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The International Monetary Fund (IMF), an arm of the World Bank, on Wednesday released its 2018 Article IV Consultation, urging Nigeria to embark on growth friendly reforms for a diversified private sector driven economy.
“Directors emphasized that structural reform implementation should continue to lay the foundation for a diversified private sector led economy. Building on recent improvements in the business environment, implementing the power sector recovery plan, investing in infrastructure, accelerating efforts to strengthen anti‑corruption and transparency initiatives, and updating and implementing the financial inclusion and gender strategies remain essential,” the IMF said.
IMF projects 2.1 percent growth in 2018 and a decline in growth to 1.9 percent in 2019. However, Nigeria’s growth strengthened to 1.9 percent year-on-year in the fourth quarter of 2017, according to the National Bureau of Statistics (NBS).
Jonson Chukwu, managing director/CEO, Cowry Asset Management limited, said 2019 is Nigeria’s traditional election year and that IMF must have projected that the economy would be overtaken by political engagements.
Chukwu also said the agreement by OPEC and non-OPEC producers led by Russia to extend oil output cuts will elapse at the end of 2018, as a result oil prices are expected to moderate in 2019. He said this will have adverse effect on government revenues and put pressure on reserves and foreign exchange.
The executive board of the IMF noted that the Nigerian economy is exiting recession but remains vulnerable.
Ayodeji Ebo, managing director, Afrinvest Securities limited said the IMF growth projection is in line with Nigerian analysts’ projections. He also noted that 2019 is an election year, adding that government should come up with policies that will consolidate the gains of the recovery growth plans.
“Reforms under the government’s Economic Recovery and Growth Plan (ERGP) have resulted in significant strides in strengthening the business environment and steps to improve governance. However, all these factors have not yet boosted non-oil non-agricultural activity, brought inflation close to the target range, contained banking sector vulnerabilities, or reduced unemployment. A higher fiscal deficit driven by weak revenue mobilization amidst still tight domestic financing conditions has raised bond yields, and crowded out private sector credit,” the IMF said.
Directors of IMF commended the recent foreign exchange measures and efforts to strengthen external buffers to mitigate risks from capital flow reversals. They welcomed the authorities’ commitment to unify the exchange rate and urged additional actions to remove remaining restrictions and multiple exchange rate practices.
They recommended continued strengthening of the monetary policy framework and its transparency, with a number of Directors urging a symmetric application of reserve requirements, and no direct central bank financing of the economy.
A few Directors urged confirmation of the appointments of the central bank’s board of directors and members of the monetary policy committee.
The IMF emphasized the need for a growth friendly fiscal adjustment, which frontloads non‑oil revenue mobilization and rationalizes current expenditure to reduce the ratio of interest payments to revenue to a more sustainable level and create space for priority social and infrastructure spending.
In addition to ongoing efforts to improve tax administration, Directors underlined the need for more ambitious tax policy measures, including through reforming the value-added tax, increasing excises, and rationalizing tax incentives.
The implementation of an automatic fuel price‑setting mechanism, sound cash and debt management, improved transparency in the oil sector, increased monitoring of the fiscal position of state and local governments, and substantially scaled-up social safety nets should support the adjustment, the IMF said.
“The very low tax collection rates in Nigeria are a direct reflection of weaknesses in revenue administration systems and a high level of systemic noncompliance. The strategy of relying on strengthened collection efforts and one-off initiatives such as the Nigerian Voluntary Asset and Income Declaration Scheme (VAIDS) as a first level intervention may not be that effective in delivering higher revenues sustainably,” the IMF said.
“Estimates of tax potential…suggest that a non-oil tax capacity of 16 to 18 percent would be optimal for a country with Nigeria’s economic structure and per capita income levels. This estimate implies space for additional tax collection of 12 percent of GDP”, IMF stated.
Despite successful initiatives to bring in a significant number of new corporate and self-employed individuals (over 530,000 new corporate registrations were made during the first quarter of 2016—a 67 percent increase), these efforts have not delivered expected revenue, IMF insists.
IMF said that Nigerian Value Added Tax (VAT) does not have the features of a modern consumption tax, adding that over time, extensive exemptions have substantially narrowed the VAT base.
The VAT in Nigeria raises 0.9 percent of GDP in revenue, which is notably smaller than the 3.8 percent of GDP collected by ECOWAS peers.
Despite significant revenue potential from Nigeria’s structural tax measures, IMF said a broad-based and comprehensive tax reform programme is needed in the short and medium term to address these objectives and generate sustainable revenue growth.
This according to IMF is possible “by broadening the bases of income and consumption taxes, closing loopholes and leakage created by corporate tax holidays and the widespread use of other associated tax expenditures, as well as creating incentives for the sub-national tiers of government to raise their own source revenues.”
HOPE MOSES-ASHIKE
