The International Monetary Fund (IMF) says that the Nigerian Government may lose as much as 0.5 per cent of its Gross Domestic Product (GDP) in revenue following its decision not to raise the Value Added Tax (VAT) rate,
The IMF said in its latest Article IV Consultation Report on Nigeria that although the recent tax reforms approved by the National Assembly and President Bola Tinubu represent a major step forward in modernising the VAT and Company Income Tax regimes, the choice to maintain the current VAT rate would lead to an immediate revenue shortfall.
“The decision not to raise the VAT rate now is reasonable, given high poverty and food insecurity, and with the cash transfer system to support the most vulnerable households not yet fully rolled out. However, this will reduce consolidated government revenue by up to ½ per cent of GDP in the authorities’ estimates,” the report said.
According to the reports by Punch newspaper on Tuesday, while the Federal Government is expected to be largely insulated from the fallout—thanks to expected gains from improved CIT compliance—the blow will be felt most by state and local governments.
It noted that unless alternative financing options are found, subnational governments may be forced to either scale back spending or ramp up their own revenue efforts.
The IMF, however, acknowledged the government’s justification for delaying a VAT hike, particularly at a time of worsening poverty and food insecurity.
With only 5.5 million of the targeted 15 million households reached under the federal cash transfer programme, the Fund noted that raising VAT at this stage could further strain vulnerable households.
Nonetheless, it cautioned that the cost of delaying reform would fall on already stretched public finances, especially at the subnational level.
“Assuming no alternative financing sources, they [states and LGAs] would have to raise additional revenue or reduce spending, which is assumed in the baseline,” the report said.
Despite this challenge, the IMF welcomed the tax reform agenda being driven by the Presidential Committee on Fiscal Policy and Tax Reforms, describing it as critical to reversing Nigeria’s poor revenue-to-GDP ratio, one of the lowest globally.
The reforms aim to boost compliance and enforcement, and the Fund believes they hold “significant medium-term revenue potential” once fully implemented.
The report added that the measures include modernising the VAT and CIT frameworks, tightening exemptions, and introducing digital tools to monitor compliance. Total revenue and grants reached 14.4 per cent of GDP in 2024, up from 9.8 per cent in 2023, buoyed by currency depreciation and improved administration.
GIK/APA