IMF Executive Board 2018 Article IV Consultation with Nigeria

IMF Executive Board 2018 Article IV Consultation with Nigeria
Photo credit: AFP


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07 Mar 2018

On March 5, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Nigeria.

The Nigerian economy is exiting recession but remains vulnerable. New foreign exchange measures, rising oil prices, attractive yields on government securities, and a tighter monetary policy have contributed to better foreign exchange availability, increased reserves to a four-year high, and contained inflationary pressures. Economic growth reached 0.8 percent in 2017, driven mainly by recovering oil production. Inflation declined to 15.4 percent year-on-year by end-December, from 18.5 percent at end-2016.

Reforms under the government’s pdf Economic Recovery and Growth Plan (6.59 MB) have resulted in significant strides in strengthening the business environment and steps to improve governance. However, all these factors have not yet boosted non-oil non-agricultural activity, brought inflation close to the target range, contained banking sector vulnerabilities, or reduced unemployment. A higher fiscal deficit driven by weak revenue mobilization amidst still tight domestic financing conditions has raised bond yields, and crowded out private sector credit.

Higher oil prices are supporting the near-term projections, but medium-term projections indicate that growth would remain relatively flat, with continuing declines in per capita real GDP under unchanged policies. The improved outlook for oil prices is expected to provide welcome relief from pressures on external and fiscal accounts, and growth would pick up to 2.1 percent in 2018, helped by the full year impact of greater foreign exchange availability and recovering oil production. Renewed import growth would reduce gross reserves despite continued access to international markets. After arrears clearance in 2018, the fiscal deficit would narrow, and public debt levels would remain relatively low, but the interest payments-to-Federal Government revenue ratio would remain high.

Risks are balanced. Lower oil prices and tighter external market conditions are the main downside risks. Domestic risks include heightened security tensions, delayed fiscal policy response, and weak implementation of structural reforms. Stress scenarios highlight sensitivity of external and public debt, particularly to oil exports and naira depreciation. Faster than expected implementation of infrastructure projects are an upside risk. A further uptick in international oil prices would provide positive spillovers into the non-oil economy.

Staff Report

Background: Fragile Recovery

A historic terms of trade shock – exacerbated by falling oil production and inadequate policy implementation – has taken a major toll on Nigeria’s economy. Output contracted for the first time in more than two decades in 2016, while external and fiscal buffers dwindled considerably. The initial policy response – including increases in electricity and fuel prices and a more depreciated exchange rate – did not yield the expected benefits, as sabotage of oil infrastructure, foreign exchange restrictions, and delayed implementation of structural reforms worsened investor confidence, increased borrowing costs, and crowded out private sector credit.

New policies and recovering oil prices are supporting Nigeria’s slow exit from recession. The doubling of oil prices from their early 2016 levels, new foreign exchange (FX) measures – including the introduction of a new investor and exporter FX window (IEFX) – and a tighter monetary policy have contributed to better FX availability, a significant narrowing of the parallel market exchange rate premium, contained inflationary pressures, a soaring financial market, and reserve buffers that reached a four-year high. This performance was accompanied by positive economic growth for two consecutive quarters in 2017, propped up by recovering oil production. Reforms under the government’s Economic Recovery and Growth Plan (ERGP) have resulted in significant strides in Nigeria’s latest Doing Business Ranking and steps to improve governance.

However, important vulnerabilities persist. Non-oil non-agricultural economic activity has yet to pick up. Fiscal dominance – driven by weak revenue mobilization – has complicated monetary policy and increased the ratio of interest payments to Federal Government revenue to unsustainable levels. Supply factors are keeping inflation high, banking sector vulnerabilities are rising, and foreign exchange market distortions are slowing efforts to attract long-term investment and diversify the economy. A large infrastructure gap, high gender and income inequality, pervasive corruption, low financial inclusion, and the ongoing humanitarian crisis in the North East remain continuous concerns.

Policy action to address current and longer-standing challenges remains urgent and should not be delayed by approaching elections and rising oil prices. Demographic trends imply that Nigeria could be the third most populous country in the world by 2050 – requiring faster growth to improve per capita incomes and significantly reduce high unemployment and poverty. The need for strong policy implementation – particularly of the ERGP – for the most part aligned with the recommendations of the 2017 Article IV consultation – remains as urgent as it was in 2016-17 but could be delayed by political jockeying ahead of the 2019 elections.

