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Increase VAT, cut interest rates – IMF to Nigeria

Published

4 years ago

December 12, 2020

An International Monetary Fund (IMF) team has advised the federal government to increase the Value Added Tax (VAT) and excise duties.

However, the proposed VAT increase should be implemented when the economy recovers..

The IMF team that prepared the 2020 Article IV noted that poverty is high and recovery is slow. Therefore, mobilization of revenue through increased VAT and Excise duty should rely on efficiency of collection.

Higher VAT and excise rates should wait till stronger economic recovery is achieved.

The IMF staff made the recommendation at the end of its virtual mission from October 30 to November 17 with regards to the 2020 Article IV Consultation with Nigeria.

According to the mission to Nigeria, “with high poverty rates and only a gradual recovery in prospect, revenue mobilization will need to rely initially on progressive and efficiency-enhancing measures, with higher VAT and excise rates awaiting until stronger economic recovery takes root”.

The mission stated that significant revenue mobilization-including through tax policy and administration improvements-is required to create space for higher social spending and reduce fiscal risks and debt vulnerabilities.

What this means is that the federal government has been advised to pursue the possibility of increasing VAT and excise duties which pose little threat to finances of the poor.

VAT is tax imposed on luxury goods and services and since Nigeria is in recession. Government needs to mobilize revenue to finance its activities. One of the best ways to do this is by taxing the wealth and marshalling excise duty on imported goods.

The mission stated that “following a significant decline in revenue collections-from levels that were already among the lowest in the world-fiscal deficits are projected to remain elevated in the medium term”.

The Article IV consultation report on Nigeria also advised the Central Bank of Nigeria (CBN) to reconsider its loan to deposit ration policy.

According to the IMF staff, “minimum Loan to Deposit Ratio (LDR) should be reconsidered because of the risk to financial stability associated with pushing credit possibly to higher-risk clients”.

In September 2019, the CBN ordered all Deposit Money Banks (DMBs) to attain a minimum LDR of 65% by December 31, 2019 and this ratio shall be subject to quarterly review.

To encourage SMEs, retail, mortgage and consumer lending, these sectors were assigned a weight of 150% in computing the LDR for this purpose.

With regards to interest rate management, the Article IV mission noted that the CBN’s “accommodative monetary stance remains appropriate in the near term given the constrained fiscal space, large fiscal financing needs and strained sovereign external market access”.

However, the IMF noted that if Nigeria’s Balance of Payment (BoP) and inflationary pressures intensify, “there might be a need to withdraw liquidity or raise rates.

“Given weak transmission and record low market interest rates, further cuts in the Monetary Policy Rates are unlikely to provide additional support to the economy”.

To check the incidence of non-performing loans (NPL), the IMF has called for “vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing non-performing loans.

“In this connection, debt relief measures for clients should remain time-bound and limited to clients with good pre-crisis fundamentals, in line with existing regulations”.

The mission pushed what it considers a “durable solution to Nigeria’s recurrent BoP problems” which it said “requires recalibrating exchange rate policies to reduce BoP risks, instill market confidence and facilitate private sector planning”.

Going forward, the mission recommended decisive actions to tackle governance weaknesses and implement regulatory and trade-enabling reforms, including the lifting of trade restrictions to unlock Nigeria’s strong growth potential.

The mission urged the Nigerian authorities “to continue strengthening the anti-corruption framework and implement plans to improve the effectiveness of the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework”.

The IMF mission argued that “despite an expected easing of food prices, inflation is projected to remain in double-digits and above the Central Bank of Nigeria’s (CBN) target range, absent monetary policy reforms”.

The 2020 Article IV Mission to Nigeria is an IMF staff team that conveys preliminary findings after a visit to a country.

The views expressed in their statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.