VAT increase seen pushing Nigeria’s revenue-to-GDP ratio to 10.3%

Nigeria’s government revenue as a percentage of GDP has been notably low in recent years but with tax reforms which comes with an increment in value added tax (VAT), the revenue-to-GDP is projected to hit 10.3 percent in 2025.

Fitch Ratings, an international credit rating agency, said in its recent report that efforts by the government to raise non-oil revenues through its series of tax reforms were necessary to expand the government’s revenue which stood at 9 percent.

It noted that despite the proposed VAT increase from 7.5 percent to 10 percent in 2025, the general government revenue to GDP will only rise marginally from 9 percent to 10.3 percent next year, still lower than the average 19 percent.

“Fitch views raising fiscal revenues—and particularly less volatile non-oil revenues—as an important element of the government’s reform agenda and a key consideration for the sovereign’s credit profile, as Nigeria’s revenue/GDP is extremely low.

“Even with the VAT rate increase, we expect Nigeria’s general government revenue/GDP to average around 10.3 per cent in 2024-2025, compared with a median of 19 per cent for sovereigns in the ‘B’ category,” the report said.

In 2021, the ratio was approximately 7 percent, placing Nigeria among the countries with the lowest revenue-to-GDP ratios globally.

Recent data indicates an improvement. In 2023, the general government revenue rose to about 9.4 percent of GDP, and projections for 2024 and 2025 estimate further increases to 13.5 percent and 13.2 percent respectively.

Despite these gains, Nigeria’s revenue-to-GDP ratio remains below the African average of 15.6 percent. To address this, the government aims to boost the tax-to-GDP ratio to at least 18 percent within the next three years, reducing reliance on borrowing for public spending.

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Efforts to achieve this target include proposals to streamline the tax system, such as creating a central tax agency to replace multiple collection bodies, and reducing the number of taxes from over 60 to 8.

But these tax reforms have generated heated debates from political and economical stakeholders alike with many seeing the bills stoking prices and compounding their hardship.

The mounted pressure and controversy that heralded the reforms led to its suspension by the Senate, allowing for wider consultations to resolve all grey areas.