Policy Discussions: Urgent Reforms for Macroeconomic Stability and Growth

Policy action based on a comprehensive package of measures remains urgent. Discussions focused on measures to: (i) initiate a growth-friendly fiscal consolidation; (ii) establish a more transparent monetary policy to reduce inflation to single digits; (iii) move towards a market-determined exchange rate; (iv) properly assess and contain banking sector risks; and (v) advance decisively on structural reforms. Actions in all these areas would lay the foundation for a diversified private-sector led economy and help achieve growth rates that can make a significant dent in reducing poverty and unemployment.

Fiscal Policy: Reduce oil revenue dependence and create space for the private sector

The draft 2018 budget – which is expected to be approved by Parliament in March 2018 – is targeting a significant fiscal consolidation, with the FG’s overall fiscal deficit declining from 4.3 percent of GDP in 2017 to 1.4 percent of GDP in 2018. This consolidation relies on tripling non-oil revenue based on improved compliance and enforcement, higher excises (0.1 percent of GDP), an increase in public enterprises’ (SOEs’) surplus revenue (0.4 percent of GDP), a review of the fiscal regime for oil Production Sharing Contracts (0.2 percent of GDP), and divestment of oil assets (0.5 percent of GDP of privatization proceeds). Budgeted spending would remain relatively flat, with savings in recurrent spending offset by a doubling of the capital budget.

However, even with projected oil prices 30 percent higher than budgeted, the 2018 budget deficit could turn out to be at least twice as high. Staff estimates an overall budget deficit of 3.6 percent of GDP in 2018 after accounting for: (i) unbudgeted spending pressures, such as pension and salary arrears repayment (0.2 percent of GDP) and the full cost of electricity subsidies and past historical deficits (0.7 percent of GDP) associated with the power sector reform; and (ii) more conservative projected yields on tax collection and oil revenue measures (including divestment from oil assets) that are likely to take time to materialize. Net oil revenue gains available to the FG would also be limited by the national oil company distributing fuel products at a loss (retail prices are currently 15 to 20 percent lower than the implied market price) and some savings accruing to the Excess Crude Oil Account. The likely under-execution of the capital budget is not expected to offset the spending overruns and revenue shortfalls.

Strengthening non-oil revenue mobilization to reduce financing constraints and avoid crowding out of private sector credit should anchor fiscal policy over the medium term. This anchor would require moving towards reducing the non-oil primary deficit below 3 percent of non-oil GDP to ensure sustainability in case of an oil price collapse. This would be achieved by increasing the non-oil revenue-to-GDP ratio from 3.2 percent in 2017 to close to 13 percent by 2023, with State and Local Governments (SLG) contributing through automatic revenue increases linked to revenue sharing arrangements and higher mobilization of internally generated revenue (e.g. property tax). These efforts – which are consistent with the authorities’ plans – would allow Nigeria to catch up with its peers, relative to which it has one of the lowest revenue ratios. As a result, the FG interest payments-to-revenue ratio would decrease towards the authorities’ 30 percent objective by 2022. Priority social cash transfers and public investment would be increased to 0.2 and close to 6 percent of GDP, respectively, over the medium term. Supporting the adjustment would require:

  • Mobilizing non-oil revenue through a two-pronged strategy (see Selected Issues Paper I: Mobilizing Tax Revenues in Nigeria). A comprehensive tax reform – guided by a strengthened tax policy unit, consistent with IMF technical assistance – could increase revenues by 1.1 percent of GDP within a year and 8.3 percent of GDP by 2023, respectively). Main planks of the reform would include:

    • Tax administration measures to double the compliance rate to at least 50 percent. Steps taken to increase tax audits, use e-filing, conduct data matching exercises to close collection loopholes, strengthen tax enforcement, and combat corruption in tax offices are welcome. A stronger focus on large taxpayers would help sustain revenue collection and move beyond reliance on one-off improvements, such as last July’s nine-month tax amnesty. The upcoming Tax Administration Diagnostic Assessment Tool (TADAT) exercise will establish performance benchmarks necessary to anchor comprehensive tax administration reform.

