By Adewale Okoya
Nigeria’s public finances present one of Africa’s most striking economic paradoxes. On paper, the combined budgets of the federal government, 36 state governments and 774 local government councils appear enormous, amounting to between ₦95 trillion and more than ₦100 trillion. Yet, when converted at the Central Bank of Nigeria’s official exchange rate of about ₦1,380 to the dollar, the country’s entire public expenditure amounts to only about $69 billion to $73 billion. The implication is sobering. Despite being Africa’s largest economy by population and one of its biggest oil producers, Nigeria ranks behind South Africa, Algeria, Egypt and Morocco in total government spending.
The contrast becomes even starker when viewed on a per capita basis. South Africa spends roughly $2,400 per citizen annually, while Nigeria allocates less than $330 for each of its more than 220 million people. This enormous spending gap explains many of the country’s persistent challenges, from inadequate infrastructure and healthcare to education, security and social welfare. It also underscores a fundamental truth: Nigeria’s fiscal problem is not merely one of expenditure but, more critically, one of revenue.
For decades, economists have argued that Nigeria’s tax system has consistently underperformed. While countries with comparable levels of development rely heavily on domestic taxation to finance government activities, Nigeria has remained largely dependent on crude oil revenues, exposing public finances to volatile global energy prices and exchange rate shocks. Until recently, Nigeria’s tax-to-Gross Domestic Product (GDP) ratio hovered around 10 per cent, one of the lowest in Africa and significantly below the continental average. By comparison, South Africa consistently records a tax-to-GDP ratio of between 25 and 27 per cent.
The difference lies not only in tax rates but in the structure of both economies. South Africa operates a highly formalised economy dominated by registered companies and salaried employment, enabling the South African Revenue Service (SARS) to deploy sophisticated digital systems that match taxpayer data across financial institutions, employers and government databases. Personal income tax, collected through a progressive system with a top marginal rate of 45 per cent, value-added tax of 15 per cent, corporate income taxes and capital gains taxes collectively provide a stable and predictable revenue base.
Nigeria, by contrast, remains predominantly informal. Millions of businesses operate outside the tax net, while cash transactions, fragmented tax administration and overlapping levies have historically weakened compliance. Businesses have long complained about multiple taxation by federal, state and local authorities while governments have struggled to expand the revenue base without discouraging investment.
Recognising these structural weaknesses, the Federal Government initiated one of the country’s most ambitious fiscal reform programmes under the Presidential Committee on Fiscal Policy and Tax Reforms. The resulting tax legislation seeks to simplify revenue administration, harmonise tax collection and broaden the tax base while protecting lower-income households and small businesses.
Among the most significant reforms is the consolidation of dozens of taxes and levies into a more coordinated national framework administered through the proposed Nigeria Revenue Service. The objective is to reduce the confusion and harassment associated with multiple tax collectors while improving efficiency, transparency and compliance. The reforms also introduce a 15 per cent corporate minimum tax aimed at preventing large corporations from significantly reducing their tax liabilities through aggressive tax planning and profit shifting.
At the same time, the reforms attempt to strike a social balance by exempting individuals earning ₦100,000 or less per month from personal income tax and shielding small businesses with annual turnover below ₦100 million from certain tax obligations. Government officials argue that the burden of revenue mobilisation should increasingly fall on larger and more profitable enterprises rather than low-income earners already grappling with rising living costs.
Early indications suggest that the reforms are beginning to yield results. Supported by electronic invoicing, improved compliance systems and stronger tax administration, Nigeria reportedly generated more than ₦21 trillion in domestic tax revenue during the first half of the year alone, representing one of the strongest revenue performances in recent history. While these figures remain encouraging, analysts caution that sustaining such momentum will require continued improvements in tax administration, public confidence and the quality of government spending.
Yet the reforms have also exposed an enduring policy dilemma. Nigeria desperately needs higher domestic revenues to finance development, but it must achieve this without undermining its attractiveness to investors.
Many international businesses have welcomed efforts to simplify the tax code and provide greater legal certainty. Investors generally favour transparent, predictable tax systems over fragmented and inconsistent regimes. Provisions preserving tax treatment for certain offshore income and reducing administrative complexity have also been viewed positively by segments of the international investment community.
However, other aspects of the reforms have generated concern. The gradual withdrawal of long-standing tax incentives in Free Trade Zones has unsettled companies that made investment decisions based on existing fiscal guarantees. Similarly, proposals affecting capital gains taxation have prompted debate over whether taxation should adequately account for inflation to avoid taxing nominal gains that do not reflect real increases in asset values. Such concerns come at a time when Nigeria is competing aggressively with other emerging markets for scarce foreign direct investment.
The Nigerian diaspora, which contributes more than $20 billion annually through remittances, also faces a changing fiscal landscape. New residency rules and evolving tax obligations are encouraging many Nigerians abroad to reassess how they manage investments and transfer funds. Increasingly, remittances are moving through formal banking channels rather than informal networks, strengthening foreign exchange inflows and improving financial transparency. At the same time, many diaspora investors are shifting from passive bank deposits towards private equity, technology ventures and digitally documented real estate investments that offer stronger legal protection and potentially higher long-term returns.
Ultimately, Nigeria’s tax reforms represent more than a revenue exercise. They are an attempt to reshape the relationship between government, businesses and citizens by building a more modern fiscal system capable of supporting sustainable economic development. Success, however, will depend on more than higher tax collections. Businesses and citizens are more willing to comply when they see tangible improvements in public services, infrastructure, healthcare, education and security. Transparency, accountability and efficient public expenditure remain essential ingredients of any successful tax system.
Nigeria therefore finds itself walking a fiscal tightrope. The country must close a substantial revenue gap while maintaining investor confidence, encouraging private sector growth and protecting vulnerable households. The reforms have undoubtedly moved the conversation beyond dependence on oil revenues towards a more diversified and sustainable fiscal framework. Whether they ultimately bridge Nigeria’s fiscal chasm will depend not simply on collecting more taxes, but on convincing taxpayers that their contributions are being translated into measurable national development. That, more than any legislation, will determine whether Nigeria can finally transform its vast economic potential into broad-based prosperity.
