Appraisal of Impact of 2023 Nigeria Fiscal Policy on SMEs

CONTRIBUTED BY IFEDIORA OBIORA

INTRODUCTION

In the ever-evolving landscape of global economics, small and medium-sized enterprises (SMEs) have emerged as vital contributors to a nation’s economic growth and stability. In Nigeria, SMEs play a crucial role in driving job creation, fostering innovation, and stimulating overall economic development. As the country entered the year 2023, it faced the challenge of redefining its fiscal policies to navigate through both local and global economic uncertainties.

The year 2023 marked a significant turning point for Nigeria’s economic outlook, necessitating an appraisal of the impact of its fiscal policies on the vibrant SME sector. The Nigerian government introduced a series of fiscal measures to address prevailing economic challenges, with a particular focus on bolstering the SME ecosystem.[1]

This research aims to critically analyze and evaluate the effect of Nigeria’s 2023 fiscal policy on SMEs. By investigating the various policy instruments employed by the government, this study will assess their potential to create an enabling environment for SMEs to thrive, overcome obstacles, and seize new opportunities.

THE CONCEPT OF FISCAL POLICY

Fiscal policy, as applied in economics and political science, refers to the use of government revenue collection, mainly through taxes, and government expenditure or spending, to impact the overall economy.[2] The primary goal of fiscal policy is often to stabilize the economy during different phases of the business cycle. This approach involves altering the level and composition of taxation and government spending, which can affect several macroeconomic variables, including aggregate demand, economic activity, savings, investment, and income distribution.[3]

The decision-making process involved in fiscal policy revolves around the government’s actions concerning revenue collection through taxation and the subsequent allocation of those funds.

NIGERIA FISCAL POLICY 2023

Fiscal Policy Measures (FPMs) are crucial macroeconomic tools for advancing economic growth and assisting the government in managing its budget. The Federal Government of Nigeria released a circular on April 20, 2023, establishing additional taxes in the FPM for 2023. Before its implementation, the Nigerian economy faced a number of difficulties, including high inflation, low economic growth, low oil output, inconsistent revenue generation from NNPC due to crude oil theft, macroeconomic uncertainty, rising public debt, worsening budget deficit, and low public debt.[4]

The federal government has committed a substantial amount of funds to pay off debt with the income it generated, leaving a sizable shortage in infrastructure needs. The government of Nigeria had a budget deficit of N6.3 trillion as of 2022, while its revenue as a percentage of nominal GDP was at 3%.[5] During this period of economic decline on a larger scale, the FPM 2023 was implemented. The reasons behind the introduction of the FPM were numerous, including the imperative to broaden the economy’s scope, decrease reliance on income from crude oil, boost revenue generation, and tackle the existing infrastructure deficiencies within the nation.[6]

The FPM has brought about several fresh tax measures, encompassing Supplementary Protection Measures (SPM), adjusted rates of excise duty, green taxes (10%), import Adjustment Tax (2-4%), and telecommunication tax (5%). As a result of these newly implemented taxes, the importation of goods like rice, woven fabrics, ceramic tiles, sinks, and other items will be impacted by the influence of SPM.[7]

These additional taxes are projected to generate government revenue, fostering the improvement of domestically produced goods, boosting manufacturing productivity in the economy, promoting climate change resilience in a sustainable manner, and encouraging local production. On the other hand, the new taxes are also expected to have adverse effects on the economy, particularly impacting the MSME (Micro, Small, and Medium Enterprises) ecosystem. The elevated taxes on imported goods, excise duties, and the introduction of new taxes will lead to increased production costs, resulting in reduced competitiveness, particularly in the international market. The surge in production expenses may lead to decreased demand, causing a decline in revenue, job losses, and business closures.[8]

Nevertheless, the implementation of the Federal Policy on Taxation for 2023 (FPM 2023) in Nigeria has raised several concerns. Primarily, stakeholders were not involved in the decision-making process before its approval.[9] Furthermore, there are inconsistencies in the policy’s approach to enforcing green taxes, and insufficient impact assessment has been carried out to gauge its potential effects. Adding to the complexity, the implementation of FPM 2022 is still ongoing, which further complicates the situation.[10]

IMPACT OF FISCAL POLICY MEASURE ON SMES

The business landscape in Nigeria has posed significant difficulties for numerous enterprises, especially micro, small, and medium-sized ones. Inflationary pressures have persisted, leaving many small businesses struggling to survive. These businesses are battling to remain operational and avoid becoming one of the countless MSMEs that succumb to the challenges before reaching their fifth year.

