprofitable. However, gravitation towards online shopping is inevitable and only those who have the capital and know-how will come out winners.
Jumia’s competitor in this space, Konga, was also recently acquired by Zinnox. Konga was then merged with another Nigerian retail giant Yudula. Interestingly, Konga’s model includes a combination of online and brick and mortar. The company has since been acquiring warehouses across the country as delivery points for its retail expansion drive.
Nigeria’s harsh operating environment is also another major challenge Shoprite faces. The Muhammadu Buhari-led administration, through the CBN, has focused on supporting locally made goods by banning forex availability for the importation of local substitutes. This has negatively impacted the number of products Shoprite can sell and how many new shelves it can create per floor space. It also creates supply chain challenges, especially with locally produced goods.
Note that supermarkets sell on very thin margins. Therefore, the more products they can sell the higher the operating profits. Taxes are also higher and Nigeria’s susceptibility to exchange rate devaluation is also a major challenge. The company makes money in Naira and must convert to dollars before converting back to Rands.
In 2017, when Nigeria last faced a currency crisis, Shoprite explained that it has about Rand 2.3 billion in cash locked up in Angola and Nigeria due to currency restrictions (inability to repatriate their money on time). Information reaching Nairametrics from traders suggest most foreign-owned investments in Nigeria are also facing “restrictions” due to limited liquidity in the NAFEX window.
Shoprite’s less talked challenge is its Legal Issues. In 2011, Nigerian company A.I.C Limited (the Claimant), which is owned by Chief Henry Akande, issued a summons against Shoprite South Africa and its Nigerian subsidiary for an alleged breach of a joint venture agreement (the JV Agreement) allegedly concluded in 1998. The company took Shoprite to court claiming it breached on an agreement to set up the Nigerian arm of the business.
The Federal High Court then ruled in favour of AIC and awarded damages of $10 million against Shoprite in 2017. Shoprite appealed the judgment in the appeal court and lost again earlier in 2020. It is unclear if Shoprite has any plans to take the matter up to the Supreme Court. Could this be another reason why the owners are deciding to divest?
Whatever the reason is, officially, it perhaps makes sense for the company to exit its Nigerian operations in the light of the points mentioned above. Its Nigerian entity is worth 1.1 billion Rands (N24 billion) per its financial statements and could be worth more when the sale is eventually consummated.
Okomu Oil: Home is where the heart is
Okomu Oil has its tires on the track and is not slowing down.
Despite the teeming opportunities in the Nigerian agriculture industry, very few companies in the agro-space have been able to put in place the right processes and systems to create huge corporations out of farm produce. But there is one that is doing just okay. With a market capitalization of N71.5 billion, Okomu Oil Plc sits at the top of the industry.
While many companies, big and small, are losing their grip to the volatile global economic landscape of 2020 birthed largely by the COVID-19 pandemic, Okomu Oil has its tires on the track and is not slowing down. More so, it is not only proving COVID-19 wrong. Just a little over a year ago, Nairametrics had downgraded the company to a “Sell” owing to its faltering revenues. Today, with huge increases in revenue in 2 out of 2 completed quarters, Okomu Oil plc is laughing last.
READ ALSO: Okomu Oil half year profit drops by 57%
Winning by the Numbers
The company’s Q1 financials had revealed a 65.2% growth in revenue as the company recorded a turnover of ₦6.9 billion in comparison to the ₦4.2 billion it made in Q1 2019. It had also recorded a profit after tax of over ₦2 billion in comparison to the ₦1 billion recorded in Q1 2019 resulting to a 101.4% jump in profits. In the second quarter of the year, its unaudited results reveal that the company has also increased its revenue. Turnover jumped by 50.6% from N4.3 billion in Q2 2019 to N6.5 billion in Q2 2020. This jump was not totally reflected in its profits after tax, however, owing to a significant increase in income tax from nothing in Q2 2019 to N462 million in Q2 2020. PAT was still able to increase by 30% to 1.9 billion in 2020. While there could be a myriad of reasons for the tax burden, the company’s foreign operations are starting to rain on its parade.
Why it has to watch its foreign operations
Okomu Oil’s wins can be directly attributable to its domestic activities, bolstered by devaluation impact and a larger market share as a result of border closures. A closer look at both its Q1 and Q2 financials reveal that a majority of its earnings have been from improved domestic operations. In Q1, the company witnessed a decline of ₦89.8 million in Q1 2020 from its 2019 figures, representing a drop of 12.5% in the comparative quarter. In Q2, its export revenue took an even greater plunge. Export sales experienced a 35.3% drop from N730.6 million in Q2 2019 to N473 million in Q2 2020. Domestic sales had increased by 67.9%.
