IMF tells Nigeria: Raise taxes. What happens next?

Prognosis of IMF’s Recommendations for Nigeria.

In 2026, one message keeps coming from the IMF to Nigeria: you need to raise taxes and broaden the tax base. On the surface, that sounds simple. But in a country already dealing with high inflation, expensive fuel, a weak currency, and rising living costs, it lands very differently.
For many Nigerians, it feels like the wrong message at the wrong time. But the IMF’s position is not emotional—it is mathematical. A country of over 220 million people, running on roughly 8–11% tax-to-GDP, cannot realistically fund infrastructure, healthcare, education, and debt obligations without constantly borrowing. So the real debate is not whether Nigeria should increase taxes. It is how it will be done—and who will bear the cost.

What the IMF Is Actually Saying.

Contrary to public perception, the IMF does not set tax policy in Nigeria. It only makes recommendations through its Article IV consultations and economic reviews.
Across its recent reports, a few clear themes keep repeating.

1. Raise tax-to-GDP to about 18% by 2030
Nigeria’s tax-to-GDP ratio stood at 10.9% in 2023 (FIRS data).
To put that in perspective:
● OECD average: ~34%
● South Africa: ~26%
● Ghana: ~13%
The IMF argues that 18% is the minimum realistic level for a country of Nigeria’s size to fund basic services without relying heavily on debt.

2. Expand the tax base instead of just increasing rates
This is where the conversation becomes more structural.
Only:
● 41 million Nigerians have Tax Identification Numbers
● Around 10 million actually file returns
● Yet the working population is about 80 million+
At the same time, the informal sector makes up roughly 65% of GDP but contributes under 5% of tax revenue.
The system is simply too narrow for the size of the economy.

3. Reduce tax waivers and exemptions
Nigeria loses an estimated ₦6 trillion every year through waivers, incentives, pioneer status benefits, and import duty exemptions.
The IMF isn’t saying incentives should disappear completely—but that many are poorly targeted and often benefit politically connected firms more than productive sectors.

4. Fix VAT collection, not VAT rate
Nigeria’s VAT rate is 7.5%, which is relatively low globally.
The problem is not the rate—it is leakage.
Between weak enforcement, multiple taxation across tiers of government, and poor automation, Nigeria collects less than half of its potential VAT revenue.
The IMF’s push is toward:
● digital invoicing
● integrated tax systems
● automated collection through banks and platforms

5. Tax the digital and high-income economy more effectively
The modern economy is growing faster than the tax system.
The IMF is pushing Nigeria to better capture:
● capital gains (stocks, property)
● high-net-worth individuals
● digital services and online income streams
Global companies like Google, Meta, and Netflix already remit VAT. But many local digital earners—content creators, e-commerce sellers, crypto traders—still operate largely outside the formal tax net.

6. Push states to generate their own revenue
A major structural issue is dependence.
Many states still rely on Abuja for up to 70% of their funding.
The IMF argues that states should lean more on:
● property taxes
● land use charges
● business premises taxes
● local consumption taxes
Without this shift, fiscal responsibility remains concentrated at the federal level.

Why the IMF Is Pushing This Now.

Three major pressures explain the timing.

1. Debt is still swallowing revenue

In 2023, Nigeria spent 94% of revenue on debt servicing.
By 2024–2025, that improved to about 68%, largely due to subsidy removal and FX reforms.
But even at 68%, the reality is harsh:
● ₦100 earned
● ₦68 goes to debt
● ₦32 remains for everything else (salaries, infrastructure, security)
That is not sustainable.

2. Oil is no longer a stable foundation

Oil once dominated government finances. That is no longer the case.
● 2014: oil = ~65% of government revenue
● 2023: oil = ~38%
Production challenges, theft, and global energy shifts mean oil can no longer carry the budget alone.
Taxation is now the only scalable alternative.

3. The population keeps expanding faster than revenue

Nigeria adds roughly 5 million people every year, with population growth around 2.4% annually.
More people means more pressure on:
● schools
● hospitals
● roads
● electricity
● security
Without higher revenue, services simply fall further behind demand.

