A Comprehensive Tax History of Nigeria

7. Beyond Oil Revenue: The Case For Tax Reform

333 CHAPTER SEVEN BEYOND OILREVENUE: THE CASE FOR TAX REFORM Background The Nigerian economy was largely dependent on agro-products before oil was discovered in commercial quantities in the latter part of the 1950s. The country’s major exchange earnings at the time came from cash crops such as cocoa, rubber, palm oil, cotton and groundnuts. Although mining activities such as coal in Enugu and tin and columbite in Jos contributed to foreign earnings, agriculture remained the bulwark of the economy; accounting for about 90 percent of foreign earnings and 70 percent of GDP.1 In 1956, Shell Petroleum discovered oil in commercial quantities at Oloibiri in Nigeria’s Niger delta region. By 1971, the oil production in Nigeria had grown so much that the country became the world’s seventh largest producer of petroleum. It was in the same year that Nigeria joined the Organisation of Petroleum Exporting Countries, OPEC.2 In 1974, there was a dramatic rise in world oil prices leading to unprecedented inflow of oil revenue in what commentators refer to as Nigeria’s oil boom period. The oil boom impacted on the role of agriculture in the economy in severely negative ways. First, the search for wage-paying jobs led to a massive wave of rural-to-urban migration by people within the productive age circle resulting in loss of farm labour in the rural areas. Second, oil superseded cash crops as Nigeria’s major exchange earner leading to less emphasis on innovations in the agricultural and manufacturing sectors. Third, because the oil revenue was not used to diversify the economic base, unemployment remained high. Between 1972 and 1974 the northern part of Nigeria, which accounted for large production of groundnuts, maize, corn, millet and livestock experienced its worst drought in six decades further undermining an already weakened agricultural sector. In 1975 there was a glut in the global oil market leading to a sudden fall in prices of oil. The fall in oil compelled the military government at the time to take steps to cushion the economic hardships that followed. First, to stimulate local entrepreneurship, the government introduced the indigenization programme which saw the federal government taking up about 60 percent of the equity in the marketing operations of the major oil companies in the country.3 Second, A Comprehensive Tax History of Nigeria 334 to reverse the trend in food importation which was occasioned by the neglect of the agricultural sector, the government introduced programmes such as Operation Feed the Nation (OFN) and the Green Revolution (GR) both aimed at improving local food production. Programmes aimed at broadening the productive base of the economy did not yield optimal results because they were located within an unstable political context. Between independence in 1960 and the beginning of the Fourth Republic in 1999, the country witnessed 10 changes in leadership at the national level only two of whom were elected.4 The rest were military dictatorships which were brought into being by series of coup d’ tat. Planned economic development and continuity in governance were impossible within the milieu of unstable politics. In the face of such persistent political instability and easy petrodollars, other revenue sources, notably taxation, were not fully optimized. ADwindlingAsset In 1956, King Hubbert, a geologist with Shell BP, developed a mathematical model to predict the development of oil production in the United States. According to the Hubbert curve (as his illustration became known), oil production from new fields will always rise sharply, then reach a plateau (i.e its peak) before falling into a sharp decline.5 The geologist predicted that the United States’ oil production would peak in 1969.6 Although his analysis was ridiculed at the time, over time, the peak oil theory has come to gain popularity among scientists and industry players. Scientists at the London-based Oil Depletion Analysis Centre are of the opinion that global oil production will peak out in 2011 and thereafter, there will be a steepening decline. Head of the Centre, Dr Colin Campbell likens the analysis to the consumption of beer: ‘the glass starts full and ends empty and the faster you drink it the quicker its gone’. 7 Although a report on statistical review of world energy published in June 2007 by BP posits that there are still enough global reserves to last another 40 years, Dr Campbell dismisses the optimism as a summary of political estimates supplied by world governments to oil companies.8 While there may be no consensus...