The International Monetary Fund (IMF) on Wednesday said the recent decision by the Nigerian government to raise the Value Added Tax by 50 per cent holds positive prospects for the country’s economy.
The IMF in an end-of-mission statement on Wednesday said although the country’s economic outlook under the current administration’s policies remains challenging, the increment of the VAT rate from 5 per cent to 7.5 per cent is a step in the right direction.
2020 budget proposal
The statement coincided with the presentation of the 2020 Appropriation Bill by President Muhammadu Buhari to a joint session of the National Assembly in Abuja.
The details of the N10.3 trillion budget tagged “Budget of Sustaining Growth and Job Creation” contained a proposed N8.2 trillion revenue for the year.
This comprises of oil revenue N2.6 trillion, non-oil tax revenues of N1.8 trillion and other revenues of N3.7 trillion.
The expenditure estimate includes statutory transfers of N556.7 billion, non-debt recurrent expenditure of N4.88 trillion and N2.14 trillion of capital expenditure (excluding the capital component of statutory transfers).
Debt service is expected to take N2.45 trillion, and Sinking Fund to retire maturing bonds issued to local contractors about N296 billion.
Buhari justifies VAT increase
In his presentation, President Buhari justified the government’s decision to increase the VAT rate, saying it will provide additional funds for health, education and infrastructure programmes.
He said the decision to raise the threshold for VAT registration to N25 million in turnover per annum was to ensure micro, small and medium-sized businesses were not negatively affected while allowing revenue authorities focus their compliance efforts on larger businesses.
In its report, the IMF said growth in the economy is expected to pick up to 2.3 per cent this year based on a continuing recovery in the oil sector and the regaining of momentum in agriculture following a good harvest.
The fund said revenue initiatives proposed in the 2020 budget, including VAT reforms, are expected to help in partially offsetting declining oil revenues and the impact of higher minimum wages.
Also, the IMF said the drop in the country’s current account to a deficit is expected to continue, while the pace of capital outflows will continue to weigh on the country’s foreign reserves, which fell below $42 billion at the end of August 2019.
It blamed the drop on the decline in foreign holdings of short-term securities and equity.
Besides, inflation is expected to rise in 2020 in the wake of expected increase in the minimum wages and a higher VAT rate, regardless of the Central Bank’s effort to sustain a tight monetary policy.
The report also included a number of recommendations for the 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 noted the improvement in the banking sector prudential ratios, the IMF said the new regulations requiring banks to avail 65 per cent of the cash reserve for lending should be carefully assessed.
The Fund suggested that the policy might need to be revisited in view of the potential unintended consequences on banks’ asset quality, maturity structure, prudential buffers and the inflation target.
Continued strengthening of banks’ capital buffers, it said, would enhance banking sector resilience.
“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.