On Wednesday, the International Monetary Fund (IMF) said the Nigerian government’s recent decision to raise the Value Added Tax by 50% has positive implications for the economy of the country.
In a Wednesday end-of-mission report, the IMF said although the economic outlook of the country remains daunting under the policies of the current administration, raising the VAT rate from 5% to 7.5% is a step in the right direction.
The declaration coincided with President Muhammadu Buhari’s submission of the 2020 Appropriation Bill to a National Assembly joint session in Abuja.
A projected N8.2 trillion revenue for the year was included in the specifics of the N10.3 trillion budget called “Budget of Sustaining Growth and Job Creation.”
It includes N2.6 trillion oil revenue, N1.8 trillion non-oil tax revenue, and other N3.7 trillion revenue.
The total budget includes N556.7 billion statutory transfers, N4.88 trillion non-debt recurring and N2.14 trillion capital expenditure (excluding the capital portion of statutory transfers).
Debt service is expected to take N2.45 trillion and Sinking Fund to remove maturing bonds issued about N296 billion to local contractors.
President Buhari defended the government’s decision to raise the VAT rate in his speech, saying it would provide additional funding for health education and infrastructure programs.
He said the decision to raise the VAT registration threshold to N25 million in annual turnover was to ensure that micro, small and medium-sized enterprises were not affected negatively, thus enabling revenue authorities to concentrate their enforcement efforts on larger enterprises.
In its report, the IMF reported that economic growth is expected to pick up to 2.3 percent this year based on continued recovery in the oil sector and recovery of momentum in agriculture after a good harvest.
The fund said revenue measures introduced in the 2020 budget, including VAT changes, are expected to help offset partially declining oil revenues and the effects of higher minimum wages.
The IMF also said that the fall in the country’s current account is expected to continue to a deficit, while the rate of capital outflows will continue to weigh on the country’s foreign reserves, which dropped below $42 billion at the end of August 2019.
It blamed the fall on short-term bonds and stock falls in international investments.
In addition, inflation is expected to rise in 2020 as a result of planned minimum wage increases and higher VAT levels, irrespective of the Central Bank’s effort to maintain a tight monetary policy.
The report also included a number of recommendations for government’s consideration.
“A comprehensive package of measures—whose design and implementation will require close coordination within the economic team and the newly-appointed Economic Advisory Council—is urgently needed to reduce vulnerabilities and raise growth.
“The increasing CBN financing of the government reinforces the need for an ambitious revenue-based fiscal consolidation that should build on the initiatives laid out in the Strategic Revenue Growth Initiative.
“A tight monetary policy should be maintained through more conventional tools. Managing vulnerabilities arising from large amounts of maturing CBN bills—including those held by non-residents—requires stopping direct central bank interventions, the introduction of longer-term government instruments to mop up excess liquidity and moving towards a uniform market-determined exchange rate,” the IMF said.
Although it acknowledged the progress in prudential ratios in the banking sector, the IMF said it was important to carefully evaluate the new regulations allowing banks to use 65 percent of the cash reserve for lending.
The Fund indicated that the policy might need to be updated in view of the possible unintended effects on asset quality, maturity structure, prudential reserves, and target inflation of banks.
Continuing to increase the capital reserves of banks, it said, would improve the stability of the banking sector.
“Structural reforms, particularly on governance and corruption and in implementing the much-delayed power sector recovery plan, remain essential to boosting prospects for higher and more inclusive growth,” it added.