New Telegraph

IMF to FG: Increase VAT to 10% in 2022

…reiterates call for unified exchange rate regime

  • Fund seeks end to CBN’s budget deficit financing

 

The International Monetary Fund (IMF) has advised the Federal Government to increase the Value Added Tax (VAT) rate  to at least 10 per cent by 2022 and 15 per cent by 2025, as part of efforts to raise more revenues and ensure a sustainable fiscal position.

 

The Fund gave the ad-vice in a report issued at the conclusion of its 2020 Article IV consultation with Nigeria.

 

According to the IMF, with Nigeria having one of the lowest revenue levels as a share of Gross Domestic Product (GDP) worldwide, coupled with the fact that a large share of the country’s revenues is spent on public debt service payments, “leaving insufficient fiscal    space for critical social and infrastructure spending and to cushion an economic downturn,” the government should see mobilizing revenues through efficiency- enhancing measures as a top near-term priority.

 

Specifically, the IMF stated: “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 valueadded tax rate to at least 10 per cent by 2022 and 15 per cent by 2025 – the average in countries belonging to the Economic Community of West African States – to create effective fiscal space.”

 

The Federal Government commenced implementation of a 7.5 per cent VAT rate on 1st February last year. While it noted that recovering oil prices and completion of the Dangote oil refinery could catalyze more domestic crude oil production and boost growth, the IMF said that Nigeria’s recovery is expected to be weak and gradual under current policies, with real GDP growth in 2021 expected to turn positive at 1.5 per cent and to recover to its pre-pandemic level only in 2022. It, thus, emphasized that it was important for the government to focus on mobilizing revenues especially, given that: “Over the medium term, a subdued global recovery and decarbonization trends are expected to keep oil prices low and Organization of the Petroleum Exporting Countries quotas in place, restricting oil-related activities, fiscal revenues and export proceeds.” The Fund also said it expects Nigeria’s non-oil growth to remain sluggish, “reflecting inward-looking policies and regulatory uncertainties.” The Bretton Woods institution also reiterated its call for Nigeria to adopt a unified, clear exchange rate regime, which, it said, would help boost economic recovery.

 

It stated: “The current system creates uncertainties for the private sector because of multiple exchange rates and non-transparent rules for foreign exchange allocation. Unifying the various rates into one marketclearing rate would establish policy credibility.

 

“Sustained premiums in the parallel market and unmet foreign exchange demand indicate the need for further adjustment in the exchange rate to reduce the gap between supply and demand. An appropriately valued exchange rate and a clear exchange rate policy would also help instill confidence and private sectorled recovery. Policy clarity is also important to attract larger capital inflows, including foreign direct investments, which have dropped significantly in recent years and successful diversification.”

 

While the Fund said it welcomed notable reforms undertaken in the fiscal sector, including removal of the fuel subsidy and steps to implement costreflective tariff increases in the power sector, it, however, noted that: “Nigeria’s export structure has not fundamentally changed over the decades, with hydrocarbon products still accounting for 90 per cent of the country’s exports today as they did in the 1970s.”

 

According to the IMF, “Successful economic diversification requires trade openness and competitive discipline. The experience of Malaysia, Indonesia, and, to some extent, India, has shown that a shift toward export-oriented industrialization can boost GDP.

 

“The limited gains from inward-oriented policies in terms of creating jobs and improving living standards suggest that Nigeria needs to change course.

 

To accommodate a growing number of young people entering the labour market, Nigeria will need to create at least five million new jobs each year over the next decade. Based on experience of other countries, embracing more open trade and competition policies would help diversify the economy and reinvigorate growth, particularly as the African Continental Free Trade Area takes effect.”

 

Furthermore, while it commended the government for the measures taken to address the health and economic impacts of the COVID-19 pandemic which have exacerbated pre-existing weaknesses in the country, the IMF “emphasized the need for urgent policy adjustment and more fundamental reforms to sustain macroeconomic stability and lift growth and employment.”

 

It said although accommodative monetary stance remains appropriate for Nigeria in the near term, tightening may be warranted if balance of payments or inflationary pressures were to increase. It stated that: “In the medium term, the monetary policy operational framework should be reformed and Central Bank financing of budget deficit phased out in order to reduce inflation.”

 

Also, although the IMF said it welcomed the resilience of the country’s banking sector, it called for continued vigilance to contain financial stability risks, advising that COVID- 19 debt relief measures for bank clients

 

“Should remain time-bound and limited to those with good pre-crisis fundamentals.”

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