IMF calls for VAT reforms, timeline to phase out AMCON

…Urges CBN to end direct intervention in the economy

…Advocates phasing out implicit fuel subsidies, strengthening social safety nets

Joseph Inokotong, Abuja

The International Monetary Fund (IMF) has stressed the need for the federal government to strengthen its domestic revenue mobilization, through additional excise duties, a comprehensive Value Added Tax (VAT) reform, and elimination of tax incentives.

It calls for the phasing out of ‘implicit fuel subsidies’ while strengthening social safety nets to ameliorate the impact on the most vulnerable can help reduce the poverty gap and free up resources for other developmental needs like education and health.

The Fund also pointed out that since inflation is still above the Central Bank of Nigeria (CBN) target, it would generally be appropriate for the Bank to consider tightening the monetary policy stance.

In this regard, the IMF encouraged the authorities to enhance transparency and communication and to improve the monetary policy framework, by using more traditional methods, such as raising the monetary policy rate or cash reserve requirements.

It also urged the CBN to end direct intervention in the economy to allow it focus more on the Bank’s price stability mandate.

These are some of the recommendations of the Executive Board of the IMF at the conclusion of its Article IV consultation with Nigeria released Wednesday in Abuja.

According to the IMF, the “Directors emphasized the need for revenue-based consolidation to lower the ratio of interest payments to revenue and make room for priority expenditure.

“They welcomed the authorities’ tax reform plan to increase non-oil revenue, including through tax policy and administration measures.

“They stressed the importance of strengthening domestic revenue mobilization, including through additional excises, a comprehensive VAT reform, and elimination of tax incentives”.

The IMF commended Nigeria’s ongoing economic recovery, accompanied by reduced inflation and strengthened reserve buffers.

It noted, however, that the medium-term outlook remains muted, with risks tilted to the downside.

In addition, “long standing structural and policy challenges need to be tackled more decisively to reduce vulnerabilities, raise per capita growth, and bring down poverty.

“Directors, therefore, urged the authorities to redouble their reform efforts, and supported their intention to accelerate implementation of their Economic Recovery and Growth Plan”.

The IMF said that securing oil revenues through reforms of state owned enterprises and measures to improve the governance of the oil sector will also be crucial.

It highlighted the importance of shifting the expenditure mix toward priority areas, and in this context, welcomed the significant increase in public investment but underlined the need for greater investment efficiency.

The Fund also recommended increasing funding for health and education.

It noted that “phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable would help reduce the poverty gap and free up additional fiscal space”.

The IMF Directors recommended stronger coordination for more effective public debt and cash management.

According to the IMF, “With inflation still above the Central Bank of Nigeria (CBN) target, Directors generally considered that a tight monetary policy stance is appropriate.

“They encouraged the authorities to enhance transparency and communication and to improve the monetary policy framework, including by using more traditional methods, such as raising the monetary policy rate or cash reserve requirements.

“Directors also urged ending direct CBN intervention in the economy to allow focus on the Bank’s price stability mandate”.

The IMF commended the authorities’ commitment to unify the exchange rate and welcomed the increasing convergence of foreign exchange windows.

It noted that a unified market based exchange rate and a more flexible exchange rate regime would support inflation targeting, and stressed that elimination of exchange restrictions and multiple currency practices would remove distortions and facilitate economic diversification.

The IMF welcomed the “decline in nonperforming loans and the improved prudential banking ratios but noted that restructured loans and undercapitalized banks continue to weigh on financial sector performance”.

It suggested “strengthening capital buffers and risk based supervision, conducting an asset quality review, avoiding regulatory forbearance, and revamping the banking resolution framework”.

Also, it recommended “establishing a credible time bound recapitalization plan for weak banks and a timeline for phasing out the state backed asset management company AMCON”.

The IMF urged the authorities to reinvigorate implementation of structural reforms to diversify the economy and achieve the Sustainable Development Goals.

It pointed to the importance of “improving the business environment, implementing the power sector recovery programme, deepening financial inclusion, reforming the health and education sectors, and implementing policies to reduce gender inequities”.

The IMF also emphasized the need to “strengthen governance, transparency, and anti-corruption initiatives, including by enhancing AML/CFT and improving accountability in the public sector”.

It welcomed improvements in the quality and availability of economic statistics and encouraged continued efforts to address remaining gaps, through regular funding.

The IMF welcomed the fact that “Nigeria’s economy is recovering. Real GDP increased by 1.9 percent in 2018, up from 0.8 percent in 2017, on the back of improvements in manufacturing and services, supported by spillovers from higher oil prices, ongoing convergence in exchange rates and strides to improve the business environment”.

It noted that “Headline inflation fell to 11.4 percent at end-2018, reflecting declining food price inflation, weak consumer demand, a relatively stable exchange rate and tight monetary policy during most of 2018, but remains outside of the central bank’s target range of 6-9 percent.

“Record holdings of mostly short-term local debt and equity and a current account surplus lifted gross international reserves to a peak in April 2018, while the three-times oversubscribed November 2018 Eurobond helped cushion the impact of outflows later in the year”.

The IMF however, said that “persisting structural and policy challenges continue to constrain growth to levels below those needed to reduce vulnerabilities, lessen poverty and improve weak human development outcomes, such as in health and education.

“A large infrastructure gap, low revenue mobilization, governance and institutional weaknesses, continued foreign exchange restrictions, and banking sector vulnerabilities are dampening long-term foreign and domestic investment and keeping the economy reliant on volatile oil prices and production.

“Under current policies, the outlook remains therefore muted. Over the medium term, absent strong reforms, growth would hover around 2½ percent, implying no per capita growth as the economy faces limited increases in oil production and insufficient adjustment four years after the oil price shock.

Monetary policy focused on exchange rate stability would help contain inflation but worsen competitiveness if greater flexibility is not accommodated when needed.

High financing costs, on the back of little fiscal adjustment, would continue to constrain private sector credit, and the interest-to-revenue ratio would remain high.

“Risks are moderately tilted downwards. On the upside, oil prices could rise, prompted by global political disruptions or supply bottlenecks.

Bold reform efforts, following the election cycle, could boost confidence and investments, especially given relatively conservative baseline projections.

On the downside, additional delays in reform implementation, a persistent fall in oil prices, reduced oil production, increased security tensions, or tighter global financial market conditions could undermine growth, provoke a market sell-off, and put additional pressure on reserves and/or the exchange rate.”