Why Higher Taxes Could Help Nigeria.

If implemented properly, tax expansion is not just about revenue—it changes how the state functions.

1. More fiscal space
Moving from 11% to 18% tax-to-GDP could generate roughly ₦25–₦35 trillion annually, depending on GDP assumptions.
That level of revenue could significantly expand investment in:
● power
● roads
● education
● healthcare
Ethiopia offers a reference point: between 2010 and 2018, it increased tax-to-GDP from 9% to 14% and used the revenue to fund infrastructure expansion, with growth averaging around 9% annually.

2. A stronger social contract
When citizens pay taxes directly, expectations change.
Oil money feels distant.
Tax money feels personal.
That shift often forces governments to become more accountable.

3. Reduced reliance on debt and oil
Broader taxation creates more stable revenue that is less dependent on:
● oil price swings
● borrowing cycles
● currency instability

The Risks: Why People Are Concerned.

Despite the economic logic, the fears are real.

1. Higher cost of living
Any increase in VAT or consumption taxes will push up:
● food prices
● transport costs
● data and utilities
For households already spending 50–60% of income on food, even small increases matter.

2. Pressure on small businesses
SMEs already deal with:
● federal taxes
● state levies
● local charges
● informal payments
Some businesses face over 30 different levies.
Without reform, more taxation risks pushing businesses deeper into informality.

3. Capital flight and evasion
Without trust in government systems:
● wealthy individuals relocate
● companies shift profits offshore
● tax evasion increases
Nigeria already loses an estimated $10–15 billion annually through illicit financial flows.

4. Political resistance
Tax reform is politically sensitive.
The 2019 VAT increase from 5% to 7.5% triggered backlash.
Any new tax effort will face resistance from:
● labour unions
● lawmakers
● citizens

5. Inflation risk
If new tax revenue is not spent productively, it can worsen inflationary pressure rather than ease it.

Who Gets Affected Most?

Households

● low-income: sensitive to food and fuel taxation
● middle class: tighter enforcement through banking and digital systems
● high-income: property tax, capital gains, luxury taxation
SMEs

The informal sector will feel the biggest shift.

Many small businesses will be brought into the tax system through:
● bank data
● BVN/NIN integration
● digital transaction tracking
Some exemptions may remain for micro businesses earning under ₦25 million annually.

Corporates
Expect:
● fewer tax waivers
● more transfer pricing audits
● tighter scrutiny of multinational profit structures

States

States that fail to build internal revenue systems will fall behind.
Those that succeed—like Lagos—will pull further ahead.

Investors

Higher taxes are not automatically negative.Investors care more about:

● predictability
● transparency
● ease of compliance

A stable, digital tax system is better than a low but chaotic one.
What Nigeria Must Get Right.

The IMF is right about the numbers—but numbers alone do not build trust.

Five things determine success:

1. Fix waste before raising taxes
2. Eliminate multiple taxation across tiers of government
3. Digitize and automate tax collection fully
4. Protect the poorest households with targeted support
5. Show visible results from public spending
Without these, tax increases will fail politically and economically.

What Other Countries Show.

● Ghana: raised VAT without fixing leaks → inflation and backlash
● Rwanda: built strong systems first → higher compliance and trust
● India: unified tax system (GST) → short-term disruption, long-term efficiency
The lesson is consistent: systems first, rates later.

The Bottom Line.

The IMF recommendation is not about punishing Nigerians. It is about a simple reality: A country of Nigeria’s size cannot function sustainably on a narrow, inefficient tax base.
The options are limited:
● raise revenue
● cut spending drastically
● or keep borrowing until debt becomes unmanageable
Each comes with consequences.

Tax reform, if done properly, is the least damaging path—but only if it is matched with transparency, fairness, and visible results. Because in the end, Nigerians are not unwilling to pay taxes. They are unwilling to pay for waste. The next few years will determine whether taxation becomes a foundation for growth—or another source of frustration in an already strained economy.

For more information, clarifications and support, Contact Prof. Prisca Ndu on +234 8033086190 or [email protected]