IMF urges Nigeria to prioritize tax collection efficiency over raising rate amid COVID-19

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Raising taxes should take the backseat for now while focus shifts to improving collection efficiency as Nigeria seeks to boost weak revenues amid a global pandemic that has hammered economic activity in Africa’s largest economy, the International Monetary Fund said at a virtual conference, Thursday.

Raising taxes is inappropriate at this time as it could increase the strain on corporate profits and a fragile economy tipped to contract by 5 percent this year.

“Before you go about raising taxes, we need to first make sure that we collect everything that is collectible,” IMF Mission Chief to Nigeria Jesmin Rahman said.

“At the moment, Nigeria has a very low tax efficiency rate,” Rahman said.

At around 7 percent, Nigeria has one of the lowest tax to GDP ratio among peers. The government raised Value Added Taxes (VAT) rate to 7.5 percent in February from 5 percent in an effort to increase its tax income amid dwindling oil revenues.

To increase revenue and make tax collection efficient, Nigeria has to improve its audit capacity and update its tax registry, according to Rahman.

Nigeria can however increase its comparatively low VAT rate once the crisis passes, according to Rahman, while working to derive new excise duties and overhaul its oil and gas sector.

Nigeria projects oil revenues to decline by as much as 80 percent this year as the Coronavirus pandemic and lower global oil prices eats into the government’s biggest revenue source.

Low revenues is making its debt servicing “worrisome” because it is expected to gulp down most of government revenue this year, according to Rahman.

“Even though the debt level itself is not a concern for sustainability, it’s servicing capacity is severely constrained and requires a close watch,” she said.

“Nigeria’s public debt was at 29 per cent of GDP in 2019 in our definition of all known liabilities like the Central Bank of Nigeria (CBN) financing of the budget, financing of the power sector, Asset Management Corporation of Nigeria (AMCON) debt and everything came to 29 per cent of GDP.

“We project this to increase to 36.5 per cent this year, which is a jump and then stay around 38 per cent of GDP in the medium term,” she said.

Nigeria’s debt service to revenue ratio hit a record 99 percent in the first quarter of 2020, according to data from the Debt Management Office (DMO).

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