The International Monetary Fund (IMF) has asked Nigeria to raise incomes from taxes, particularly through ensuring compliance and expanding the tax net, creating a medium-term plan to reduce its debt vulnerabilities.
Nigeria has been grappling with a burgeoning public debt profile amid faltering oil revenue that has made the country’s treasury empty. Though Africa’s largest economy recently introduced a new tax regime, it ranks the lowest globally at 8 percent tax-to-GDP ratio.
The Debt Management Office (DMO) announced in March that the country’s debt stock as at December 2022 had reached N46.25 trillion. Given recent borrowings by the federal government, the debt stock is expected to hit N77 trillion by the end of May.
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Thus, the IMF, in its latest Fiscal Monitor, titled; ‘On the path to Policy Normalization,’ released Wednesday during its joint spring meetings with the World Bank, said Nigeria’s debt is projected to keep rising, creating the need for increased revenue generation from taxes.
“In general, what we are saying about Nigeria is the need for a medium-term plan to reduce debt vulnerabilities over time and is because Nigeria has very low tax revenues. So, that makes it more vulnerable to these types of shocks and tightening global conditions,” Paulo Medas, division chief, Fiscal Affairs Department at IMF, said.
“What we advocate is raising taxes which are going to create space not only to manage debt but also to spend on other priorities. And the other part of what we say is that Nigeria has not benefited as much from the windfall of the oil prices in the past because a lot of it has been spent on these untargeted energy subsidies.
“By shifting to more targeted subsidies, you can reduce the fiscal deficit, and you can use those resources on other priorities that actually can promote higher growth in the future such as education, and health, and reduce the deficit. So having more targeted energy subsidies actually can be very beneficial both for fiscal, debt dynamics, and growth.”
In 2020, Nigeria increased its Value Added Tax (VAT) from 5% to 7.5% as part of the government’s push to expand the scope of revenue generation amid dwindling oil revenue. But compared to several other countries of its status, the 7.5% VAT increase was considered not enough as there have been shortfalls in other areas of taxation.
Medas said Nigeria has “a lot of room for increasing the tax base and improving tax compliance” given that it has one of the lowest tax revenues in the world as a share of GDP.
While growing debt has become a global challenge led by the US and China, the world’s largest economies, the IMF said the impact will be heavier on developing economies.
The fund said public debt is growing faster than projected before covid globally as a result of the debt volumes of the US and China. Other large economies such as Brazil are also seeing rapid growth in their debt-to-GDP ratios.
The report said low-income developing countries had been hit by several concomitant shocks, including the COVID-19 pandemic and the cost-of-living and food security crises, which have taken their toll on public finances.
“Fiscal deficits in low-income developing countries, at an average 4.2 per cent of GDP in 2022, showed moderate improvements relative to the worst of the pandemic. Primary spending remained stable at 16.9 percent of GDP, just below its 2021 level, on average, as countries increased fuel subsidies and social spending to respond to rising energy and food import prices.
“The increase in spending was larger among commodity exporters Burundi, Democratic Republic of Congo and oil exporters Nigeria, Yemen, with the latter group benefitting from more fiscal space thanks to high energy prices. In non-oil commodity exporters, the average fiscal deficit rose by 0.6 percentage points in 2022, reversing the improvement in 2021, as both primary spending and debt service payments increased,” the IMF said.
The federal government has said that it plans to increase VAT further to 10%, and is in consultation with stakeholders to determine the kickoff date.