The Federal Government risks losing up to 0.5 per cent of the country’s Gross Domestic Product (GDP) in revenue following its decision to maintain the current Value Added Tax (VAT) rate, the International Monetary Fund has warned.
In its latest Article IV Consultation Report on Nigeria, the IMF said that although recent tax reforms represent a significant step toward overhauling the nation’s fiscal framework, delaying an increase in the VAT rate would come at a cost particularly for state and local governments.
“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 IMF stated.
While the federal government may be largely shielded from the short-term impact due to anticipated gains from improved Company Income Tax (CIT) compliance, the burden is expected to fall heavily on subnational governments. Without alternative revenue sources or external support, states and local councils may be forced to cut spending or ramp up internal revenue collection efforts.
Poverty Concerns Delay VAT Hike
The Tinubu administration has defended its cautious approach to tax policy, citing deepening poverty and inflationary pressures. As of mid-2025, only 5.5 million households out of the targeted 15 million had been reached through the federal cash transfer programme, raising concerns about the readiness of the social safety net to absorb the shock of a VAT hike.
Despite these challenges, the IMF acknowledged that recent reforms led by the Presidential Committee on Fiscal Policy and Tax Reforms are a critical foundation for reversing Nigeria’s historically low revenue-to-GDP ratio, which remains among the lowest in the world.
The ongoing tax overhaul includes efforts to modernise the VAT and CIT systems, eliminate unnecessary exemptions, and deploy digital tools to improve compliance and enforcement.
Thanks to these measures, Nigeria’s total revenue and grants rose to 14.4 per cent of GDP in 2024 up from 9.8 per cent in 2023 driven in part by naira depreciation and better administrative efficiency.
Debt Still Rising, Fiscal Risks Persist
However, public debt remains a major concern. Nigeria’s debt-to-GDP ratio climbed to 52.9 per cent in 2024, with interest payments accounting for 41.1 per cent of federal revenue a figure the IMF has flagged as unsustainable.
To avoid worsening the debt burden, the IMF has urged Nigeria to maintain a neutral fiscal stance in 2025 and resist the temptation to borrow excessively in response to revenue shortfalls.
It also called on the government to outline a clear, medium-term revenue strategy, including timelines for future tax adjustments, to enhance investor confidence and restore fiscal credibility.
“Pre-committing to an implementation timeline for further policy measures in an updated medium-term framework would support fiscal sustainability and provide guidance on available fiscal space for development spending and support for the most vulnerable households,” the report said.
Calls for Strategic Balance from Local Economists
Echoing the IMF’s concerns, the Nigeria Economic Summit Group (NESG) has warned that stalling VAT reforms could undermine the country’s fiscal outlook.
Speaking during a media session in Abuja, NESG CEO Tayo Aduloju stressed that while streamlining the tax system is essential, maintaining the current VAT rate without corresponding rate adjustments could weaken the government’s revenue base.
“Without those rate hikes, it means that the government might lose some revenue,” Aduloju said. He added that simply reducing the number of taxes without addressing the VAT rate would likely result in a net revenue loss.
IMF Still Backing Nigeria’s Reform Efforts
Despite its warnings, the IMF reiterated its support for Nigeria’s broader economic reform agenda. It commended the government’s moves since 2023 including fuel subsidy removal and foreign exchange liberalization which have contributed to improved macroeconomic stability, even if their benefits have yet to be widely felt.
With inflation still high at 22.9 per cent as of May 2025 and poverty deepening across many regions, the government appears to be prioritising immediate social stability over aggressive fiscal expansion for now.
However, the IMF cautioned that continued delays in tax reform, if not balanced by effective alternative measures, could carry long-term fiscal and economic consequences.
