Juliana Taiwo-Obalonye, Washington DC
The International Monetary Fund (IMF), has advised Nigeria as well as other income countries to build fiscal buffers so that they are ready to tackle challenges that would inevitably come.
The Director of Fiscal Affairs Department, IMF, Vitor Gasper, made the call Wednesday at the Fiscal Monitoring pressing briefing at the on going 2018 Spring Meetings in Washington DC,
He said, “When we insist that low income countries should be improving their tax revenue mobilisation, we see that as an instrument of sustainability and development.
“In that context, higher tax capacity could also help sustain debt service. But that is not an end. The end in itself is the ability to stand on priority areas – health, education, public infrastructure, and others.
“Governments are well advised to build fiscal buffers so that they are ready to tackle challenges that would inevitably come.”
Catherine Pattillo, Assistant Director, Fiscal Affairs Department, IMF, on her part noted,”I think we can all agree that for Sub Saharan African countries that sustained development and increasing per capita income roof which is built on macro stability is the main priority and the fund has been working with African countries to help build tax capacity so that countries can sustain levels of public debt and also so that they can mobilize spending for health, education, infrastructure so the composition of borrowing in countries is changing as you mentioned and those rising public debt is changing in composition is creating some vulnerabilities and some risks.
“Borrowing by countries can create benefits if used for investments of high returns our evidence suggests that’s not the case in some countries so rising debt then create the vulnerabilities, There will be interest rate risks, market risks and large interest burdens that will squeeze out spending priorities. With high debt, countries need to deliver on their fiscal plans for adjustments and use borrowed funds for high return investments.”
Speaking on Nigeria’s interest debt serving rate which she said is very high at 63 percent, added that there is need to spend more on infrastructure, social safety nets among others.
Pattillo said, “You have seen the most recent IMF staff report on Nigeria which was emphasizing that with a constraining debt servicing as you know the ratio of federal government interest payment to debt revenue is extremely high, 63 percent, so there is a need to build revenue so that you have more space to spend for infrastructure, social safety nets etc otherwise interest is eating up most of your revenue so building revenue is key and how do you do that?
The recommendation in the IMF staff report is to broaden the tax base by removing exemptions, to rationalize tax incentives in particular to strengthen tax compliance and our recommendation to raise the VAT rate. So those were the recommendations for Nigeria on tax.”
On Nigeria’s current debt restructuring strategy that is tilted towards more of foreign debt and less of domestic debt, Pattillo said, “There is merit to that strategy. Factors that support that is that Nigeria’s current external debt to GDP ratio is low so the external interest payments are relatively low. The benefits of that switch is a reduction in overall interest payments and a lengthening of maturities.
“The emphasis is that countries have these risks of very high interest payments to revenue because of large borrowing and exhibiting change in borrowing. There’s more non-concessionary borrowing, there’s more domestic borrowing so if you have problems repaying your debts then yes, its a risk for futuire borrowing. People don’t want to lend if they think that there’s some risk that repayment won’t happen.”