Home Economy Nigeria interest payments as a share of tax are very, very high, two-third of revenue—IMF

Nigeria interest payments as a share of tax are very, very high, two-third of revenue—IMF

by Business News Report

International Monetary Fund IMF, has said that for Nigeria to fast track its development the priority should be a comprehensive reform to durably increase non‑oil tax revenue saying that Nigeria uses two-third of its revenue to service debt. Speaking at the ongoing IMF/World Bank Annual Meetings in Washington DC, Mr Vitor Gaspar, Director, Fiscal Affairs Department, Cathy Pattillo, Assistant Director, Fiscal Affairs Department and Paolo Mauro, Deputy Director, Fiscal Affairs Department said that “there are a number of reasons” for Nigeria to focus on non oil tax drive. The IMF officials said “Of course, this will contribute to providing the space for important spending on infrastructure and on human development spending, social spending. And for Nigeria, that is very important. One, because right now, interest payments as a share of tax are very, very high, around a third for overall and two‑thirds for the Federal Government revenue. And that is not because interest payments are particularly high. It is because the denominator is incredibly low. 

“Nigeria has one of the lowest tax ratios in the world. And it is not because Nigeria does not have big development problems, development challenges. Nigeria also will have a lot of needs then for education and health spending. It has some very low indicators in that area. And with the demographic projections, Nigeria is actually projected to be, by 2050, the third most populous country in the world. So addressing those challenges is really important. 

For Ghana, similarly, the priority is sustained fiscal adjustment and transparent financing to reduce large financing needs and anchor the debt dynamics. So right now, Ghana is in the process of getting ready for the 2020 budget. And we welcome then that they are committed to the budget deficit of 5 percent. This is going to be an election year in Ghana. So meeting that budget target in 2020 will really send a strong signal to all, including investors, of the government’s commitment to fiscal discipline. For Ethiopia, Ethiopia has challenges relating to debt sustainability, but they have just released a new homegrown economic reform program that we very much welcome. And we are looking forward to working with the authorities on that reform program that will, again, then provide the space for social spending and maintaining good quality infrastructure spending.

Finally, on South Africa. In South Africa, there is really a need to move beyond business as usual to boost growth. So there is a need for urgent reforms to stop the decline in per capita GDP and to build jobs. There is also a need to overhaul the power utility ESCOM. And there, really a gradual but sizable consolidation is needed to stabilise debt at lower levels. This would reduce financing costs. In South Africa, the public debt has doubled over the last decade, and it is set to increase over the next 20 years or so on business as usual. So this gradual fiscal consolidation should really prioritise growth‑friendly and inclusive measures.

“ African continent is very exposed to the effects of climate change. On the other hand, it is not yet a contributor. When you look at some of the numbers in the Fiscal Monitor, the emissions are not really coming much from Africa. That may be the case later on in this century but not yet.

IMF said that “Fiscal policy is at the centre of economic policy debates today. In fact, fiscal policy plays a central role in, for example, managing the synchronised slowdown in the global economy, preparing for downside risks, contributing to financial stability, financing the 2030 Sustainable Development Goals, and, finally, in addressing climate change, which is the topic of the Fiscal Monitor this time. Major economies should be prepared for coordinated action in case of a downturn. Moreover, inflation and inflation expectations are drifting below target, and interest rates are negative in many advanced economies. Hence, the time is now for countries with budgetary room to use it to support aggregate demand. In most other economies, however, monetary policy is not constrained. Public debt and interest‑to‑tax ratios are high and rising. Therefore, we advise policymakers to follow prudent fiscal policies, anchored by a medium‑term framework. Otherwise, as often happened in the past, complacency, fuelled by low interest rates, will lead to over‑borrowing, followed by investors’ panic and financial markets’ disruptions.

“Sovereign bond yields are negative across the maturity spectrum in most advanced economies. We are now deep into zero or negative territory. Further decreases in policy interest rates are limited. This contrasts with the situation just before the global financial crisis. In emerging markets and low‑income developing countries, public debt ratios are high and rising. The cost of servicing debt is also increasing, unlike advanced economies, where low interest rates have compensated for high debt levels. Some countries are vulnerable to exchange and interest rate shocks. In China, the largest emerging market economy, we expect the economic slowdown and fiscal stimulus to widen the deficit. We recommend that fiscal policy helps dampen the negative impact on growth from trade disputes and that it supports the long‑term rebalancing of the Chinese economy. Fiscal policy has an important role to play in the development agendas of many countries, which need to substantially raise spending to meet the Sustainable Development Goals by 2030, particularly low‑income developing economies. The spending must be framed in the context of a comprehensive growth and development strategy. 

“Building tax capacity is necessary to enable the state to deliver on its functions for inclusive and sustainable development. Efficiency in spending is a crucial aspect of good governance. It is also necessary to ensure complementarities between public finance, private investment, and Official Development Assistance. Let me now turn your attention to the Fiscal Monitor on climate change. By simply looking at me, you can notice a very important thing. I am holding a leaflet. Why is it that I am holding a leaflet? Because the Fiscal Monitor is now fully digital. It is fully paperless. And so it contributes to limiting global warming. It is important to realise that current pledges under the Paris Agreement are not enough. They will limit global warming to three degrees Celsius. This is well above the safe level. To limit global warming to two degrees Celsius or less, the level deemed safe by scientists, fiscal policy must be mobilised, and governments and Finance Ministers need to take further substantial action.

“How much more? Each country would have to take measures that are as ambitious as our carbon tax implemented now and rising to $75 per ton by 2030. Countries may choose to take other options. We discuss various possible combinations of measures in the Monitor. Nevertheless, the $75 carbon tax provides one measure of the degree of ambition which is required to deliver on the Paris goals. What would this entail? If the carbon tax of $75 per ton were implemented globally, China and India would account for almost 70 percent of CO2 reductions among G20 economies, compared with a no‑action scenario. This reflects the dominant role of coal in the production of energy in China and India. The carbon tax would lead to higher prices for consumers. For retail electricity, for example, price increases would vary from 2 percent in France to 89 percent in South Africa. The average increase would be 45 percent. The differences largely reflect the role of coal in generating energy in each country. The goal is to reshape the tax system and fiscal policy more generally to discourage emissions. It is crucial that the additional revenues from carbon taxation are used appropriately to reduce burdens and make the reform more politically acceptable. The Fiscal Monitor presents several options involving, for example, labor tax cuts, payments to households, and public investment. And for a further discussion, please do not forget to consult the Fiscal Monitor. To wrap up, fiscal policy is at the centre of the economic policy debate today. In fact, fiscal policy plays a central role in, for example, managing the synchronised slowdown in the global economy, preparing for downside risks, contributing to financial stability, financing the 2030 Sustainable Development Goals, and, finally, in addressing climate change”.

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