    • Tax policy. Staff welcomes recent proposals to increase excises on tobacco and alcohol, review stamp duties, and introduce a registration threshold for VAT. Additional reforms needed at the FG level would imply: (i) broadening the pool of products subject to excises; (ii) undertaking a comprehensive reform of the VAT regime – including revising the design of the tax to allow input credits on capital goods, broadening the base by removing exemptions, and increasing the VAT rate; and (iii) rationalizing tax incentives and exemptions. The publication of tax expenditures with the annual budget will help identify and quantify revenue foregone from incentives while strengthening transparency.

  • Improving the transparency of government operations in the oil and energy sectors. Staff welcomes the recent adoption of the longstanding Petroleum Industry Governance Bill (PIGB) – a bill pending since 2008, which will create new regulatory independent agencies and allow the national oil company to be run on a commercial basis. To support this aim, and with import fuel prices rising relative to the retail structure established in 2016, staff recommends a full implementation of the fuel price adjustment mechanism to avoid further losses accumulating at the national oil company for refined product retail sales. Such losses are expected to lower the operating surplus to the federation account in 2018 by an estimated 0.45 percent of GDP, and could put pressure on the national oil company’s ability to fund JV commitments. Staff also recommends that the full costs of the power sector reform be budgeted.

  • Adopting a draft petroleum fiscal legislation that balances revenue mobilization aims with the viability of new investments. Staff supports the authorities’ objective to ensure that the government take from oil exploration is appropriate. To that end, it welcomes the minimum royalty payment on all oil and gas production but notes that the proposed combination of price-based and production-based royalties is overly complicated and risks posing an unnecessary barrier to investment. Some proposals to be considered could include: (i) avoiding a price-based royalty while having the Nigerian Hydrocarbon Tax become the main fiscal tool to capture mineral rents; and (ii) modifying the proposed tax inversion penalty to soften the adverse impact on investment and marginal production.

  • Continuing to rationalize current expenditures to make room for much needed capital spending to close the infrastructure gap. To this end, overhead and personnel costs should be contained – including through cost auditing, full use of the whistleblower policy, and continuous payroll audit – as well as resisting pressures to increase minimum wages or deviate from approved budget appropriations.

  • Strengthening public financial management and explore savings from public investment efficiency. This should happen through closer coordination of central financial agencies, stronger expenditure controls and auditing functions to avoid arrears accumulation, an efficient procurement process that includes rolling out e-procurement and open contracting, strengthening multi-year budgeting, and the creation of a single SOE oversight unit to monitor fiscal risks, which could be presented in the budget as part of a fiscal risk statement.

  • Improving debt management. The strategy to substitute a quarter of outstanding T-Bills with Eurobonds – $3 billion, with expected savings of N60 to N70 billion in 2017/2018 – and to increase FX borrowing is welcome, in view of the low external debt-to-GDP ratio, negligible external interest payments, lengthened maturity, and the fiscal space created for private sector credit. Looking ahead, the long-term objective of achieving an external-to domestic-debt ratio of 40 percent may need to be reviewed in view of lumpy redemptions in the future and the doubling of the exchange rate risk.

  • Strengthening coordination between cash management, debt management and central bank operations. CBN’s mopping-up operations and T-bill issuances should be more closely coordinated. Staff welcomes the Ministry of Finance’s actions of moving funds away from government agencies that are not immediately using the cash released to them. Staff recommends a more effective use of the Treasury Single Account to ensure that overdrafts from the CBN are avoided while large idle government cash deposits are available (N6 trillion by end-2017). Additionally, through better longer-term government cash flow forecasts, cash management operations can be supported through adjustments in T-bill issuances to limit unremunerated cash balances at the central bank.

  • Increasing SLG monitoring, including to reduce arrears accumulation and increase internally generated revenue. Ensuring strict compliance with the 22-point Fiscal Sustainability Plan – including on fiscal reporting – prior to states receiving any additional budget support would help maintain budget discipline and better monitor risks from SLGs. Additional internal revenue could be generated from tax reforms, such as the introduction of a property tax and an overhaul of the personal income tax, reinforced by improvements in compliance.

