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Why Nigeria Should Not Introduce New Tax Regime Now – IMF



The International Monetary Fund (IMF) has advised the federal government not to introduce new tax measures as it said Nigeria is in for a difficult year in 2020 with gross domestic product (GDP) growth expected to contract by -5.4 per cent.

Speaking at a press briefing on the Regional Economic Outlook for Sub-Saharan Africa yesterday, director of the IMF’s African Department, Abebe Aemro Selassie, said while it will be very important to have very nimble policy response to ensure that the hits to the economy is not compounded by policy challenges, this is not the time to be aggressively introducing new tax measures.

“There is a long standing challenge on the fiscal side of needing to have sufficient resources generated by the government from non-oil sources to provide investments in health, education, infrastructure so there is that long-term agenda that needs to be addressed.

“Right now, fiscal policy can be supportive and needs to be supportive. On the monetary and exchange rate front, there is a response that will facilitate the much needed adjustment of the economy to these real shocks.

“Our projection of -5.4 per cent is contingent on an in-built policy response and avoiding some of the challenges that were experienced when oil prices declined in 2016 causing GDP to be depressed for an extended period.

“Subject to a flexible and nimble policy response, we expect that there would be some recovery but this year would be a difficult one for the country. Nigeria is an oil exporting country so the impact of the pandemic is being compounded by the sharp decline in oil prices.”

On the pandemic, Selassie said “this is a fast-moving crisis and recent developments suggest that the downturn will be significantly larger than we had anticipated only 10 weeks ago. The risks we highlighted in April all continue to be a concern, but the deterioration of the global outlook has been particularly striking. In line with this new outlook, and consistent with local high-frequency indicators, output in Sub-Saharan Africa is now projected to shrink by 3.2 percent this year, more than double the contraction we had outlined in April. Again, this is set to be the worst outcome on record.

“The growth rate of new cases has slowed slightly since April, and a number of countries have cautiously eased some of their containment measures. But region-wide, the pandemic is still in its exponential phase—Sub-Saharan Africa has recently exceeded more than a quarter of a million confirmed cases, and new cases are still doubling every two to three weeks.”

Selassie said given the region’s already-stretched healthcare capacity, the immediate priority is still to protect lives and to do whatever it takes to strengthen local health systems and contain the outbreak.

The IMF director noted: “On economic policies, sub-Saharan African countries have acted swiftly and aggressively to support the economy. Monetary and prudential policies have been eased, with countries adopting a mix of reduced policy rates, added injections of liquidity, greater exchange-rate flexibility, and a temporary relaxation of regulatory and prudential norms, depending on country circumstances.

“On the fiscal side, however, country responses have often been more constrained. Even before the crisis, debt levels were elevated for many countries in the region. In this context, and in light of collapsing tax revenues, the ability of governments to increase spending has been limited.

“To date, countries in the region have announced COVID-related fiscal packages averaging three per cent of GDP. This effort has been indispensable. But it has often come at the expense of other priorities, such as public investment, and is markedly less than the response seen in other emerging markets or advanced economies.

“Also, authorities in sub-Saharan Africa face a distinct challenge in getting support to those who need it most. Around 90 percent of non-agricultural employment is in the informal sector, where participants are usually not covered by the social safety net.

“Moreover, a large proportion of this activity centers on the provision of services, which have been particularly hard hit by the crisis. Further, informal workers typically have few savings and limited access to finance. So staying at home is often not an option; complicating the authorities’ efforts to maintain an effective lockdown.

“In response, many authorities have done what they can to temporarily expand their safety nets; using home-grown, often innovative approaches to ensure that transfers reach as much of their population as possible. But again, resources are limited, and these efforts cannot hope to offset the full impact of this crisis.

“In sum, many authorities in Sub-Saharan Africa face a particularly stark set of near-term policy choices; concerning not only the scale of support they can afford, but also the pace at which they can reopen their economies”.