Businesses Groan As COVID-19 Impact On Economy Worsens
The Coronavirus (COVID-19) pandemic raises several challenges across different sectors of the economy. No sector from banking, telecoms, manufacturing, e-Commerce among others are exonerated from the uncertainty and rising costs of operations triggered by the pandemic. Therefore, getting the economy and businesses working post-COVID-19 will require collaboration with private sector operators on key issues like taxation and stimulus packages for businesses across all sectors of the economy.
The Coronavirus (COVID-19) outbreak has caused widespread concern and economic hardship for consumers, businesses, and communities across the globe. It is estimated that there is no sector of the economy that has not been affected negatively including the banking, telecoms, e-commerce, manufacturing sectors.
The situation has come with widespread impacts across different sectors of the economy. In this vein, many economies have injected stimulus packages in the form of government spending, tax breaks, loan guarantees, to mention but a few.
Many countries have therefore intervened to save businesses and their economies from the pandemic impact. According to the International Monetary Fund (IMF) report on economic responses governments are taking to limit the human and economic impact of the COVID-19 pandemic, the United States inaugurated the US$483 billion Paycheck Protection Program and Health Care Enhancement Act.
The legislation includes US$321 billion for additional forgivable Small Business Administration loans and guarantees to help small businesses that retain workers; US$62 billion for the Small Business Administration to provide grants and loans to assist small businesses; US$75 billion for hospitals; and US$25 billion for expanding virus testing.
For China, an estimated RMB 4.2 trillion of discretionary fiscal measures have been announced. Key measures include increased spending on epidemic prevention and control, production of medical equipment, accelerated disbursement of unemployment insurance and extension to migrant workers, tax relief, and waived social security contributions.
According to the IMF, in Australia, fiscal stimulus, consisting of expenditure and revenue measures worth A$134.5 billion put in place through the fiscal year 2023 to 24, with measures like sizable wage subsidies, income support to households, cash flow support to businesses, investment incentives, and targeted measures for affected regions and industries.
In Canada, the government carried out key tax and spending measures worth CAD 262.6 billion, with $5.7 billion to the health system while around $171.9 billion in direct aid to households and firms, among others.
Nigeria has been severely hit by the spread of COVID-19 and the associated sharp decline in oil prices. Government policy is responding to both developments. The Federal Executive Council (FEC) approved the N2.3 trillion stimulus package (1.6 per cent of Gross Domestic Product- proposed by the Economic Sustainability Committee, designed to cushion the impact of the COVID-19 pandemic on Nigeria’s economy.
The Central Bank of Nigeria (CBN) cut the monetary policy rate on May 29 to 12.5 per cent, reduced interest rates on all applicable CBN interventions from nine to five per cent. The CBN Governor, Godwin Emefiele also announced a one-year moratorium on CBN intervention facilities and created a N50 billion targeted credit facility, among other measures including N100 billion to support the health sector.
Stakeholders insisted on the need to re-evaluate other ways to use tax incentives to grow the economy post-COVID-19 without over-emphasis on multiple taxations for sectors that are required to support the economic recovery process.
Would it not be more sustainable for the Federal Inland Revenue Service (FIRS) to provide adequate incentives to taxpayers in key sectors as it is done in other climes, instead of seeking to ramp up collection of advance tax?
There are certain steps FIRS needs to take to reflate the economy and promote sustainable growth. FIRS can push for banks to provide loans for working capital for all private companies that were tax-compliant and solvent before the pandemic.
The agency can also adopt tax deferral measures allowing all large companies to defer payment of profit tax for the second and third quarter of 2020 in 2021. Telecom, Manufacturing, active processing, and call centres can defer payments for the rest of 2020 to 2021. Small businesses with turnover below N25 million could be advised not to pay profit tax for the remainder of 2021.
In a recent report titled “Changing Competitive Landscape in the Fintech and Banking sectors in Nigeria” by PricewaterhouseCoopers (PwC), said that all sectors of the economy are facing the adverse impact of COVID-19 at various degrees. The banking sector has had to contend with rising bad loans, although the ongoing shift to remote work is driving demand for networking infrastructure and connectivity in the telecom sector; the demand, could also strain the system and lead to public perception issues if the right technology, which requires a heavy capital outlay, is not provided.
The PwC report explained that excessive demand on mobile and communications networks — including temporary suspension of data caps — could affect service quality, creating a ripple effect as companies across various sectors implement remote-work plans.
PwC says the crisis underscores the need for more flexible, resilient business models, that do not include draining liquidity through taxes from the telecoms, banks, or manufacturers.
It said a number of telcos have high debt loads, which could put pressure on their debt-reduction programmes.
To succinctly capture the overall situation in the telecom industry, Analysys Mason (Global consulting and research firm specialising in telecoms) in its April 2020 report, while commenting on revenue impact during the COVID-19 lockdown, says: “Overall revenue declines are expected to amount to 3.4 per cent in 2020 (against a previous forecast of an increase of 0.7 per cent) with a modest rebound of 0.8 per cent in 2021.”
