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IMF urges Nigeria to increase tax to cut borrowing

The International Monetary Fund (IMF) has called on the Federal Government of Nigeria (FGN) to reduce its debt by focusing on increasing the tax basket…

The International Monetary Fund (IMF) has called on the Federal Government of Nigeria (FGN) to reduce its debt by focusing on increasing the tax basket and compliance as a means of generating revenue to cut borrowing.

The fund in its latest Fiscal Monitor titled, ‘On the path to Policy Normalisation’, released yesterday noted that Nigeria’s debt is projected to continue to rise and urged the government to remove fuel subsidies and direct them towards health and education.

The Minister of Finance, Budget, and National Planning, Zainab Ahmed, last week said Nigeria had secured a World Bank facility worth $800 million as the first tranche of palliatives to be disbursed through cash transfers to about 50 million Nigerians, who belong to the most vulnerable category in the society, to cushion effects of a planned removal of petrol subsidy by June.

The loan document, which was sighted by Daily Trust revealed that the facility agreement, which was signed by both parties, Nigerian government and IDA, on 16 August, 2022, comes with a commitment charge rate of 0.5 per cent per year and a service charge of 0.75% per year on the withdrawn credit balance, as well as an interest charge of 1.25% per year on the withdrawn credit balance.

The repayment will be made in instalments, with payments due on January 15 and July 15 each year. The first payment is due on January 15, 2027, and the last payment is due on July 15, 2051.

However, speaking on the side-lines of the briefings, Division Chief, Fiscal Affairs Department, IMF, Paulo Medas said: “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.

“So, what we advocate is raising taxes, which is 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.”

The IMF also advised on target subsidy. “So, by shifting to more targeted subsidies, you can reduce the fiscal deficit, and you can use that 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.”

Speaking on tax reforms required, he said emphases should be on improving tax compliance and tax bracket citing that Nigeria’s tax revenues are one of the lowest in the world.

The Fiscal Monitor report highlighted that low-income developing countries have 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.

The increase in spending was larger among commodity exporters Burundi, Democratic Republic of Congo, and oil exporters Nigeria and Yemen, with the latter group benefitting from more fiscal space thanks to high energy prices.

On his part, the IMF Director of the Fiscal Affairs Department, Vitor Gaspar, giving a global perspective noted that the near-term outlook is complex amid high inflation, tightening financing conditions, and elevated debt and urged policymakers to prioritise keeping fiscal policy consistent with central bank policies to promote price and financial stability.

Gaspar said: “Many countries will need a tight fiscal stance to support the ongoing disinflation process, especially if high inflation proves more persistent. Tighter fiscal policy would allow central banks to increase interest rates by less than they otherwise would, which would help contain borrowing costs for governments and keep financial vulnerabilities in check.

“Tighter fiscal policies require better-targeted safety nets to protect the most vulnerable households, including addressing food insecurity while containing overall spending growth, as governments are likely to confront social pressures to compensate for past increases in the cost of living.”

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