While this is reflective of the current economic activities, there are rising fears that it will keep relapsing. Failure to contain its activities will, sooner than later, have it in the same position as some of the equally large companies that had to eventually spin off ailing foreign activities. Reduced turnover is not the only diaspora-induced challenge being faced by the company. Its Q2 financials also reveal exchange losses of over N17 million for the quarter. Compared to the exchange losses incurred in Q2 2019 which stood at 1.2 million, it recorded a 1284% increase in foreign exchange losses.
In today’s world, it is becoming increasingly tough for businesses to ward off the allure of foreign opportunities in trade as well as in the area of raising finance. While these, no doubt, have immense benefits to businesses, there’s a long list of reasons why staying home and penetrating local markets has been underrated. Being able to source inputs locally, produce locally, and even finance locally is becoming even more of a luxury to Nigerian companies especially given the challenges around the relatively weak currency to stronger currencies.
Okomu Oil plc is creating a sustainable market in Nigeria and its efforts are paying off. Until order is restored, an increasing focus on its domestic market will do the company more good. That said, the company is a great stock to have in your investment portfolio to serve as a hedge against companies that have been negatively impacted by the pandemic. Its current share price is N74.95. While its price to book ratio is high at 2.2857 hinting that it could be overvalued, its EPS is stable at 7.33.
Why you should avoid investing long term in Nigeria’s stock market
The stock market is only as resilient as the economy.
Thirteen years ago today, I was getting set to oversee a meeting with a group of partners in a newly formed investment club. About a dozen of us, young and just at the cusp of family hood thought it was important to come together and put money aside for the future.
We had several options such as real estate or treasury bills, but we settled for the Nigerian Stock market. The decision wasn’t difficult to make especially when you look at the performance. Stocks were up 37.8% in 2006 and will close the first half of 2007 55% up.
Demand was high as everyone wanted a piece of what was then the fad. Private placements, right issues, IPOs were fast and coming and it was as if any offer placed in the table was sure to sell. The early signs that this was a bubble was when spare part traders abandoned their trade to get in on the gold rush.
The All Share index showed its first signs that the bears were around the corner when it fell by 5.15% in August 2007. As investors who were made to understand that investing in stocks for the long term was wise, we ignored the temptation to sell believing that stocks will rise again.
It’s 13 years now and the Nigerian All Share Index is down 52% between June 2007 and June 2020. In hindsight, we should have sold everything we had and simply bought dollars and kept it under our pillows. The stocks, we had hoped will deliver compounding returns over the years have delivered nothing but losses.
The Nigerian Stock Exchange is not a long-term market. We learned this 13 years ago but believed that experience was just a massive correction and that things will change. It did not and is unlikely to change so long as we remain a highly import-dependent economy. The stock market is only as resilient as the economy. If you have an economy like Nigeria that is good at growing its population and not its economics, investments in capital and money markets is a risky activity.
READ MORE: Where to Invest N5 Million right now
The more we remain reliant on crude oil and high imports, the worse it gets and you lose more money. Thus, it is my firm belief that investing in Nigerian stocks for the long term is folly. There are much better investments out there that will deliver you better returns and reduce capital erosion, two of the major symptoms of the Nigerian Stock market. But why is this market not a long term investment?
Firstly, stocks rely heavily on foreign portfolio investors to drive demand up. Since former CBN Governor, Sanusi Lamido Sanusi allowed foreign investors to repatriate any portfolio investment into the country without restrictions, stocks have become heavily reliant on hot money to keep valuations high. Thus, when foreign investors exit, stocks suffer. They create a bubble when they enter our markets and leave bears to dominate when they exit, until they are ready to get back in again.
READ MORE: A New Wave: Where to Invest in H2 2020
Secondly, Nigeria’s susceptibility to frequent currency devaluations keeps market valuations in perpetual risk of capital erosion. For example, if your portfolio was worth N165, 000 in 2013 it was the equivalent of $1,000. Today, that portfolio is worth just $412 assuming N400/1. So, even if you are lucky to have a portfolio that has performed well over the years, it will struggle to outperform dollar investments on the medium term.
Also, Nigerian companies are hardly accountable with the way their businesses are run. Insider trading persists without control and suspicions are immediately swept away. There are no consequences for reckless corporate behaviour. Most of the corporate fraud and unscrupulous activities perpetrated in the great stock market crash of 2008/2009 did not lead to a single jail term for anyone.
Billions lost in stocks over the years have not been recovered. Whilst some companies have continued to grow their revenues and profits most remain unprofitable and lack the basics of corporate governance.
Investor protection is weak in this market as there are no reliable remedies for fraud induced market losses. The stock market is also very limited in the number of products available to buy. Apart from buying and owning stocks, there are little options to short-sell. We understand this is in the pipeline but it has remained there for years.
These are examples that explain why investing for the long term cannot work in Nigeria for now. Buy and hold forever is a myth at least in today’s Nigeria. You will get burned and likely lose the value of your investments.