Higher taxes could worsen capital market, economy

The federal government should not contemplate increasing taxes in order not to further weaken the economy.

Mr Matthew Ogagavworia, a  stockbroker and principal partner, Matog Consulting, gave this caution when he reacted to questions from Daily Times Nigeria, on the possible impact of an increase in taxes, to the economy and the Nigerian capital market.

Daily Times Nigeria recalls that the Country Senior Partner, PricewaterhouseCoopers Nigeria, Mr Uyi Akpata, recently in an interview disclosed that Nigeria may review taxes upwards to generate more earnings.

Explaining why the government has to increase taxes, Akpata said “ It is like a catch-22 situation in which you say companies or businesses are doing badly and you are thinking of increasing taxes. The truth is that when we think about the ratio of taxes to Gross Domestic Product, Nigeria is one of the lowest.”

He said that there is a huge gap for Nigeria to explore through tax earnings.  “It means that there is a huge gap for us to explore. So, if there is anyone interested in real development in Nigeria, then we have to recognize that we have to raise the basis for taxes. That is one of the income and revenue streams that will see us out of these economic doldrums”

Akpata expressed optimism on the nation’s economy demonstrated by alignment of the government and the private sector in terms affecting positive change in the nation’s economic direction.

He said that increased government spending would address inflation on a short term basis. “But if the government provides such funds and real development takes place, there is going to be a plateau at some time and obviously, we will be better for it,” he added.

He acknowledged that there are still challenging times ahead adding “I believe we have seen the worst of it, at least from the feelers around us” He explained that People want to do business in Nigeria because they see the opportunities. The openings in Europe, he said, are very limited. “Africa still remains the destination but we just need to send the clear-cut signals that we are ready to support such investment”

But, Ogagavworia, reacting to the possibility of increasing taxes to beef national revenue, said that such development would further retard development.

Ogagavworia pointed that taxes reduce the availability of cash to business and corporate organizations and this usually have a spiral effect on the volume of business carried out by the organizations.

The senior stock broker said that taxes help to constrain liquidity and the possibility of investing in new businesses and the implication would be a scarcity of funds and people would not have enough disposable funds and also funds to execute expansion projects or further investments.

He said “Constrained cash means constrained ability to invest in new business; market will be drained of funds”

The senior stock broker said that the multiplier effect of increase in taxes would cut across sectors as even the money and capital markets would be starved of investible funds and the underlying impact would be poor performance of companies and the market “Market performance will be negatively impacted”

He added “Corporate Performance will be impacted negatively as new business opportunities may not be taken because of reduced funding due to increased payment of taxes”

According to Ogagavworia, if taxes are increased, stocks of companies listed on the Nigerian stock Exchange (NSE0 would be negatively affected hence there would be reduced demand for them, also earnings of companies will be impaired and this would also impact on dividend payment which will also be negatively impacted”

The stock broker, however, hinges the revival of the equities market to the recovery of the local economy, adding that if the economy rejigs, it will impact positively on the market “If the local economy improves, Nigerians will have investible funds to place bets on the market. Similarly, listed equities will be able to return good profits and hence dividends. This will also encourage more entry into the market”

He counselled that “The worry is not all about equities. It is about the economy. The market is expected in the fullness of time to be a barometer of the good, the bad, the ugly of our economic strides or missteps or misfortune of fortune or trajectory”