The International Monetary Fund (IMF) has concluded bilateral discussions with Nigeria under Article IV of the IMF’s articles of agreement. The staff report together with a selected issues paper commenting on Nigeria’s economic situation were published on the IMF website on 30 March 2015.
The Nigerian economy has been growing strongly for a decade, achieving 6.8% per annum during that time. Issues of poor infrastructure, poverty and income inequality remain. The decrease in the oil price has highlighted the need to tackle the remaining challenges in the economy.
The IMF points out that government revenue from oil is volatile as a result of fluctuating oil prices, as illustrated by the current low oil price. This is a challenge to fiscal management and planning. Fiscal management can be improved by stabilization mechanisms but also by diversification of the revenue base by opening up more stable non-oil revenue sources. Nigeria currently has relatively low non-oil government revenue and this is a consequence of the tax rates, tax exemptions and problems with enforcement.
Value added tax
The value added tax (VAT) rate of 5% is among the lowest VAT rates in the world and there are problems with the design of Nigeria’s VAT. The ratio of VAT actually collected to the amount that could be collected if VAT were applied to all final consumption is quite low at 0.29. This partly reflects the exemptions given for basic food and agriculture but is also a consequence of compliance issues.
The IMF suggests that if the VAT rate is raised to 10%, the exemptions are tightened and compliance improved the VAT collected could increase from 1% to 3.5% of non-oil GDP. Other measures could be introduced to encourage investment and to improve the enforcement of VAT, such as a credit for input tax on capital goods and services; the withdrawal of VAT withholding at source by ministries and departments; and the introduction of a minimum threshold for VAT registration. These measures combined would offset the gains in VAT revenue by around 0.5% of GDP.
Corporate income tax
The rate of corporate income tax (CIT) is 30% which is above the rate in comparable countries, but the revenue collected from CIT is much lower than in those countries. For example, the CIT collected is 1.5% of GDP in Nigeria compared to an average of 3% in Indonesia, Mexico and Turkey. One reason for this low tax collection is the extensive use of exemptions, especially the exemption for pioneer status companies which gives a three year CIT exemption, often renewable, to pioneer companies in a broad range of sectors.
The CIT law gives the Federal Executive Council the discretion to introduce exemptions overriding the tax law. If these exemptions were abolished the tax revenue raised from CIT could increase by more than 0.5% of GDP. The tax collection from CIT could also be increased by improving control and compliance.
Tax Reform
The IMF report suggests that there is an urgent need to speed up the pace of tax reform. The tax code needs to be modified to correspond to a more diversified and modernized economy. The reforms should aim to raise more VAT and CIT revenue and should also encourage investment to achieve more economic growth. The fiscal framework would also need to be fair to low income groups, and this could be achieved by targeted programs for transfer payments.
