WASHINGTON – Nigeria will need to increase its value-added tax (VAT) rate to at least 10% by 2022 and 15% by 2025 from 7.5% now to boost revenues after it recovers from a recession, the International Monetary Fund said on Monday.
In a report, the Fund also said the government must continue to pursue reforms to help overcome the twin shocks of the oil price crash and the COVID-19 pandemic.
“The Nigerian economy is at a critical juncture. Policy adjustment and reforms are urgently needed to navigate this crisis and change the long-running lackluster course,” it said.
VAT was raised from 5% in February 2020 but disruptions due to the pandemic have delayed full implementation of the increase.
The rate remains among the lowest in the world and less than charged by other major oil-exporting nations including Nigeria’s West African neighbours, the IMF said.
Africa’s largest economy probably contracted by 3.2% last year, the IMF said in December, after the coronavirus crisis tipped it into its second recession in five years.
The Fund has projected growth of 1.5% this year and said on Monday that output was likely to recover to pre-pandemic levels by 2022.
Nigeria collects the equivalent of 5.7% of gross domestic product in tax and the government mostly relies for revenue on crude sales.
Tumbling oil prices had already hammered the economy, triggering a historic decline in growth and weakening the naira while pushing up the government’s financing needs.
The Fund welcomed fiscal, power and oil sector reforms. It said a gradual and multi-step approach to establishing a unified and clear exchange rate would help clear a payment backlog.
Nigeria’s central bank adjusted the exchange rate last year, after an official devaluation in March, in an attempt to align multiple quoted currency rates. But the naira has continued to weaken this year.
The IMF proposed a monetary policy reset to tackle high inflation.
“The central bank’s financing of the fiscal deficit has resulted in large buildup of open market operations bills … which … has increased Nigeria’s susceptibility to capital outflow risks,” its report said.