IMF backs Nigeria to delay VAT hike, says “you cannot tax poverty”

The International Monetary Fund (IMF) has backed Nigeria’s decision to hold off on raising its Value Added Tax (VAT) rate, saying the move is appropriate given high poverty levels and food insecurity across the country.

In its Article IV consultation report released Wednesday, the IMF said “the decision to not 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.”

The Fund’s message comes at a time when households are grappling with sharp price increases and lagging income growth, new taxes risk worsening hardship.

The recommendation comes as Nigeria’s government pushes forward with a broader fiscal reform agenda, including efforts to modernise tax collection and improve efficiency in public finance.

While acknowledging “recent improvements,” the IMF noted that “Nigeria continues to have one of the lowest revenue collection ratios in the world.”

Nigeria’s tax reform bills – developed by the Presidential Committee on Fiscal Policy and Tax Reforms, approved by National Assembly and signed into law by President just last week —aim to overhaul the VAT and Corporate Income Tax (CIT) systems.

According to the Fund, these measures should “improve compliance and facilitate enforcement.”

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Nigerian authorities see significant medium-term potential from the reforms once fully implemented, and the IMF is supporting this effort through capacity development, including a resident advisor.

Still, the Fund warned that postponing a VAT rate hike will have a short-term cost. It estimates the delay will “reduce consolidated government revenue by up to ½ percent of GDP.”

However, the federal government will likely be less affected due to a compensating increase in CIT from lower deductions. “The loss would instead fall on state and local governments,” the IMF added.

With no new financing sources currently in place to fill the gap, subnational governments may be forced to either increase their own tax collections or cut spending. “Assuming no alternative financing sources, they would have to raise additional revenue or reduce spending, which is assumed in the baseline,” the IMF wrote in the report.

Rather than rushing to raise rates, the IMF advised Nigeria to focus on long-term credibility and sustainability in its fiscal plans.

It recommended that authorities “pre-commit to an implementation timeline for further policy measures in an updated medium-term framework.”

This, the Fund argued that this would strengthen investor confidence, provide greater clarity on available resources, and ensure that development spending and social protection for the most vulnerable remain priorities.

The Fund also noted that its technical assistance is actively supporting Nigeria’s revenue reform agenda, helping the country balance the urgent need for more revenue with the imperative to protect its poorest citizens.