IMF Executive Board 2019 Article IV Consultation with Nigeria

IMF Executive Board 2019 Article IV Consultation with Nigeria
Photo credit: AP | Abbas Dulleh

03 Apr 2019

Mobilizing Resources to Invest in People

Spending on health and education in Nigeria is among the lowest in the world. To fund these crucial sectors, Nigeria will have to maximize the amount of revenue it raises. Diversifying the government’s revenue base, increasing non-oil revenues, and securing oil revenues, will all be critical, says the IMF in its latest economic health check of sub-Saharan Africa’s most populous economy.

“Identifying two or three big-ticket items could lift revenue sustainably and in a timely manner – other reforms could follow,” said Amine Mati, IMF mission chief and senior resident representative in Nigeria.

Challenges of a global dimension

According to the report, public services and infrastructure in Nigeria are under considerable strain. Globally, Nigeria ranks first in the number of children out of school. Infant mortality is also high: 12 percent of all children who die under the age of five are Nigerian.

At 1.7 percent and 0.6 percent of GDP, levels of spending on education and health are among the lowest in the world, and insufficient to address growing challenges. To meet these large spending needs, greater resource mobilization is critical. With rapid population growth that could make Nigeria the third most populous country in the world by 2050, these issues will intensify if left unaddressed.

Limited breathing space

The revenue base is simply too low to address the current challenges, says the IMF. At 3-4 percent of GDP, Nigeria’s non-oil revenue mobilization has been one of the lowest worldwide, reflecting weaknesses in revenue administration systems and systemic noncompliance.

For corporate income tax, less than 6 percent of registered taxpayers are active. Estimates on payment compliance in the case of value added tax (VAT) vary between 15 and 40 percent, and Nigeria raises less than 1 percent of GDP in VAT revenue, compared to almost 4 percent of GDP in the countries of the Economic Community of West African States (ECOWAS). Tax exemptions and incentives are narrowing the base.

International evidence shows that a minimum tax-to-GDP ratio of 12.75 percent is associated with a significant acceleration in growth and development of state capacity. It would allow increased expenditure for economic development and reduce budget exposure to oil revenue volatility.

Accelerated and forceful reforms needed to make a visible dent

The government is recognizing these challenges. It has taken welcome steps to increase tax audits, use e-filing, self-assessments, conduct data matching exercises to close collection loopholes, strengthen tax enforcement, and combat corruption in tax offices, and increased excises on alcohol and tobacco. It also launched the Strategic Revenue Growth Initiative that calls for the appointment of a high-powered steering committee to guide reforms and monitor progress on several welcome proposals.

A more comprehensive tax reform could help increase the tax-to-GDP ratio by about 8 percentage points. These could be generated through tax policy and revenue administration measures that could yield an additional 3½ percent of GDP from VAT reforms, 1½ percent of GDP from excises, 2 percent of GDP from the rationalization of tax expenditures, more than 1 percent of GDP from efficiency gains and stronger internally-generated revenue collection, and through taxation of property at the state level.

Such a reform program would broaden the base of income and consumption taxes, improve data collection and monitoring, improve tax compliance and create incentives for sub-national tiers of the government to raise their own revenues.

Moving forward

“VAT reform would benefit both the federal and subnational budgets,” said Amine Mati, IMF mission chief and senior resident representative in Nigeria. “It would include tax credits for intermediary inputs used for the final products and capital expenditures, an annual turnover threshold for VAT registration to exclude small and micro businesses, and improved monitoring and control,” he added. 

The report suggests there should be a single and higher rate for VAT of between 10-15 percent. Exemptions should be limited, well-targeted and follow equity considerations. The report underlines that vulnerable populations must be shielded from any negative impact of the reform, including through targeted social transfers.

Short-term tax and customs administration measures are essential, suggest IMF economists. They should include strengthening taxpayer register and improving filing and payment compliance and initiating large scale data analysis and cross matching. Improving filing and payment compliance, for example, through document simplification and penalties for non-compliance, and putting in place appropriate management controls in customs are other key measures.

Oil revenues that make up a substantial share of government revenues also need to be secured. This includes ensuring that the ongoing work on new petroleum legislation brings an appropriate government take, while not discouraging foreign investment. It is also important that any sales of oil assets should be preceded by changes in legislation (Petroleum Profit Tax Act) to ensure revenues of the new operator are not exempted and find their way into public finances.

The report acknowledges that raising revenues in a short time by a significant amount is ambitious, but the authors believe the proposal is feasible, as shown by international experience. Facing this challenge will help Nigeria make the necessary investment into priority areas – crucial to boost living standards for its young and rapidly growing population.

Executive Board Assessment

Executive Directors welcomed Nigeria’s ongoing economic recovery, accompanied by reduced inflation and strengthened reserve buffers. They noted, however, that the medium-term outlook remains muted, with risks tilted to the downside. In addition, long standing structural and policy challenges need to be tackled more decisively to reduce vulnerabilities, raise per capita growth, and bring down poverty. Directors, therefore, urged the authorities to redouble their reform efforts, and supported their intention to accelerate implementation of their Economic Recovery and Growth Plan.

Directors emphasized the need for revenue-based consolidation to lower the ratio of interest payments to revenue and make room for priority expenditure. They welcomed the authorities’ tax reform plan to increase non-oil revenue, including through tax policy and administration measures. They stressed the importance of strengthening domestic revenue mobilization, including through additional excises, a comprehensive VAT reform, and elimination of tax incentives. Securing oil revenues through reforms of state owned enterprises and measures to improve the governance of the oil sector will also be crucial.

Directors highlighted the importance of shifting the expenditure mix toward priority areas. They welcomed, in this context, the significant increase in public investment but underlined the need for greater investment efficiency. They also recommended increasing funding for health and education. They noted that phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable would help reduce the poverty gap and free up additional fiscal space. Directors recommended stronger coordination for more effective public debt and cash management.

With inflation still above the central bank target, Directors generally considered that a tight monetary policy stance is appropriate. They encouraged the authorities to enhance transparency and communication and to improve the monetary policy framework, including by using more traditional methods, such as raising the monetary policy rate or cash reserve requirements.

Directors also urged ending direct central bank intervention in the economy to allow focus on the central bank’s price stability mandate.

Directors commended the authorities’ commitment to unify the exchange rate and welcomed the increasing convergence of foreign exchange windows. They noted that a unified market based exchange rate and a more flexible exchange rate regime would support inflation targeting. Directors also stressed that elimination of exchange restrictions and multiple currency practices would remove distortions and facilitate economic diversification.

Directors welcomed the decline in nonperforming loans and the improved prudential banking ratios but noted that restructured loans and undercapitalized banks continue to weigh on financial sector performance. They suggested strengthening capital buffers and risk based supervision, conducting an asset quality review, avoiding regulatory forbearance, and revamping the banking resolution framework. Directors also recommended establishing a credible time bound recapitalization plan for weak banks and a timeline for phasing out the state backed asset management company AMCON.

Directors urged the authorities to reinvigorate implementation of structural reforms to diversify the economy and achieve the Sustainable Development Goals. They pointed to the importance of improving the business environment, implementing the power sector recovery program, deepening financial inclusion, reforming the health and education sectors, and implementing policies to reduce gender inequities. Directors also emphasized the need to strengthen governance, transparency, and anti-corruption initiatives, including by enhancing AML/CFT and improving accountability in the public sector.

Directors welcomed improvements in the quality and availability of economic statistics and encouraged continued efforts to address remaining gaps, including through regular funding.

Source International Monetary Fund
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Date 03 Apr 2019
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