The International Monetary Fund (IMF) has reiterated its advice to Nigeria to step up efforts to bring more people into the tax net, increase taxes, and reduce the country’s debt burden. These suggestions emerged from sidelines of the on-going IMF/World Bank Spring meetings in Washington DC.
IMF also restated the need for Nigeria to phase out its controversial petrol subsidy and redirect such funding to targeted subsidies on critical development drivers, like health and education. The recommendation was contained in IMF’s latest Fiscal Monitor, titled, “On the path to Policy Normalisation,” which was released yesterday.
The fund noted that Nigeria’s debt was projected to continue to rise.
Speaking on the sidelines of the IMF/World Bank Spring meetings, 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 it is because Nigeria has very low tax revenues. So, that makes it more vulnerable to these types of shocks and tightening global conditions.
“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 are saying 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.
“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. Having more targeted energy subsidies actually can be very beneficial both for fiscal, debt dynamics, and growth.”
Medas said emphasis should be on improving tax compliance and tax bracket, insisting that Nigeria’s tax revenue is one of the lowest in the world.
“Nigeria should broaden tax space, improve tax compliance. Nigeria has one of the lowest tax revenues in the world as a share of GDP. So, there’s a lot of room for increasing the tax base and improving tax compliance,” he stated.
Meanwhile, in the Fiscal Monitor report, IMF noted that low-income developing countries had been hit by several shocks, including the COVID-19 pandemic and the cost-of-living and food security crises, which have taken their toll on public finances.
The report said, “Fiscal deficits in low-income developing countries, at an average 4.2 per cent of GDP in 2022, showed moderate improvements relative to the worst of the pandemic.
“Primary spending remained stable at 16.9 per cent of GDP, just below its 2021 level, on average, as countries increased fuel subsidies and social spending to respond to rising energy and food import prices.”
It stated further, “The increase in spending was larger among commodity exporters Burundi, Democratic Republic of Congo and oil exporters Nigeria, Yemen, with the latter group benefitting from more fiscal space, thanks to high energy prices.
“In non-oil commodity exporters, the average fiscal deficit rose by 0.6 percentage points in 2022, reversing the improvement in 2021, as both primary spending and debt service payments increased.”
The report also said, “In some low-income developing countries, debt is projected to continue rising. Nigeria and some have asked for debt relief under the Group of Twenty (G20) Common Framework (Chad, Ethiopia, Ghana, Zambia.”
Director, Fiscal Affairs Department at IMF, Vitor Gaspar, speaking on the global perspective, noted that the near-term outlook was complex, amid high inflation, tightening financing conditions, and elevated debt. Gaspar 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 on-going 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.
“Risks are high, however, and policymakers will need to be ready to respond quickly. If financial turbulence morphs into a systemic crisis, fiscal policy may need to intervene swiftly to facilitate resolution. If economic activity weakens substantially and unemployment rises, governments should allow automatic stabilisers to work for example, allow deficits to rise as unemployment benefits increase or tax revenues fall, especially if inflation pressures are under control and fiscal space is available.”
He added that reducing debt vulnerabilities and rebuilding fiscal buffers over time was an overriding priority.
Gaspar stated, “Despite the envisaged gradual fiscal tightening in the coming years, we project global public debt will rise, driven by some large advanced and emerging market economies.
“More generally, concerns with debt vulnerabilities have intensified in many countries. In low-income developing economies, higher borrowing costs are also weighing on public finances, with 39 countries already in or near debt distress.
“Countries should step up efforts to develop credible risk-based fiscal frameworks that reduce debt vulnerabilities over time and build up the necessary room to handle future shocks.
“The enhanced fiscal frameworks can combine strengthened institutions with revamped fiscal rules. Medium-term fiscal plans should include credible policy commitment to achieving debt sustainability—that is, announce specific spending and revenue measures or reforms—while allowing for flexibility to adjust to shocks.
“Low-income countries face particularly severe challenges. Revamped efforts to increase revenue are critical to restoring fiscal sustainability, dealing with the cost-of-living crisis, and achieving Sustainable Development Goals.
“Despite multiple waves of tax reforms, revenues remain stubbornly insufficient, below levels that enable the state to play its role in sustainable and inclusive development. International cooperation is crucial to helping these countries resolve unsustainable debt burdens in an orderly and timely manner.”
