IMF Proposes More Taxes, Higher Interest Rates After Subsidy Removal

…says loan servicing obligation too high, insists no debt restructuring talks

Look inwards for funding, foreign loans becoming scarce, costly, Fund tells Nigeria

The International Monetary Fund, on Friday, said for Nigeria’s fuel subsidy removal policy and foreign exchange unification initiative to translate to economic growth and stability, the Federal Government must collect more taxes to fund the national budget and pay public debts.

The IMF Africa Department Director, Abebe Selassie, made the position known during a press briefing on the Sub-Saharan Africa Regional Economic Outlook at the ongoing World Bank Group/International Monetary Fund Meeting in Marrakech, Morocco.


He spoke against the backdrop of the harsh economic conditions in Nigeria on the back of the removal of fuel subsidy and foreign exchange unification by President Bola Tinubu after taking office in late May.

The deregulation of the downstream oil sector has pushed petrol prices from about N185/litre to about N600/litre, a development that has caused pain and untold hardships for more Nigerians.

Aside from this, policies aimed at unifying the official and parallel market rates of the naira announced in early June by the government have worsened the sharp rise in the prices of goods and services following the jump in the pump price of petrol.

Despite the initial savings made from fuel subsidy removal by the Federal Government, over 90 per cent of government revenue still goes into debt servicing, leaving it with a meagre amount to cater to major economic growth and development projects.

However, the IMF said on Friday that Nigerian policymakers must urgently complement the fuel subsidy removal with a set of policies that could ameliorate the economic challenges facing the country.

Selassie said, “The exchange rate reforms that the government did were very, very welcome, trying to unify the rate, similarly the fuel subsidy. But that will not help and will not stick unless you also are tightening monetary policy; unless you’re also doing something to mobilise more tax revenues. So, a holistic package of reforms is what’s needed.

“So, you have a medley of things mainly rooted in the fiscal challenges that Nigeria has faced, not having tax revenues. At the same time, this is a country with incredible potential and we have seen reforms moving in the right direction in recent months. What is needed, we feel, is making the reforms holistic and help reinforce each other. Just as things were not reinforcing each other in the past, I think there is scope to make the reforms reinforce each other.”

The IMF director noted that Nigeria had over-relied on oil revenue, making it difficult to tap its potential in other areas.

He said, “Why are there not enough tax revenues? I think in the past, over-reliance on oil was when prices were high. Second, of course, also is the subsidy regime, which also entails quite a lot of loss of government resources being directed where they perhaps should not be. So, I think these are all interlinked issues, including causing some of the inflation that you’re seeing, because, given the difficulty to tap international capital markets, the government has had to rely more on domestic financing, which has either crowded out the private sector or of course caused the monetary injection, which again has weakened the exchange rate.”

Selassie, however, said the leaders at the Central Bank of Nigeria and the Ministry of Finance were new, adding that there was a need to give them more time to act.

He expressed confidence in their ability to make the right economic decisions, saying, “I think we have to give a bit of time to the new administration also, I mean, the central bank governor has just been appointed. The Minister of Finance has only been in office for a few weeks. So, we’re hopeful that they will move in the right direction, and we stand there to provide any policy advice the government needs.”

Debt talks

On Nigeria’s debt, the IMF director said the country leaders had yet to initiate any discussion on debt cancellation or forgiveness.

The Debt Management Office data showed that Nigeria had a total debt stock of $113.4bn as of June 30, 2023.

The IMF director said, “I am not aware of any discussions that are going on debt profiling and restructuring in Nigeria. There are, of course, like elsewhere in the region, debt pressures. And I think in Nigeria, by far the most important cause of the pressures is the fact that the government doesn’t generate enough tax revenues for all the services it needs to provide. So, interest payment as a share of revenues is very high and not leave much room to spend on other issues. I think that is the key issue and the one that needs to be worked on.”

He also said Nigeria’s debt was still manageable but noted that more revenue must be generated to service it.

“When we look at the debt in Nigeria, our sense is that the stock is manageable in general. It’s the debt servicing that is much more difficult. And the debt servicing is hampered, as I said earlier, by the country not generating enough non-oil tax revenues. I think that is by far the most important area of reform, by far the most important area of work that there is for any administration in Nigeria,” Selassie added.

Forex ban removal

The IMF has supported the CBN’s removal of the forex ban on 43 items.

Selassie said, “On the trade restrictions, our view has always been that in Nigeria, as in many other cases, our economies now are so sophisticated and so complex. I don’t think that these kinds of restrictions work. The best way to manage modern economies is for the government authorities to use both the fiscal policy lever and monetary policy lever to affect the right kind of outcomes, rather than going in and saying I don’t like this good, so I don’t want it to come in, et cetera.