“Consumer services, which account for the majority (68 per cent) of telecoms revenue, have a demonstrable level of resilience during economic downturns. The restrictions of movement in place in many countries and the emphasis on home working and entertainment means that fixed services perform relatively well. However, business telecoms will be badly hit. Increased unemployment, business closures and the overall decline in activity mean that spend by businesses on telecoms will fall sharply.”
This is exactly what telcos in Nigeria are facing at the moment. They have lost a huge percentage of their revenue which comes from their Enterprise customers (Organisations, big corporates).
In the banking sector, the CBN Deputy Governor, Financial Systems Stability Directorate Mrs. Aishah Ahmad, said 17 commercial banks have submitted requests to restructure 32,000 loans in their portfolios to the CBN. The majority of the loans were taken by energy companies affected by a drop in crude oil prices due to the COVID-19 pandemic.
Director-General of the Lagos Chamber of commerce and Industry, Muda Yusuf, said the manufacturing sector has also been hit. He said aside difficulty in accessing foreign exchange due to a drop in Nigeria’s dollar earnings, the cost of operation for the sector has risen rapidly, impacting demand for goods and services. For instance, the manufacturing and non-Manufacturing Purchasing Manager’s Indices (PMIs) declined significantly to 42.4 and 25.3 index points, respectively, in May 2020, compared with 51.1 and 49.2 index points in March 2020.
The e-Commerce segment of the economy has also not been left out. As people have embraced social distancing as a way to slow the spread of the pandemic, there has naturally been a drop-off in brick-and-mortar shopping, but that has not led to increased sales for e-commerce companies.
An economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the attractiveness of the banking industry is deteriorating and rivalry is intensifying. For him, transaction banking is being threatened and cannibalized by leading financial technology firms.
According to Rewane, the economy is heavily challenged, and every segment is impacted by the COVID-19 pandemic. He said even though ICT resources were part of the tools used to adapt to the new normal, that does not exclude the sector from the negative impact the pandemic has had on the economy.
He said taking advance taxes from the telecom, banking, or manufacturing sectors will be unfair, and will be based on estimation, which is not the right optimization for tax collection.
Senior Vice Chairman, Africa Standard Chartered Bank Group, Mrs. Bola Adesola, said the world has changed, including the way people live and do business. Speaking at a webinar organized by Financial Institutions Training Centre, Lagos, she said that COVID-19 has had an enormous impact on people’s lives and businesses, hence the need for government, its agencies, and private sector operators to take steps that would guarantee continuous profitability for companies.
Globally, the COVID-19 pandemic has had a significant negative impact on employment. According to the maiden report of COVID-19 impact monitoring recently released by the National Bureau of Statistics (NBS), the impact of COVID-19 pandemic on the employment of Nigerians has been prevalent.
The report stated that nearly 40 million Nigerians are projected to lose their jobs by the end of this year, due to lockdowns and social distancing measures put in place to curb the spread of COVID-19, underscoring the widespread devastation to the Nigeria labour market from the coronavirus. Preemptive measures can save this situation and cases have been made that good tax practices ultimately lead to job creation.
The theory behind the argument is that an increase in taxes will increase the real price of labour, decreasing the demand for labour and increasing the unemployment rate. In response, firms will replace labour with capital, and the long-run shift from labour to capital will eventually decrease the marginal product of capital low enough to reduce investment and growth. Now more than ever, policies should encourage job creation as the economy is grappling to survive and good tax practices can only be more beneficial to us.
It is common knowledge that the Nigerian economy has taken a big knock because of COVID-19. In line with established best practices, it is the responsibility of government (like most western countries) to reboot the economy by supporting businesses with various incentives which can also include a business support fund.
It will be important at this stage to recognise what the Nigerian government has so far done through the various COVID-19 committees, particularly in the injection of funds to support the economy.
Some of the notable initiatives being implemented by government include the investment of N2.3 trillion into the economy over 12 months, N10 billion loans and grants approved for various groups and organisations for pharmaceutical and healthcare-related research, under the COVID-19 intervention scheme and Micro, Small and Medium Enterprises (MSMEs) Survival Fund, which incorporates a Guaranteed off-take Stimulus Scheme and the Credit Support to MSMEs.
While stakeholders commend the Federal Government for these initiatives, it is strongly believed that there is a lot more to be done to ensure that all sectors of the economy are adequately reflated post-COVID-19. This is therefore not a time for various State Governments, Ministries, Departments and Agencies of Government (MDAs) to invent new taxes or increase existing ones, rather, it is a time for them to see how they can reduce some taxes, outrightly eliminate some others, and provide the enabling business environment to help businesses tide over this period, leading towards a positive effect on job creation and overall economic growth.