The International Monetary Fund (IMF) says Nigeria’s low tax revenue-to-gross domestic product (GDP) ratio is “problematic”.
Abebe Aemro Selassie, IMF’s director of the African department, spoke at a news conference on Friday, focusing on the firm’s regional economic outlook for the year.
At an investors’ forum on April 19 in Washington, Wale Edun, finance minister and coordinating minister of the economy, said Nigeria’s tax-to-GDP ratio is low because citizens are not paying their taxes.
The tax-to-GDP ratio is essentially a comparison between the amount of tax collected in a year relative to a country’s GDP, which is the total output of goods and services in a period.
A higher percentage of the tax-to-GDP ratio implies that a nation can take care of its expenditures or primary spending without expanding debt.
While Nigeria’s public debt is racing toward the N100 trillion mark at N97.34 trillion in the fourth quarter (Q4) of 2023, its tax-to-GDP ratio stagnates at 10.86 percent.
Speaking on the economic challenges in Nigeria at the news conference, Selassie said the current government inherited very difficult microeconomic conditions.
“Huge imbalances were being masked by a lot of controls, which were not effective either,” Selassie said.
The IMF executive said the federal government has been pursuing policies ‘that we think are broadly in the right direction”.
‘NIGERIA SHOULD DIVERSIFY ITS ECONOMY’
He said the financial firm has also advised Nigeria on what an ideal mix of policies would be like. “We have many reports on this,” Selassie said.
“I think Nigeria, first and foremost, needs to diversify its economy. Second, this also applies to the resources that the government relies on, which are excessively dependent on oil and not enough on non-oil revenue.
“In a country like Nigeria, Africa’s most populous country, with all of those development spending needs, we think it’s problematic that tax revenue to GDP is only 8 to 9% when it should be much higher, so that more resources can be spent on building universities, on building infrastructure.”
On the monetary and exchange rate concerns, Selassie said it is important to have a system that is broadly reflective of supply and demand conditions.“I think that’s the direction which the government has moved,” he said.
‘WHY WE SUPPORT SUBSIDY REMOVAL’
Nigeria had ended its subsidy on petrol in May 2023, and the IMF had on many occasions expressed support for the policy.
The multilateral lender asked the federal government to completely phase out petrol and electricity subsidies in the country on February 12.
“The reason why we counsel against such generalised subsidies, it’s very simple: It tends to be highly regressive, meaning the benefits of such fuel subsidies tend to accrue to the richer people than the poorer people,” Selassie said.
“So, it’s people that are driving these large cars with big houses, when they receive subsidised fuel. They’re the ones benefiting relative to the poor and vulnerable in Nigeria.
“The people of Nigeria pay for subsidies and it’s the poorer segment of society that actually are losing out. That’s why subsidy reform is important.”
Selassie said the resources could instead be used to improve conditions for poorer people instead of accruing to richer people.
He said the IMF applauds the steps the government took to reduce the extent of subsidies.
