IMF Urges Nigeria to Embark on Aggressive Revenue Drive, Raise VAT to 10% by 2022

The International Monetary Fund has stressed the need for Nigeria’s federal government to intensify revenue mobilisation in order to reduce fiscal sustainability risks.

It also advised the federal government to increase Value Added Tax (VAT) in the country to 10 per cent by 2022, from the 7.5 per cent it is presently, once economic recovery takes root.

The Washington-based institution advised the government to rely initially on progressive and efficiency-enhancing measures with higher tax rates, while awaiting a more sustained economic recovery.

The IMF stated this in its latest Article IV Consultation on Nigeria, which was released on Monday.

It added that the report was prepared by a staff team of the IMF for the Fund’s Executive Board’s consideration on January 27, 2021, following discussions that ended on November 17, 2020, with officials of Nigeria on economic developments and policies.

It also highlighted the need for improved social safety nets to cushion potential negative impacts on the poor.

It restated the need for a market-based exchange rate policy to instill confidence.

“Staff recommends establishing a market-clearing unified exchange rate with the near-term focus on allowing greater flexibility and removing the backlog of requests for foreign exchange,” it added.

It advised the central bank to focus more on price stability and called for more financial system vigilance to contain stability risks.

On the upside, it pointed out that recovering oil prices, which hit $60 per barrel yesterday, as well as the expected completion of the Dangote oil refinery could catalyse more domestic crude oil production and boost growth.

The IMF executive directors also commended Nigeria over measures taken to address the health and economic impacts of the COVID-19 pandemic, which have exacerbated pre-existing weaknesses.

The IMF stressed “the need for urgent policy adjustment and more fundamental reforms to sustain macroeconomic stability and lift growth and employment.”

It added: “Directors welcomed notable reforms undertaken in the fiscal sector, including removal of the fuel subsidy and steps to implement cost-reflective tariff increases in the power sector.

“Directors noted that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges. They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.”

The IMF directors observed that the accommodative monetary stance remained appropriate in the near- term, stating that tightening may be warranted if balance of payments or inflationary pressures were to increase.

In the medium term, they advocated that monetary policy operational framework should be reformed and central bank’s financing of budget deficit phased out in order to reduce inflation.

However, they welcomed the resilience of the banking sector and called for continued vigilance to contain financial stability risks.

They noted that COVID-19 debt relief measures for banks’ clients should remain time-bound and limited to those with good pre-crisis fundamentals.

The IMF directors welcomed recent progress in structural reforms and called for continued reforms aimed at promoting economic diversification and reducing the dependence on oil and increasing employment.

In addition, they stressed the need to strengthen governance and anti-corruption frameworks, including compliance with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) measures.

The directors also welcomed the ratification of the African Continental Free Trade Area and underscored that implementing trade-enabling reforms remains critical to rejuvenate growth.

“In the short run, the recommended policy mix is heavily tilted toward exchange rate adjustment given constrained capacity on the monetary and fiscal fronts.

“In the medium term, revenue mobilisation is a top priority. In the short run, fiscal policy should address economic and health impact of the pandemic in a transparent and efficient manner.

“Significant revenue mobilisation will be needed in the medium term to reduce fiscal sustainability risks arising from low debt-servicing capacity.

“With high poverty rates, revenue mobilisation will need to rely on progressive and efficiency-enhancing measures, with higher value-added and excise tax rates awaiting a firm economic recovery,” the IMF added.

It reiterated that Nigeria’s economy has been hit hard by the COVID-19 pandemic, stating that following a sharp drop in oil prices and capital outflows, the country’s real Gross Domestic Product (GDP) was estimated to have contracted by 3.2 per cent in 2020 amidst the pandemic-related lockdown.

In a related development, officials of the IMF have advised the federal government to increase Value Added Tax (VAT) in the country to 10 per cent by 2022, from the 7.5 per cent it is presently, once economic recovery takes root.

They also recommended that VAT in the country should be 15 per cent by 2025.

The IMF stated this in an article posted on its website yesterday, titled: “Five Questions About Nigeria’s Road to Recovery,” that was authored by some staff of its African Department.

They noted that Nigeria has one of the lowest revenue levels as a share of GDP worldwide, stating that a large share of the country’s revenue is spent on the country’s public debt service payments, leaving insufficient fiscal space for critical social and infrastructure spending and to cushion an economic downturn.

In this context, it noted that mobilising revenues through efficiency-enhancing and progressive measures ought to be a top near-term priority. “Revisiting tax exemptions and customs duty waivers, increasing and broadening the base for excise taxes, developing a high-integrity taxpayer register, enhancing digital infrastructure, and improving on-time filing and payment are important measures.

“Once economic recovery takes root, Nigeria will need to increase the value-added tax rate to at least 10 percent by 2022 and 15 percent by 2025—the average in countries belonging to the Economic Community of West African States—to create effective fiscal space,” they stated.

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