If Nigeria intends to achieve macroeconomic stability, it must take the bold step to put in place “decisive fiscal and monetary” policies, the International Monetary Fund (IMF) has declared.
These policies, according to the global lender, include increasing the tax rates, especially the value-added tax (VAT), from 7.5 per cent to double digits, adopting a single exchange rate regime, removing subsidies on petrol, and raising the benchmark interest rate to curb inflation, which is slightly above 21 per cent.
In a statement issued on Wednesday after the conclusion of its Executive Board’s consultation with Nigeria, the IMF said it was impressed with the growth recorded by the country’s economy after COVID-19 hit in 2020.
In the statement made available to Business Post, the IMF attributed this recovery to “favourable oil prices and buoyant consumption activities.”
“Nigeria’s economy has recouped the output losses sustained during the COVID-19 pandemic,” the organisation stated, praising the federal government for “containing and managing the COVID-19 infections.”
But it warned that “socio-economic conditions remain difficult” as a result of “higher domestic food prices, worsened the scarring effects of the pandemic, particularly on the most vulnerable—with Nigeria being among the countries with the lowest food security.”
“The near-term outlook faces downside risks, while there are upside risks in the medium term. Higher international food and fertilizer prices and continued widening of the parallel market premium could culminate in the de-anchoring of inflation expectations,” it said.
However, the IMF said if the country hopes to surmount these problems, the country must make “bold fiscal reforms to create needed policy space, [and] put public debt on sound footing” because high fuel subsidy costs have further widened “the general government fiscal deficit” in 2022.
The IMF “urged the authorities to deliver on their commitment to remove fuel subsidies by mid-2023 and increase well-targeted social spending.”
“Strengthening revenue mobilization, including through tax administration reforms, expanding the tax automation system and strengthening taxpayer segmentation, and improving tax compliance is also a priority.
“In the medium term, directors recommended modernizing customs administration, rationalizing tax incentives, and raising tax rates to the levels of the Economic Community of West African States (ECOWAS),” it also said after advising Nigeria last November to raise VAT to 15 per cent.
The body emphasised that the Central Bank of Nigeria (CBN) must further increase the policy rate if needed, and implement additional actions, including fully sterilizing central bank financing of fiscal deficits and phasing out credit intervention programs.
Last year, the bank raised the Monetary Policy Rate (MPR) by 5.00 per cent to 16.50 per cent in an attempt to bring down inflation, which moderated in December to 21.34 per cent. Last month, it further jerked the rate higher by 100 basis points.