Amine Mati, a senior resident
representative with the International Monetary Fund (IMF) and mission chief for
Nigeria, says an increase in value-added tax is a step in the right direction
for the country as it will contribute to declining revenue.
The federal executive council
recently approved an increase in VAT to 7.2% and the 2020 budget submitted by
President Muhammadu Buhari based its revenue projections at 7.5% VAT.
In a statement released on
Wednesday at the end of a visit to Nigeria to update macroeconomic projections
and review reform implementation, Mati said there is an urgent need for a
comprehensive reform package to reduce vulnerabilities and raise growth.
“The outlook under current
policies remains challenging. Growth is expected to pick up to 2.3 percent this
year on the strength of a continuing recovery in the oil sector and the
regaining of momentum in agriculture following a good harvest,” he said.
“Revenue initiatives planned
under the 2020 budget—including a VAT reform that increases the rate,
introduces a minimum registration threshold and exempts basic food
products—will help partially offset declining oil revenues and the impact of
higher minimum wages, thus keeping the overall consolidated fiscal deficit
elevated.
“The current account’s shift to a
deficit is expected to persist while the pace of capital outflows continues to
weigh on international reserves. Inflation will likely pick up in 2020
following rising minimum wages and a higher VAT rate, despite a tight monetary
policy.”
The IMF official expressed
concern at CBN’s “increased financing of government” and urged that longer-term
government instruments should be introduced to mop up excess liquidity.
“Over-optimistic revenue
projections have led to higher financing needs than initially envisaged,
resulting in overreliance on expensive borrowing from the CBN to finance the
fiscal deficit.
“The increasing CBN financing of
the government reinforces the need for an ambitious revenue-based fiscal
consolidation that should build on the initiatives laid out in the Strategic
Revenue Growth Initiative.
“A tight monetary policy should
be maintained through more conventional tools. Managing vulnerabilities arising
from large amounts of maturing CBN bills—including those held by
non-residents—requires stopping direct central bank interventions, the introduction
of longer-term government instruments to mop up excess liquidity and moving
towards a uniform market-determined exchange rate.”
Mati also urged the CBN to
carefully assess its recent directive to banks on increasing loan to deposit
ratio to 65% for potential consequences on banks’ asset quality and the
inflation target.
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