  • Social safety nets should be expanded and transfers scaled up to mitigate the impact of fiscal reforms on the most vulnerable. Plans to expand the national cash transfer program are welcome and should be accelerated. As the proposed revenue reforms under the adjustment scenario will have an impact on households’ purchasing power and thus could increase poverty (albeit expected to decrease inequality), existing cash transfers would also be used to target the poorest households as a mitigating measure. An illustrative scenario (doubling the VAT rate, increasing compliance to 70 percent) shows that cash transfers of about N400 billion would be needed to keep the poverty gap unchanged relative to current levels. As social safety nets are likely not fully scalable in the short term, complementary measures (lifeline tariff; increase in health and education spending) will be needed as part of the reform package (see Selected Issues Paper II: The Distributional Impact of Fiscal Reforms in Nigeria).

Structural Policies: Reforms to support inclusive growth and employment

Structural impediments, including a large infrastructure gap, hamper the recovery of the economy and Nigeria’s diversification objective. Export diversification has decreased in recent decades, reflecting longstanding structural issues: a large infrastructure gap and logistical challenges, a weak business climate and burdensome regulations, and high corruption. Nigeria ranks 136 among 176 countries in the Corruption Perceptions Index and one out of three Nigerians reports having paid bribes. Weak financial inclusion and inequality of opportunity and income constrain a large share of the population. Gender inequality is very high by most measures, with Nigeria ranking 122 among 144 countries (World Economic Forum). Narrowing the infrastructure and gender gaps could respectively boost growth by more than ¾ percentage points and 1¼ percentage point a year, with varying growth impacts across states (Selected Issues Paper III: The Macroeconomic Costs of Gender Inequality in Nigeria).

Addressing structural impediments is a priority of the Nigerian government and its ERGP. Notable actions initiated so far include:

  • Doing Business. Nigeria’s ranking among the 10 economies showing the most improvement in the recent World Bank Doing Business Rankings (rising by 24 places to 145th place) is commendable. Welcome actions include the significant decrease in documents required to import and export, the implementation of the 48-hour electronic visa, and the establishment of a collateral registry.

  • Power sector and infrastructure. Actions under the Power Sector Recovery Plan (PSRP) have included increased power supply generation (a new record peak generation of 5100MW in the grid in December 2017), appointment of new boards for sector agencies, appropriate budget provisions to ensure government agencies pay their electricity bills and enable the Bulk Trader to pay in full for generated power, and an off-grid electrification strategy. The PSRP aims to restore financial viability, technical stability, regulatory certainty and governance in the sector to attract much needed private sector investment throughout the value chain. In addition, the ERGP aims at partnering with the private sector through public-private partnerships to scale up infrastructure investment more generally.

  • Anti-corruption and transparency. Staff welcomes the development and adoption in August 2017 of the National Anti-Corruption Strategy (NACS), the recent passing of the PIGB by the House of Representatives, initial efforts taken to digitize public officials’ asset declarations, the publication of the first national money laundering and terrorist financing risk assessment report, and the ongoing development of the action plan to address risks identified (Selected Issues Paper IV: Strengthening Transparency and Governance in Nigeria).

To continue the structural reform agenda, staff recommends:

  • Further strengthening the business environment, including through completing reforms under the second 60-day Doing Business plan, pushing for further simplification of administrative and tax procedures, increasing the speed and efficiency of conflict resolution, and launching the 24 hours accelerated pilot port operations. The planned submission of the “Omnibus Bill” to parliament would help achieve quick-wins in removing administrative constraints.

  • Urgently implementing the PSRP. In line with World Bank technical assistance, the review of the multi-year tariff schedule should be accelerated to help reset the revenue requirements and cost recovery levels with a view of setting the stage for tariff increases in 2019. The tariff review would provide more time to improve collection (through metering) and further increase power delivery in a reliable manner.

  • Accelerating ongoing plans to revise the financial inclusion strategy – which aims at reducing exclusion from 41 percent overall (80 percent in the North) to 20 percent by 2020. Key priorities include developing reliable and inclusive wholesale and retail payment systems, mobile money and agent expansion, and creation of a harmonized biometric citizens’ database.