“That tends to create unhelpful distortion. But in general, I think the direction that the CBN has moved is a helpful one.”

Look inwards

Meanwhile, the IMF has advised the Nigerian government and other economies in sub-Saharan Africa to look inwards for funding, pointing out that foreign loans are becoming scarce and costly.

It said this in its regional outlook report.

The report read in part, “Sub-Saharan Africa is only now emerging from a series of unprecedented global shocks and is still in the grips of an acute funding squeeze. On the positive side, global inflation is receding, and international financial conditions are starting to ease. But the underlying funding challenge may still endure—the crisis has demonstrated the risks of relying on volatile private capital markets for development funding, while other traditional sources such as official development assistance and bilateral lending are shrinking.

“Funding for development seems likely to become increasingly scarce and ever more costly, making it more difficult for countries to sustain even current levels of per capita spending on priorities such as health, education, and infrastructure, much less increasing the spending required to meet the Sustainable Development Goals.”

It added, “But the region is far from powerless. More patient and less pro-cyclical private investment inflows remain a critical and underused resource, and there is significant scope for the region to accelerate investment climate reforms while carefully considering the role of added public incentives. Ultimately and most important, domestic resource mobilisation is the key to sustainable development. Boosting public revenues is clearly vital. But expanding the pool of private savings is also essential, and to this end, promoting financial market development and financial inclusion should also be a priority.”

The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, had on Tuesday said the government would explore new ways to collect tax revenue more efficiently.

Also on Thursday, the new CBN Governor, Olayemi Cardoso, removed the eight-year forex ban on 43 items.

Chinese loans waning

Meanwhile, the IMF has said Nigeria and other countries in sub-Saharan Africa are at a crossroads in their relations with China because the Chinese government is beginning to reduce its exposure on the continent.

In its report released on Friday titled, ‘At crossroads: Sub-Saharan Africa relations with China’, the IMF said African countries must now explore domestic funding.

The report read in part, “Sub-Saharan Africa has forged broadly beneficial economic ties with China over the last two decades. China has become the region’s largest trading partner, a major credit provider, and a significant source of foreign direct investment. However, China’s support to Africa has also faced some criticisms. Recently, China has retrenched its financing activities in sub-Saharan Africa amid a growth slowdown and reduced risk appetite.

“The projected future deceleration in China’s growth is likely to affect African trading partners negatively over the medium term, mainly through reduced trade. Therefore, it is crucial that countries in the region strengthen their resilience and implement structural reforms to foster economic diversification, deepen intraregional trade, enhance competitiveness, and catalyze domestic growth.”

As a result of the development, the IMF report advised African countries, including Nigeria, to review their economic policies in view of China’ scaling down on the continent.

The report added, “Sub-Saharan Africa has to adapt to evolving economic ties. Sub-Saharan Africa has benefited from China’s growth takeoff, but the region needs to adapt to China’s growth slowdown and declining economic engagements. Navigating these new realities in a context of global uncertainty and amid increasing geo-economic fragmentation will require building resilience and implementing structural reforms that foster alternative sources of growth, including through diversification and enhancing competitiveness.

“Building resilience will help cushion against the negative spillovers from China’s growth decline. Increasing regional trade integration offers African countries the opportunity to diversify export destinations and import sources. The African Continental Free Trade Area is particularly promising, but its implementation will require substantial reduction of trade barriers and improvements in the broader trade environment, including reduction of non-tariff trade barriers. If all are realized, the median goods trade within Africa could increase by 53 percent and with the rest of the world by 15 per cent.

“This has the potential to raise the real per capita GDP of the median African country by more than 10 per cent and lift an estimated 30–50 million people out of extreme poverty. Rebuilding buffers and strengthening policy frameworks will help reduce macroeconomic vulnerabilities and external reliance. This includes reviving efforts to boost domestic revenue mobilization to reduce dependence on external revenue and financing while strengthening spending efficiency and generating alternative and sustainable sources of funding for development priorities. Measures include improving revenue administration and tax policy reforms.

“To offset China’s declining economic engagement in the region, structural reforms are necessary to foster alternative sources of strong, sustainable, and inclusive growth, such as: Promoting economic diversification, which is vital for forging new trade relationships beyond China and can mitigate the repercussions from changing global trade patterns. Oil-exporting countries need to gradually manage the transition away from a heavy reliance on Chinese demand.

“Moreover, as the world embraces the green energy transition, the region can seize opportunities in the strong demand for critical mineral exports that support renewable energy development. Countries can strive to develop more local processing capabilities while moving up higher value chain segments. Essential reforms—including adopting best practices in mining laws and enhancing public financial management—are crucial to capturing the potential windfalls and optimising economic benefits

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