Largade makes case for VAT increment, commends phased removal of subsidy

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The International Monetary Fund (IMF) Wednesday added its voice to the call for increasing the Value Added Tax (VAT) with a call for the consideration to jerk it up from what it currently is.

The Fund also touched on the fuel subsidy issue that has been on the front-burner with a commendation to the government for its phased removal.

To the state governments, the IMF offered to assist in financial management as well as budget reforms.

Nigerians currently pay five percent VAT on procurement but agitation from government quarters has been loud for its increase to 10 percent. Nigeria’s VAT rate is rated one of the lowest in the West Africa sub-region and which the federal Inland Revenue Service FIRS has subtly been pushing for its increase.

Christine Lagarde, the IMF Managing Director, during discussion with members of the Senate Wednesday on how to improve the economy noted the first step is to improve on tax collection while another is to plug the leakages in the economy.

“The first step is to broaden the tax base and reduce leakages by improving compliance and enhancing collection efficiency. At the same time, public finances can be bolstered further to meet the huge expenditure needs. For example, the current VAT rate is among the lowest in the world and well below the rates in other ECOWAS members—so some increase should be considered.”
Largarde noted that “as more people pay taxes there will, rightly, be increasing pressure to demonstrate that those tax payments are producing improvements in public service delivery.”

With regards to the controversial foreign exchange restrictions championed by the Central Bank of Nigeria (CBN), Largarde noted that “the goal of achieving external competitiveness requires a package of policies including business-friendly monetary, flexible exchange rate and disciplined fiscal policies, as well as implementing structural reforms.

Additional exchange rate flexibility—both up or down— she said can help soften the impact of external shocks, make output and employment less volatile, and help build external reserves. It can also help avoid the need for costly foreign exchange restrictions – which should, in any case, remain temporary.”

Going forward, improved competitiveness from improved exchange rate flexibility and other reforms the IMF MD said “will facilitate the needed diversification of the exports base and, ultimately, growth.”

The IMF Chief, commended the federal government for commencing the process of eliminating fuel subsidy in the 2016 budget. According to her, “continuing the move already begun by the government in the 2016 budget to eliminate resources allocated to fuel subsidies would allow more targeted spending, including on innovative social programs for the most needy.”

She lamented that “fuel subsidies are hard to defend. Not only do they harm the planet, but they rarely help the poor. IMF research shows that more than 40 per cent of fuel price subsidies in developing countries accrue to the richest 20 per cent of households, while only 7 per cent of the benefits go to the poorest 20 per cent.”

Nigeria’s experience of administering fuel subsidies she said, “suggests that it is time for a change—think of the regular accusations of corruption, and think of the many Nigerians who spend hours in queues trying to get gas so that they can go about their everyday business.”

Largarde urged Nigerians not to “forget the huge challenges facing Nigeria’s state and local governments. These sub-national governments—which account for the bulk of social spending—have only limited tools to manage the impact of declining oil revenues. My message here is to manage better the smaller purse, while building capacity to increase internally generated revenue.”

The IMF she offered can help “by providing technical assistance on public financial management. We can explore how to support states’ efforts to undertake budget reform.”

For Nigeria’s banking system, Largarde suggested that the country should build resilience by fostering a sound banking system which will help channel more savings into productive investments, especially in quality infrastructure.

Nigeria’s banks she said “are generally well-capitalized and more resilient than during the downturn of 2008-09. But they are beginning to feel the impact of the growing vulnerabilities in the corporate sector. This means rising non-performing loans, which will need to be carefully monitored and managed.”

Largarde had earlier met with the the Governor of the Central Bank of Nigeria (CBN) Godwin Emefiele and some bank chief executives with a commendation for the strength of the financial sector.

“Financial sector of Nigeria is strong solid and it needs to continue to be so, but it also needs to lend to the real economy and to provide good terms of business.”

CBN Governor, Emefiele said the visiting IMF executive tried to encourage our Nigerian banks to continue to support the real sector and the small scale Entreprises in Nigeria and indeed also try as much as possible to do those lending activities at a very consentionary pricing just like we are doing.”

He also disclosed that the banks gave their word to support the system notwithstanding the critical risk as well as some of the challenges that we have in the environment.

At the Mother Theresa Orphanage Home in Gwarinpa, Abuja Lagarde donated $250,000 (N1.5 million) to help with the running of the home.

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Speaking while donating the money, she called on privileged Nigerians to come to the aid of the less-privileged in Nigeria. “Nothing is as touching as a visit like this one. Nigeria is a country of large resources. It’s a country rich of youths. We at the IMF care about the youths” she said.

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