  • Strengthening governance and transparency initiatives, including through (i) streamlining the legal and institutional framework to improve the effectiveness of investigation, prosecution and conviction of corruption and facilitate asset recovery; (ii) advancing efforts to enhance transparency, particularly in the extractive sector in line with the EITI standard; (iii) strengthening the asset declaration regime; (iv) continuing to strengthen AML/CFT measures by formulating prioritized policies to address identified risks and target CBN’s AML/CFT supervision; and (v) addressing risks posed by politically-exposed persons and vulnerabilities of BDCs.

  • Implementing policies to level the playing field for men and women, including through executing and updating the 2006 national gender strategy (notably on adopting equal legal rights); allocating more funds to the health sector; improving awareness and protection against gender-based violence; and reinvigorating efforts with respect to gender-based budgeting. The provision of gender-disaggregated data should be strengthened.

Selected Issues paper

I. Mobilizing Tax Revenues in Nigeria

Relative to peers, Nigeria has one of the lowest revenue-to-GDP ratios. 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. In particular, 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. Comparing Nigeria’s tax structure with those of a selected sample of advanced, emerging, and developing economies, none of its domestic tax collection showed a promising performance. 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 countries, excises alone raise 3.6 percent of GDP.

Nigeria has a significantly higher revenue potential. Recent empirical work shows that internationally, there is a tipping point in the relationship between tax capacity and growth. A minimum tax-to-GDP ratio of 12¾ percent is associated with a significant acceleration in the process of growth and development, and likely with changes in social norms of behavior and state capacity. Taxation is not an end in itself, but an instrument for advancing citizens well-being as part of a well-functioning state. Tax is a core part of state-building and constitutes a visible sign of the social contract between citizens and the state, enshrining the principle of revenue-for-service. Estimates of tax potential from the literature (Fenochietto 2013, IMF 2017b) suggest that 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 estimate implies space for additional tax collection of 12 percent of GDP.

The authorities have made a key development objective raising the non-oil revenue to GDP ratio to 15 percent by 2020. Both the ERGP published in March 2017, which seeks to keep the fiscal deficit within the boundary established by the Fiscal Responsibility Act, and the draft 2018 Budget emphasize this revenue target. Increasing non-oil tax revenue would be realized through a series of 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 to capture a greater share of the informal economy).

Tax Administration Reforms

Recent reform measures have sought to strengthen revenue collection at the federal level through information technology improvements and by expanding the number of registered taxpayers. FIRS has implemented technology initiatives such as online portals for assessment and payment of stamp duties (e-stamp) which has dramatically reduced the time to register a company, the processing of tax clearance certificates (e-TCC), and the automation of withholding tax remittances by MDAs. The Integrated Tax Administration System (ITAS) project had also been completed following its deployment in a majority of tax offices, although a major test for success remains that it also be actively used for compliance management FIRS has also continued to expand the taxpayer register, and has taken steps to create a specialized collection enforcement function and improve the integrity of the audit process. It also continued to improve staff capacity and infrastructure. Importantly, these measures are strengthening the foundation of tax administration, yet compliance levels across all levels of tax payments remain low. The strategy of relying on strengthened collection efforts and one-off initiatives (such as the Nigerian Voluntary Asset and Income Declaration Scheme, VAIDS) as a first level intervention may not be that effective in delivering higher revenues sustainably.

Additional revenue could be raised in the short term with tax and customs administration measures, including by:

  • Initiating 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. Data analysis and cross matching offers real potential for enhancing revenue, reducing both administrative and compliance costs, and strengthening the working relationship between the FIRS and the Nigerian Customs Service (NCS). Developing a repeatable data matching methodology for deployment, initially for a small group of data sets, will be needed.

  • Recovering tax arrears (such as, unremitted withholding of PAYE). The stock of arrears has grown significantly and as of mid-2017, it stood at N 1.4 trillion – N1.2 trillion of which were attributable to large taxpayers. Early wins could thus 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 to validate arrears, institute collection measures, and enforce difficult debt, including debt owed by public agencies. Staff estimates that additional minimum revenue yields of N150 billion could be generated in 2018 only from these measures.

