Thursday, August 10, 2017/ 10:50 AM /FBNQuest Research
The FGN has this week named 27 industries as eligible for pioneer status incentives. Their principal benefit is exemption from companies’ income tax for three years, with a possible extension for one or two years.
Monitoring of the scheme is to be the responsibility of the Nigerian Investment Promotion Council, which will maintain a list of qualifying companies on its website. The FGN is also developing its plans for six special economic zones (SEZs), one for each geopolitical zone.
The two initiatives are driven by the FGN’s determination to attract investment. Nigeria has some catching up to do. Investment amounted to just 14.8% of GDP in 2015. We recall an old donor rule-of-thumb estimate that a steady investment ratio of 25% generates about 5% GDP growth. Nigeria requires rather higher growth, not least because its population is said to be growing by 2.8% annually.
We read that an industry or company may be designated pioneer if its development is viewed as in the public interest. We hope that this will not be interpreted as an invitation to push national prestige projects.
An opportunity has emerged for Nigeria and other low-wage economies. An estimated 85 million manufacturing jobs are being relocated from China due to rising labour costs including 20 million in textiles and clothing. The textile worker in China is paid US$700 per month, rather more than the proposed national minimum wage in Nigeria of N45,000 (US$150) per month.
Free zones have delivered some impressive results. In the 1980s there was Mauritius, and much more recently Ethiopia. In June Nigerian government advisors witnessed the opening of the country’s fifth zone, reserved for textiles and clothing and set to create 65,000 jobs.
The example of China is Ethiopia writ large, and it is no coincidence that investors from the first are prominent in the Ethiopian zones. The first four zones were established in south-east China in the 1980s. According to data cited by the Abuja Chamber of Commerce and Industry, zones accounted for 22% of Chinese GDP and 50% of its FDI in 2007.
The FGN’s initiatives have a negative impact on revenue collection. The authorities can argue that an initial sacrifice will yield far greater fiscal benefits over time. However, the FGN is under acute fiscal pressure, judging from the CBN governor’s recent statement that the deficit in H1 was a provisional N2.51trn (compared with the full-year target of N2.36trn). In these circumstances it may want to redouble its efforts to scrutinize the tax exemptions granted by the previous administration.
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