Nigeria’s government must improve revenue collection especially through its tax policy, which is currently among the lowest in the world, to kickstart stronger economic recovery after Covid, an International Monetary Fund (IMF) official has said.
The recommendation comes after an IMF staff team led by Jesmin Rahman conducted a virtual mission with Nigeria from October 30 to November 17 amid the devastating coronavirus pandemic.
“Following a significant decline in revenue collections – from levels that were already among the lowest in the world – fiscal deficits are projected to remain elevated in the medium term,” reads a statement issued by the IMF Chief to Nigeria, at the conclusion of the mission.
Africa’s biggest economy has much lower domestic revenue levels than its peers on the continent and one of the lowest globally.
In 2017, the total amount of tax collected as a proportion of gross domestic product in Nigeria was at 5.7%, compared to South Africa’s 29%, Ghana’s 18%, Egypt’s 15%, and Kenya’s 18%, according to data from the Organisation for Economic Co-operation and Development (OECD).
The average for the 26 African countries in the report, Revenue Statistics in Africa 2019, was 17.2% and 34% for OECD members, which includes all the advanced economies.
According to the IMF, a minimum tax-to-GDP ratio of 12.75 percent is associated with a significant acceleration in growth and development of state capacity, as it allows for increased expenditure for economic development and reduced budget exposure to oil revenue volatility.
“Significant revenue mobilization – including through tax policy and administration improvements – is required to create space for higher social spending and reduce fiscal risks and debt vulnerabilities,” the statement adds.
But raising taxes to mobilise domestic revenue at this time may be inappropriate considering the impact of the coronavirus pandemic, Rahman said on a virtual call back in July.
Once the crisis ends, the IMF has called on Nigeria to increase its relatively low value-added tax (VAT) rate of 7.5% and derive new excise duties. The government only recently raised the rate from 5% this year and plans to increase it further to 10%.
Nigeria also needs to first make sure that it “collects everything that is collectible” before raising taxes, Rahman said. “At the moment, Nigeria has a very low tax efficiency rate. To increase revenue and make tax collection efficient, Nigeria has to improve its audit capacity and update its tax registry.”