IMF/World Bank, OPS clash over growing revenue

BY EMEKA EJERE

There is no common ground, at least for now, between the International Monetary Fund (IMF)/World Bank Group, and the Nigeria business community on the best way for the managers of the nation’s economy to generate more revenue to cut borrowing.

While the both sides are in agreement that the country is already facing debt sustainability crisis, they are far from convergence on modalities to address the revenue problem without worsening the debt burden.

At the just concluded IMF/World Bank Spring meetings in Washington DC, the Fund reiterated its advice to Nigeria to step up efforts to bring more people into the tax net, increase taxes, and reduce the country’s debt burden.

IMF also restated the need for Nigeria to phase out its controversial petrol subsidy and redirect such funding to targeted subsidies on critical development drivers, like health and education.
The Fund also advised the Central Bank of Nigeria (CBN) to maintain its monetary policy-tightening mood in order to cage inflation, which jumped to 22.04 per cent as of February. The recommendation was contained in IMF’s latest Fiscal Monitor, titled, “On the path to Policy Normalisation.”

This year’s Spring Meetings came at a time of high global uncertainty with successive shocks of the war in Ukraine, rising inflation, fragmentation and monetary policy tightening and most recently the financial market stress on the Silicon Valley Bank, Signatures Bank and Credit Suisse Bank. Top of the concerns at the meetings is the huge poverty levels, with some 345 million people in developing countries facing acute food insecurity.

Inflation in Nigeria has remained stubbornly high in the past few years, prompting the apex bank to continuously increase its benchmark interest rate, the Monetary Policy Rate (MPR), since last year. Specifically, the CBN has increased interest rate six times.

The rate was raised to 13 per cent in May last year, 14 per cent in July; further increased to 15 per cent and 16.5 per cent between September and December 2022; 16.5 per cent in December 2022; 17.5 per cent in January 2023; and 18 per cent in March.

Raising taxes

Division Chief, Fiscal Affairs Department, IMF, Paulo Medas, said, “In general, what we are saying about Nigeria is the need for a medium-term plan to reduce debt vulnerabilities over time and it is because Nigeria has very low tax revenues. So, that makes it more vulnerable to these types of shocks and tightening global conditions.

“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 are saying 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 un-targeted energy subsidies.

“So, 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. Having more targeted energy subsidies actually can be very beneficial both for fiscal, debt dynamics, and growth.”

Medas said emphasis should be on improving tax compliance and tax bracket, insisting that Nigeria’s tax revenue is one of the lowest in the world.

Speaking on the global perspective, Director, Fiscal Affairs Department at IMF, Vitor Gaspar, noted that the near-term outlook was complex, amid high inflation, tightening financing conditions, and elevated debt. Gaspar urged policymakers to prioritise keeping fiscal policy consistent with central bank policies to promote price and financial stability.

Gaspar said, “Many countries will need a tight fiscal stance to support the on-going 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.’’

According to the World Bank’s Macro Poverty Outlook for Nigeria: April 2023 report, Nigeria spent 96.3 percent of revenue on debt servicing in 2022 from 83.2 percent in 2021, which shows how the fiscal deficit has worsened the nation’s public debt stock.

The report said in 2022, the cost of the petrol subsidy increased from 0.7 percent to 2.3 percent GDP. Low non-oil revenues and high interest payments compounded fiscal pressures.

“The fiscal deficit was estimated at 5.0 percent of GDP in 2022, breaching the stipulated limit for federal fiscal deficit of 3 percent. This has kept the public debt stock at over 38 percent of GDP and pushed the debt service to revenue ratio from 83.2 percent in2021 to 96.3 percent in 2022,” the multilateral institution said…

Nothing but disaster

Back home, economic experts, members of the Organised Private Sector (OPS) and the labour movement have faulted IMF’s call for tax hike, arguing that the move spells nothing but disaster for an economy that is struggling to stay afloat.

Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said increasing taxes is not the best way to increase revenue; it should, rather, be more about ensuring the efficiency of tax administration. He said government should ensure it widens the tax net and ensures the tax system is truly progressive.

“There is need to optimise tax revenue, make the system more efficient and make sure that people, who should be in the tax net, are in the tax net’’, he said.

Noting that Nigeria is losing revenue in areas of oil theft, fuel subsidy and foreign exchange subsidy, he said if subsidy is completely stopped, the money gained could be used to grow the economy, rather than resorting to borrowing.

Similarly, political economist and former deputy governor of the CBN,  Prof.:* Kingsley Moghalu, says he disagrees with the IMF over call on Nigeria’s government to increase taxes, as such recommendation will not solve Nigeria’s economic crisis.

“What we need is more efficient and more widespread tax collection. Millions, who should pay taxes don’t. Then we need to spend better, curb waste and corruption,” he tweeted.
“We need to spend more on things that yield economic dividends. And then we need to consider a “Wealth Tax” where the extremely wealthy pay their fair share as is the case in developed countries. Finally, we should end the regime of “waivers” that give wealthy businesses trillions,” Moghalu said on Twitter.

Director-General of the Nigeria Employers’ Consultative Association (NECA), Adewale-Smart Oyerinde, maintained that a decision to increase taxes might only appear to be in favour of the government, since it would drive up its revenues.

According to him, for a private sector already overwhelmed by multiple taxes, the imposition of additional taxes on services would make the business community more vulnerable, with a trade-off on growth and job creation.

He noted that for any discerning government, a higher tax in an environment with rising inflation is not the best decision, as more taxes will weaken the purchasing power of individuals and stifle consumption, with attendant consequences for social cohesion.

Oyerinde, who said countries tend to reduce taxes during economic lulls but increase the same during a boom, said Nigeria, unfortunately, is not in the latter position.

“Any attempt to consider tax hike would create more burdens on taxpayers. It may defeat any attempt to widen the tax net, as taxpayers would consider tax avoidance measures. There will be massive capital flight, and the drive for direct foreign investment could be defeated,” he said.

Assistant General Secretary of the Nigeria Labour Congress (NLC), Chris Onyeka, who urged the Federal Government to shun IMF policies, alleged that the IMF and World Bank leaders, especially in Africa and third-world countries, are trying to subjugate economies under those of the West. “It is anti-development,” he said.

He queried if the advice was for the government to tax low-income workers, who are paid peanuts, so that they can pay for the profligacy of the government.

“The facts are very clear. IMF is not being truthful. They will give you advice that will subjugate you. They will give you policies that will mess up your economy, which is to their advantage.

“Is it not the same IMF that was encouraging the Nigerian government to continue borrowing? It is high time the government shunned all Brexit-hood institutions. They are all our competitors, yet, we are expecting them to come and give us good advice. Government should reduce the cost of governance, to finance other things,” he said.

However, CBN governor, Godwin Emefiele, says IMF’s growth projection for Nigeria showed that the country and its handlers are doing something right.

“It means we are doing certain things that are correct and we’ll continue to do those things that are right’’, Emefile said.

“But it also means that we are not going to remove our eyes on monetary policy, which is to focus extensively on how to moderate inflation, but at the same time, ensure that banking system stability remains resilient and then strong, as it is right now.”