The International Monetary Fund (IMF) has forecasted that Nigeria’s decision not to raise the Value Added Tax (VAT) rate will result in a revenue loss equivalent to 0.5% of the country’s Gross Domestic Product (GDP). According to the IMF’s latest Article IV Consultation Report on Nigeria, although the recent tax reforms approved by the National Assembly and President Bola Tinubu represent a significant step forward in modernizing the VAT and Company Income Tax regimes, maintaining the current VAT rate will lead to an immediate revenue shortfall.
The IMF, however, welcomes the tax reform agenda driven by the Presidential Committee on Fiscal Policy and Tax Reforms, describing it as critical to reversing Nigeria’s poor revenue-to-GDP ratio, one of the lowest globally. The reforms aim to boost compliance and enforcement and hold significant medium-term revenue potential once fully implemented.
This development comes on the heels of the IMF’s report exposing persistent errors in Nigeria’s fiscal forecasting, with budget projections for revenues, expenditures, and deficits consistently overestimating actual outcomes. The report highlights systemic optimism in revenue projections, particularly from oil, and under-execution of capital expenditures, raising concerns about the credibility of the budget as a tool for economic planning.
The IMF’s prediction of a 0.5% GDP revenue loss is part of a broader narrative of fiscal challenges facing Nigeria. The country’s budget planners have been accused of overestimating government revenues by an average of 1.8% of GDP annually, roughly 36% above actual collections. The primary driver of this overestimation is overly optimistic oil production forecasts, with Nigeria missing its oil production targets in 11 out of 13 years reviewed.
The IMF’s report serves as a wake-up call for Nigerian authorities to revisit their fiscal forecasting strategies and improve the accuracy of their budget projections. By doing so, the country can better manage its finances, reduce reliance on central bank financing, and promote sustainable economic growth.
In related news, the IMF has downgraded Nigeria’s economic growth forecast for 2024 to 3.1%, down from 3.3% projected in April. This development underscores the need for prudent economic management and fiscal reforms to drive growth and stability.
