The International Monetary Fund (IMF) asked the Central Bank of Nigeria (CBN) yesterday to let commercial banks set the rates for buying and selling dollars to bring more foreign money into the economy.
The Fund said it is still essential for foreign investors to have faith in the economy that there is a single, market-clearing exchange rate.
The IMF said this in its 2022 Article IV Consultation concluding statement, written after an official staff visit to Nigeria. The IMF insisted that continued forex shortages, a stable exchange rate regime, rising inflation, limited debt servicing capacity, and administrative restrictions on current transactions fuel devaluation speculations.“These factors hinder much-needed capital inflows, encourage outflows, and constrain private sector investment. The mission reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN, accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies.
“In the medium term, the CBN should step back from its role as main forex intermediator, limiting interventions to smoothing market volatility and allowing banks to determine forex buy-sell rates freely,” the report said.
The Fund also told Nigeria that a big step toward closing the fiscal gap would be to get rid of fuel subsidies and stop oil theft. The Fund said that getting rid of fuel subsidies, which primarily help the rich, entirely and permanently by mid-2023, as planned, is an important short-term goal.
“The government should also prioritize addressing oil thefts and governance issues in the oil sector to restore production to pre-pandemic levels. Step up implementation of tax administration reforms,” it said.
The Fund said that fiscal transparency is essential to a sound fiscal policy. “Notwithstanding recent improvements, some gaps remain. While the authorities have published the annual financial reports of the Nigeria National Petroleum Corporation (NNPC) since 2019, uncertainties remain regarding the nature of tax write-offs and fuel consumption volumes”.
“The mission recommended a closer look at the nature of NNPC’s financial commitments to the government and the costing details of the fuel subsidy, including through a financial audit.”
The IMF also told Nigeria to close down the Asset Management Corporation of Nigeria (AMCON) by the end of 2023 and fix smaller banks that aren’t doing well.
The Fund said that even though oil prices are rising, the economy is growing at a rate just a little bit faster than the population growth rate.
“The double-digit increases in Nigeria’s terms of trade and significant improvement in the trade balance created an opportunity to build fiscal space and foreign exchange (FX) reserves, but that opportunity was not harnessed,” the report said.
IMF said that inflation is high and that fuel subsidy continues to take a big bite out of government revenue. It also noted that ensuring macroeconomic stability requires tightening all policy levers, bringing in more money, and changing the exchange rate.
“In addition to consistent macroeconomic policies, a more robust growth trajectory would require measures to tackle governance weaknesses and implement trade and agricultural reforms decisively,” it said.
The mission was pleased with how well the tax automation system (TaxPro Max) was being used. It suggested that more work be done to increase coverage under a well-designed roadmap and improve taxpayer segmentation, with a focus on the Large Taxpayer Offices (LTOs).
In the middle term, it asked the government to create a compliance improvement program and a comprehensive customs modernization program, improve how well the State Internal Revenue Service runs the Pay-As-You-Earn (PAYE) system, and make it easier for agencies to work together and share information.
As compliance with the law gets better, the mission told the government to consider lowering tax rates to levels similar to the average in the Economic Community of West African States (ECOWAS).
“This includes increasing the VAT rate to 15 percent by 2027 while streamlining numerous VAT exemptions based on systemic reviews, increasing excise rates on alcoholic and tobacco products while broadening the base, and rationalizing tax incentives by streamlining tax expenditures based on comprehensive periodic reviews.”