  • Improving filing and payment compliance. In the short term, the focus would need to be on outreach initiatives for dormant registered taxpayers to motivate them to start filing and paying taxes and actively sending bulk reminders to taxpayers shortly before the filing dates. Data analysis and cross-matching can help identify taxpayers with active economic activities.

  • Improving integrity and putting in place appropriate management controls in customs. Stakeholders report widespread “irregular practices and payments” that have a negative impact on revenue flows and investor confidence. Implementation of a comprehensive integrity strategy that is 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.

Rationalization of Tax Incentives

The extensive use of tax holidays, reduced rates, and generous allowances have eroded revenues from CIT, which only yielded 1 percent of GDP in 2016. Despite imposing a relatively high statutory rate of 30 percent, Nigeria’s CIT efficiency, as measured by the ratio of CIT revenues to the product of GDP and the corporate tax rate, is 0.03 when calculated with respect to the non-oil economy only, and 0.06 when CIT revenue is compared to total economy GDP. These values are significantly below the 0.07 ECOWAS average and the 0.13 average for the group of emerging and developing economies, indicating that Nigeria’s corporate tax base has been eroded by tax expenditures.

Nigeria offers several types of tax incentives and allowances. The income tax system has generous incentives in the form of tax holidays of 3 to 5 years for pioneer industries and products, complete exemption of tax at the federal, state and local level for companies under the free zones regime, and various waivers and reductions by presidential decree or as embedded in the CITA for preferential sectors. Without coordination between measures, in practice some of these incentives are likely to overlap and be redundant.

The authorities intend to rationalize Nigeria’s endemic use of tax incentives as one of the strategies of increasing non-oil revenues, which is a timely development. An Inter-Ministerial Committee was constituted in January 2016 and tasked with undertaking a review of tax expenditures resulting from 52 types of incentives being implemented by the Federal Government through its agencies (NCS, FIRS and NIPC). The Committee’s preliminary findings based on a partial quantification of expenditures indicate that between 2011 and 2015, the government conceded N1 trillion, or 1.28 percent of GDP to the granting of only four types of incentives: import duty waivers / concessions / grants, VAT waivers / concessions / grants, and pioneer status – separately for nonoil companies and oil companies – which carries tax holidays of 3 to 5 years. The largest share of incentives came from the granting of import duty waivers, which represented almost half of the total cost of incentives. Importantly, these estimates do not include incentives granted by Government under existing laws such as the Corporate Income Tax Act, Personal Income Tax Act, Petroleum Profits Tax Act, or the Minerals and Mining Act, on which the Committee could not obtain data, but nevertheless suggest that the size of expenditures is likely considerable.

A systematic review of tax expenditures, ideally accompanying the annual Budget, would help quantify the cost of incentives and identify ways to improve the fairness of the tax system and recover lost revenue. The scarce availability of corporate taxpayer-level data would need to be considerably improved to undertake such an assessment. Cost-benefit analyses of tax incentives would also allow determine which incentives provide a net benefit to the economy. Generally, there are better options for low income countries’ effective and efficient use of tax incentives for investment than tax holidays and income tax exemptions:

  • Mechanisms such as investment tax credits and accelerated depreciation generally yield more investment per dollar spent than tax holidays and income tax exemptions, which tend to be fiscally costly for the country and often redundant;

  • Tax incentives targeted at export-oriented sectors and mobile capital appear to be more effective, while those targeted at sectors producing for domestic markets or extractive industries generally have little impact;

  • Enabling conditions (such as good infrastructure, macroeconomic stability, and rule of law) are critical for effectiveness and efficiency, as are the good governance of incentives and transparency – the granting of tax incentives should be rules-based and consolidated under the authority of the Minister of Finance.

While the justification for tax incentives is to change relative prices, profits and costs to steer investment in a desired direction, if granted almost to all sectors of the economy their efficiency is diffused and make little difference in attracting investments. Streamlining tax expenditures in the short term would require placing a moratorium on the introduction of new profit tax incentives, followed in the medium term by a rationalization of granted expenditures. The expansion of the tax base will afford to the gradually alignment of CIT rates to the current international average of approximately 25 percent for non-extractive industries, which in itself would help reduce pressures for tax incentives from the business community.