The International Monetary Fund (IMF), again, on Wednesday asked Nigeria to raise incomes from taxes, particularly through ensuring compliance and expanding tax net in order to generate more revenues and cut burgeoning debt.
At 8 percent tax-to-GDP ratio, Nigeria ranks among the lowest globally, amid concerns that the country’s total debt stock could hit N77 trillion by the end of May.
The Debt Management Office (DMO) reported in March that the country’s debt stock as of December 2022, had reached N46.25 trillion or $103.11 billion.
In its latest Fiscal Monitor titled ‘On the path to Policy Normalisation’ released Wednesday during its joint spring meetings with World Bank, IMF noted that Nigeria’s debt is projected to keep rising and that necessary steps must taken to generate needed revenues.
“In general, what we are saying about Nigeria is the need for a medium-term plan to reduce debt vulnerabilities over time and is because Nigeria has very low tax revenues. So, that makes it more vulnerable to these types of shocks and tightening global conditions,”Division Chief, Fiscal Affairs Department, IMF, Paulo Medas said.
“What we advocate is raising taxes which is going to create space not only to manage debt but also to spend on other priorities. And the other part of what we say is that Nigeria has not benefited as much from the windfall of the oil prices in the past because a lot of it has been spent on these untargeted energy subsidies.
“By shifting to more targeted subsidies, you can reduce the fiscal deficit, and you can use that resources on other priorities that actually can promote higher growth in the future such as education, and health, and reduce the deficit. So having more targeted energy subsidies actually can be very beneficial both for fiscal, debt dynamics, and growth.
“Nigeria should broaden the tax space, improving tax compliance so Nigeria has one of the lowest tax revenues in the world as a share of GDP. So, there’s a lot of room for increasing the tax base and improving tax compliance.”
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The IMF noted in the fiscal report that globally, public debt is higher and growing faster than projected before the COVID-19 pandemic. This is driven mainly by the world’s two largest economies, the United States and China.
The fund projected that 60 percent of countries could see their public debt to GDP ratios decline through 2028 after COVID-related surges, but a significant number of large economies, including Brazil, China and the United States, are seeing rapid growth in their debt-to-GDP ratios.
The report further noted how low-income developing countries had been hit by several concomitant shocks, including the COVID-19 pandemic and the cost-of-living and food security crises, which have taken their toll on public finances.
“Fiscal deficits in low-income developing countries, at an average 4.2 per cent of GDP in 2022, showed moderate improvements relative to the worst of the pandemic. Primary spending remained stable at 16.9 percent of GDP, just below its 2021 level, on average, as countries increased fuel subsidies and social spending to respond to rising energy and food import prices,” IMF’s report said.
“The increase in spending was larger among commodity exporters Burundi, Democratic Republic of Congo and oil exporters Nigeria, Yemen, with the latter group benefitting from more fiscal space thanks to high energy prices. In non-oil commodity exporters, the average fiscal deficit rose by 0.6 percentage points in 2022, reversing the improvement in 2021, as both primary spending and debt service payments increased.
“In some low-income developing countries, debt is projected to continue rising Nigeria and some have asked for debt relief under the Group of Twenty (G20) Common Framework (Chad, Ethiopia, Ghana, Zambia.”
Vitor Gaspar, director of the IMF’s Fiscal Affairs Department, who addressed the press on the new report noted that the near-term outlook is complex amid high inflation, tightening financing conditions, and elevated debt and urged policymakers to prioritise keeping fiscal policy consistent with central bank policies to promote price and financial stability.
Gaspar said global public debt soared to almost 100% of GDP in 2020 before posting its steepest drop in 70 years by 2022, although it remained about 8 percentage points above the pre-pandemic level.
Rather than normalising, the ratio was expected to start rising again this year, hitting 99.6% of GDP in 2028, the last year of the IMF’s forecast horizon, he said.
“Many countries will need a tight fiscal stance to support the ongoing disinflation process especially if high inflation proves more persistent. Tighter fiscal policy would allow central banks to increase interest rates by less than they otherwise would, which would help contain borrowing costs for governments and keep financial vulnerabilities in check.”
“Tighter fiscal policies require better-targeted safety nets to protect the most vulnerable households, including addressing food insecurity while containing overall spending growth, as governments are likely to confront social pressures to compensate for past increases in the cost of living.”
“Risks are high, however, and policymakers will need to be ready to respond quickly. If financial turbulence morphs into a systemic crisis, fiscal policy may need to intervene swiftly to facilitate resolution. If economic activity weakens substantially and unemployment rises, governments should allow automatic stabilizers to work for example, allow deficits to rise as unemployment benefits increase or tax revenues fall, especially if inflation pressures are under control and fiscal space is available.”
According to him, reducing debt vulnerabilities and rebuilding fiscal buffers over time remains an overriding priority.
“Despite the envisaged gradual fiscal tightening in the coming years, we project global public debt will rise, driven by some large advanced and emerging market economies. More generally, concerns with debt vulnerabilities have intensified in many countries. In low-income developing economies, higher borrowing costs are also weighing on public finances, with 39 countries already in or near debt distress,” he said.
“Countries should step up efforts to develop credible risk-based fiscal frameworks that reduce debt vulnerabilities over time and build up the necessary room to handle future shocks. The enhanced fiscal frameworks can combine strengthened institutions with revamped fiscal rules. Medium-term fiscal plans should include credible policy commitment to achieving debt sustainability—that is, announce specific spending and revenue measures or reforms—while allowing for flexibility to adjust to shocks.
“Low-income countries face particularly severe challenges. Revamped efforts to increase revenue are critical to restoring fiscal sustainability, dealing with the cost-of-living crisis, and achieving Sustainable Development Goals. Despite multiple waves of tax reforms, revenues remain stubbornly insufficient, below levels that enable the state to play its role in sustainable and inclusive development. International cooperation is crucial to helping these countries resolve unsustainable debt burdens in an orderly and timely manner.”
