Remove Fuel Subsidy Now and Increase VAT to Sustain Development-IMF Advises Nigeria.

Remove Fuel Subsidy Now and Increase VAT to Sustain Development-IMF Advises Nigeria.

The International Monetary Fund (IMF) has called on the Federal Government to urgently consolidate its fiscal policies to create space and reduce debt sustainability risks.

It specifically urged the government to increase Value Added Tax (VAT) from the current 7.5 percent and remove fuel subsidy without further delay in order to enhance long-term, inclusive growth.

This is contained in the 2021 IMF Executive Board Article IV Consultation with Nigeria, which was concluded on January 31, 2022, and released Tuesday.

The IMF’s report said: “Nigerian economy is recovering from a historic downturn benefitting from government policy support, rising oil prices and international financial assistance” but noted that there is a need for “major reforms in the fiscal, exchange rate, trade, and governance areas to lift long-term, inclusive growth.”

Highlighting the urgency of fiscal consolidation to create policy space and reduce debt sustainability risks, the IMF Executive Board “called for significant domestic revenue mobilisation, including by further increasing the value-added tax rate, improving tax compliance, and rationalising tax incentives.”

Similarly, the “Directors also urged the removal of untargeted fuel subsidies, with compensatory measures for the poor and transparent use of saved resources. They stressed the importance of further strengthening social safety nets.”

While commending the authorities’ proactive management of the COVID-19 pandemic and its economic impacts, they noted, however, that the outlook remains subject to significant risks, including from the pandemic trajectory, oil price uncertainty, and security challenges.

It observed that in spite of the recovery in oil prices, the general government fiscal deficit is projected to widen in 2021 to 5.9 percent of GDP, reflecting implicit fuel subsidies and higher security spending, and projected at 3 percent for 2021.

“Moreover, the consolidated government revenue-to-GDP ratio at 7.5 percent remains among the lowest in the world”, said the IMF.

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