IMF Chief calls on Nigeria to raise VAT as budget strained

January 11, 2016, 10:53am

By Yinka Ibukun, Bloomberg Business
Photo: Wikipedia Commons

Nigerian authorities should consider raising value-added taxes and removing fuel subsidies to boost revenue and compensate for a plunge in oil prices, International Monetary Fund Managing Director Christine Lagarde said.

“Hard decisions will need to be taken on revenue, expenditure, debt and investment going forward,” she said in a speech to lawmakers in the capital, Abuja, on Wednesday. The government must “act with resolve by stepping up revenue mobilization,” she said, and possibly raise the VAT rate from 5 percent, which is among the lowest in the world.

The slide in oil prices means the government of Africa’s largest crude producer needs a “fundamental change” in the way it operates and can’t rely on its oil wealth to deliver services, she said. President Muhammadu Buhari’s administration will need to focus on managing debt, curbing recurrent costs and eliminating fuel subsidies, she said.

A decline of about two thirds in oil prices since the middle of 2014 has left most of Nigeria’s 36 states unable to pay salaries and honor financial commitments, leading the federal government to approve bailout packages. Crude exports account for two-thirds of government revenue and most state budgets have relied mainly on oil-income transfers.

Budget Reform

"We can explore how to support states’ efforts to undertake budget reform," Lagarde said. "These sub-national governments -- which account for the bulk of social spending -- have only limited tools to manage the impact of declining oil revenues."

Nigerian Petroleum Minister of State Emmanuel Kachikwu, who is also group managing director of state-owned Nigerian National Petroleum Corp., had said the fuel subsidy would be scrapped on Jan. 1. NNPC spokesman Ohi Alegbe declined to comment Wednesday when asked whether the subsidy, which cost as much as $7 billion a year, was removed.

Taxpayers will also be tapped for more revenue. Nigeria’s revenue agency targets broadening its tax base by 5 million individuals and 500,000 companies by the end of March, Chairman Tunde Fowler said on Wednesday. The West African nation ranks 181 of 189 countries in a World Bank and PricewaterhouseCoopers 2016 survey on paying taxes.

Lagarde said Wednesday that Nigeria’s foreign-exchange controls are "costly" and should be used on a "temporary basis." That adds to mounting pressure on the country to devalue the naira, which has been all but fixed at 197-199 per dollar since March as the central bank curbed foreign exchange trading and introduced import controls.