Despite being the backbone of Nigeria’s economy, the outlook for MSMEs appears bleak. The combination of inadequate infrastructure, decreased disposable income, inflation, insecurity, and high energy costs is seriously impacting these businesses, leading to adverse consequences.[11]

Sequel to the above, the following are the Impact of Fiscal Policy Measures on SMEs

  1. Harsh Business Environment: Despite some progress in the World Bank’s ease of doing business ranking, with Nigeria moving up 15 places from 146 out of 190 countries in 2018 to 135 in 2023, running a business in the country remains extremely difficult.[12] Small and Medium Enterprises (SMEs) continue to face various obstacles such as multiple taxation, limited access to credit, inadequate public infrastructure, and low capacity. The unstable electricity provision in Nigeria has forced small businesses to heavily rely on diesel and petrol, leading to a significant increase in operating expenses and putting pressure on their profit margins.
  2. Taxation: Changes in tax rates or tax incentives have directly affected SMEs. Lower tax implementations by the government or tax breaks can lead to increased cash flow and profitability for SMEs, allowing them to reinvest in their businesses, expand operations, or hire more employees.
  3. Export Incentives: Export-oriented fiscal policies, such as tax rebates or incentives, have encouraged SMEs to participate in international trade and expand their customer base beyond domestic borders.
  4. Training and Development: Fiscal policies which support skill development and training for SME employees have enhanced their productivity and competitiveness. Government-backed training programs can improve the overall capacity and efficiency of SMEs.
  5. Economic Stability: SMEs have benefited from fiscal policies designed to promote economic stability and a more predictable business environment, making it easier for them to plan and make long-term investments.

It’s essential to note that the success of fiscal policies in supporting SMEs depends on their effective implementation, monitoring, and evaluation. Additionally, any policy can have unintended consequences, and policymakers should carefully consider potential risks and adjustments needed to ensure positive outcomes for SMEs and the broader economy.[13]Top of Form

RECOMMENDATIONS

In other to make the Fiscal Policy for SMEs more relaxed and favourable given the current situation of the economy, the following recommendations are proffered;

  1. Consultation with SMEs: The Nigerian government should actively engage with SMEs through consultations, surveys, and feedback mechanisms to understand their needs, challenges, and expectations. This input will help design fiscal policies that are more aligned with the realities faced by SMEs.[14]
  2. Tax Incentives: Offer tax incentives and concessions to SMEs to reduce their tax burden and encourage business growth and investment. Lowering corporate tax rates, simplifying tax compliance, and providing deductions for specific expenses can positively impact SMEs’ cash flow and profitability.[15]
  3. Access to Finance: Ensure that SMEs have improved access to affordable finance. Facilitate the creation of SME-focused loan schemes, grants, and credit guarantees. Partner with financial institutions to increase the availability of credit for SMEs at reasonable interest rates.
  4. Support Innovation and Technology Adoption: Encourage SMEs to embrace innovation and new technologies. Provide incentives for the adoption of digital tools and technologies that can enhance efficiency and competitiveness. Support SMEs in exploring international markets and export opportunities. This can be achieved through export promotion programs, market access facilitation, and trade missions.

CONCLUSION

The success of SMEs is crucial for the overall economic growth and development of Nigeria. The government’s fiscal policy, if properly crafted and effectively implemented, can significantly contribute to the success of SMEs by providing them with a conducive business environment, access to affordable credit, and appropriate incentives for growth. By nurturing the SME sector, Nigeria can harness its full entrepreneurial potential and foster a thriving, resilient, and inclusive economy.

  1. Business Day, ‘Private Sector’s Position on 2023 Fiscal Policy Measures’ https://www.thisdaylive.com/index.php/2023/05/30/private-sectors-position-on-2023-fiscal-policy-measures accessed 22 July, 2023.
  2. A Adenikinju, & S.O Olofin, ‘Economic policy and manufacturing sector growth performance in Africa.’ The Nigeria Journal of Economic and Social Studies.
  3. Ibid
  4. Joseph Nnanna ‘Are the new fiscal policy measures a way out for the Nigerian economy?’ https://businessday.ng/opinion/article/are-the-new-fiscal-policy-measures-a-way-out-for-the-nigerian-economy/ accessed 23 July, 2023.
  5. Ibid
  6. Ibid
  7. This Day ‘Private Sector’s Position on 2023 Fiscal Policy Measures’ https://www.thisdaylive.com/index.php/2023/05/30/private-sectors-position-on-2023-fiscal-policy-measures accessed 23 July, 2023.
  8. Ibid
  9. Odewale Abayomi ‘Nigeria’s conflicting fiscal and monetary policies: The bane of MSMEs’ https://www.thecable.ng/nigerias-conflicting-fiscal-and-monetary-policies-the-bane-of-msmes accessed 23th July, 2023.
  10. Ibid
  11. Deborah Dan-Awoh, ‘SMEs adopt new survival strategies as economy slides further’ https://punchng.com/smes-adopt-new-survival-strategies-as-economy-slides-further/#google_vignette accessed 24 July, 2023.
  12. Ibid
  13. Victor Oluwole, ‘ How Nigeria’s monetary policy is affecting small business growth’ https://africa.businessinsider.com/local/careers/how-nigerias-monetary-policy-is-affecting-small-business-growth/0cbxzn3 accessed 23th July, 2023.
  14. Brookings, ‘Deepening access to capital for Nigerian MSMEs’ https://www.brookings.edu/articles/deepening-access-to-capital-for-nigerian-msmes-during-a-pandemic/ accessed 23th July, 2023.
  15. Leadership News, ‘High Operating Cost: SMEs Ask For Tax Holidays’ https://leadership.ng/high-operating-cost-smes-ask-for-tax-holidays-regulatory-forbearance/ accessed 23th July, 2023.

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