The Federal Government may lose as much as 0.5 per cent of the country’s Gross Domestic Product in revenue following its decision not to raise the Value Added Tax rate, the International Monetary Fund has disclosed.

In its latest Article IV Consultation Report on Nigeria, the IMF stated that although the recent tax reforms approved by the National Assembly and President Bola Tinubu represent a major step forward in modernising the VAT and Company Income Tax regimes, the choice to maintain the current VAT rate would lead to an immediate revenue shortfall.

“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 report noted.

While the Federal Government is expected to be largely insulated from the fallout—thanks to expected gains from improved CIT compliance—the blow will be felt most by state and local governments.

According to the Fund, unless alternative financing options are found, subnational governments may be forced to either scale back spending or ramp up their own revenue efforts.

The IMF, however, acknowledged the government’s justification for delaying a VAT hike, particularly at a time of worsening poverty and food insecurity.

With only 5.5 million of the targeted 15 million households reached under the federal cash transfer programme, the Fund noted that raising VAT at this stage could further strain vulnerable households.

Nonetheless, it cautioned that the cost of delaying reform would fall on already stretched public finances, especially at the subnational level.

“Assuming no alternative financing sources, they [states and LGAs] would have to raise additional revenue or reduce spending, which is assumed in the baseline,” the report said.

Despite this challenge, the IMF welcomed the tax reform agenda being driven by the Presidential Committee on Fiscal Policy and Tax Reforms, describing it as critical to reversing Nigeria’s poor revenue-to-GDP ratio, one of the lowest globally.

The reforms aim to boost compliance and enforcement, and the Fund believes they hold “significant medium-term revenue potential” once fully implemented.

Measures include modernising the VAT and CIT frameworks, tightening exemptions, and introducing digital tools to monitor compliance. Total revenue and grants reached 14.4 per cent of GDP in 2024, up from 9.8 per cent in 2023, buoyed by currency depreciation and improved administration.

However, public debt also rose, hitting 52.9 per cent of GDP last year, with interest payments consuming 41.1 per cent of Federal Government revenue. The IMF advised the government to maintain a neutral fiscal stance in 2025, stressing that revenue shortfalls should not lead to excessive borrowing.

It also urged the authorities to clearly set out a medium-term revenue plan, including timelines for further tax policy changes, to restore investor confidence and ensure policy credibility.

The report stated, “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.”

Nigeria’s decision not to raise VAT comes at a time of heightened global and domestic uncertainty. Lower oil prices, rising financing costs, and mounting social pressures have narrowed the government’s fiscal space.

The IMF observed that while reforms since 2023—including fuel subsidy removal and the liberalisation of the foreign exchange market—have improved macroeconomic stability, their benefits have yet to trickle down to most Nigerians.

With inflation still elevated at 22.9 per cent as of May 2025, and poverty levels worsening, the government appears to be prioritising stability over revenue acceleration, for now.

However, the IMF warned that the long-term cost of inaction could be higher if reforms stall or if subnational governments struggle to adjust.

In the meantime, the IMF continues to support Nigeria’s reform efforts, including through capacity development and the deployment of a resident advisor to assist with revenue mobilisation strategies.

The PUNCH earlier reported that the Nigeria Economic Summit Group warned that the Federal Government could face revenue shortfalls if it does not increase the value-added tax rate as part of the ongoing tax reform process.

The Chief Executive Officer of NESG, Dr Tayo Aduloju, made this statement during an interactive media session in Abuja. He emphasised that while reforms in the VAT system are essential, maintaining the current VAT rate without an increase could lead to a significant loss of revenue for the government.

Speaking on the issue, Aduloju said, “Without those rate hikes, it means that the government might lose some revenue.” Aduloju explained that the current tax reform process must strike a balance between simplifying the tax system and increasing the VAT rate to maintain revenue stability.

According to him, simply reducing the number of taxes without adjusting the VAT rate could weaken the government’s revenue base.