Nigerian authorities should consider raising value-added taxes and removing fuel subsidies to boost revenue and compensate for a plunge in oil prices, International Monetary Fund Managing Director Christine Lagarde said.
“Hard decisions will need to be taken on revenue, expenditure, debt and investment going forward,” she said in a speech to lawmakers in the capital, Abuja, on Wednesday. The government must “act with resolve by stepping up revenue mobilization,” she said, and possibly raise the VAT rate from 5 percent, which is among the lowest in the world.
The slide in oil prices means the government of Africa’s largest crude producer needs a “fundamental change” in the way it operates and can’t rely on its oil wealth to deliver services, she said. President Muhammadu Buhari’s administration will need to focus on managing debt, curbing recurrent costs and eliminating fuel subsidies, she said.
A decline of more than 30 percent in oil prices over the past year has left most of Nigeria’s 36 states unable to pay salaries and honor financial commitments, leading the federal government to approve bailout packages, while looking at cost-cutting measures. Crude exports account for two-thirds of government revenue and most states have relied mainly on oil-income transfers to fund their budgets.
We can explore how to support states’ efforts to undertake budget reform," Lagarde said. "These sub-national governments -- which account for the bulk of social spending -- have only limited tools to manage the impact of declining oil revenues."
Nigeria Petroleum Minister of State Emmanuel Kachikwu, who is also group managing director of state-owned Nigerian National Petroleum Corp., had said the fuel subsidy would be scrapped on Jan. 1 once a new price mechanism took effect. NNPC spokesman Ohi Alegbe declined to comment Wednesday when asked whether the subsidy, which cost the government as much as $7 billion a year, had been permanently removed.
In a bid to generate more revenue for the government, Nigeria’s revenue agency targets broadening its tax base by 5 million new individuals and 500,000 new companies by the end of March, its chairman, Tunde Fowler, said by phone from Abuja on Wednesday. The West African nation ranks 181 of 189 countries in a World Bank and PricewaterhouseCoopers 2016 survey on paying taxes.
"Christine Lagarde is right that there’s room to increase the VAT," Fowler said. "But that would be a policy that would have to be decided by the president and his economic team," he said.