IMF Urges Nigeria to Increase VAT, Remove Fuel Subsidy

Panic Buying, Long Fuel Queues in Abuja Despite Subsidy Reversal. (News Central TV)

The International Monetary Fund has recommended that Nigeria embarks on an upward review of its Value Added Tax as well as to permanently end its fuel subsidy in order to stimulate economic growth.

This recommendation was made in the body’s 2021 Article IV Consultation with Nigeria released on Tuesday where it offered a number of monetary policies that could support sustainable growth in the country.

While commending Nigeria for its efforts in managing the impact of COVID, the IMF highlighted the urgent need to implement fiscal consolidation measures to create policy space and reduce debt sustainability risks, urging for the removal of fuel subsidy and using the funds to create social safety nets.

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The Article reads in part: “Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ proactive management of the COVID-19 pandemic and its economic impacts. They noted, however, that the outlook remains subject to significant risks, including from the pandemic trajectory, oil price uncertainty, and security challenges.

Looking ahead, they emphasised the need for major reforms in the fiscal, exchange rate, trade, and governance areas to lift long-term, inclusive growth. Directors highlighted the urgency of fiscal consolidation to create policy space and reduce debt sustainability risks. In this regard, they called for significant domestic revenue mobilisation, including by further increasing the value-added tax rate, improving tax compliance and rationalising tax incentives.

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“Directors also urged the removal of untargeted fuel subsidies, with compensatory measures for the poor and transparent use of saved resources. They stressed the importance of further strengthening social safety nets.”

Nigeria recently announced its suspension of the planned removal of fuel subsidies, saying that it will keep it in place until at least the end of 2022. Previously, the country had announced plans to end the subsidy scheme in July. It later reversed itself with the Minister of Finance Zainab Ahmed pointing at the timing as “problematic.”

However, the International Monetary Fund insists that fuel subsidies, in addition to low VAT, an official exchange rate and other unrealistic schemes are inimical to the growth of Nigeria’s growth and development.

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