Daniel Otera
The Federal Government’s decision to maintain the current Value Added Tax (VAT) rate may provide short-term economic relief to struggling households, but experts warn it could trigger long-term fiscal setbacks, particularly for state and local governments already grappling with tight budgets and increasing social obligations.
This concern was highlighted in the International Monetary Fund’s (IMF) 2025 Article IV Consultation Report on Nigeria, which estimated that holding the VAT rate steady could cost the country as much as 0.5 per cent of its Gross Domestic Product (GDP) in revenue.
“The decision not to raise the VAT rate now is reasonable, given high poverty and food insecurity,” the IMF noted, while acknowledging that the federal cash transfer programme had only reached 5.5 million of the 15 million targeted households.
While the Federal Government may offset the shortfall through anticipated improvements in Company Income Tax (CIT) compliance, the IMF cautioned that states and local governments will bear the brunt of the revenue loss.
“Assuming no alternative financing sources, they [states and LGAs] would have to raise additional revenue or reduce spending,” the report warned.
According to the IMF, Nigeria’s total revenue and grants rose sharply to 14.4 per cent of GDP in 2024, up from 9.8 per cent in 2023. This was attributed to currency depreciation, improved tax administration, and gains from subsidy and exchange rate reforms.
However, these revenue improvements were accompanied by a steep increase in public debt, which surged to 52.9 per cent of GDP, while interest payments consumed 41.1 per cent of Federal Government revenue—raising concerns about debt sustainability.
Despite endorsing the Federal Government’s ongoing tax reforms, particularly those driven by the Presidential Committee on Fiscal Policy and Tax Reforms, the IMF warned that the delay in VAT adjustment could weaken fiscal recovery.
“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,” the Fund stated.
The Federal Government controls the bulk of national revenue, with subnational governments heavily reliant on monthly allocations from the Federation Account Allocation Committee (FAAC).
According to BudgIT’s 2024 “State of States” report, 14 states sourced over 70 per cent of their total income from FAAC, while 32 states depended on it for more than 55 per cent of their revenue.
This dependence has made many states vulnerable to federal revenue fluctuations. A recent Foundation for Investigative Journalism (FIJ) analysis revealed that 30 of Nigeria’s 36 states failed to meet their 2024 capital expenditure targets, despite increased FAAC allocations. North Central states like Benue, Niger, Nasarawa, and Kogi were among those flagged for moderate to poor performance, having scaled back capital projects due to financial pressures and competing social demands.
The IMF also noted that while federal agencies can rely on expanding CIT collections or digital compliance tools, most states lack the technical infrastructure and policy autonomy to mitigate revenue shocks.
BudgIT’s data further indicated that 34 of 36 states derive over 55 per cent of their budgets from federal transfers. Only Lagos and Rivers States were classified as fiscally self-sufficient, based on their robust Internally Generated Revenue (IGR) profiles.
In states like Niger and Nasarawa, federal transfers account for more than 90 per cent of total revenue, making them particularly vulnerable during periods of low federal receipts.
A Premium Times report published in July 2025 also highlighted that many states continue to prioritise recurrent expenditures including salaries, overheads, and debt servicing over investments in healthcare, infrastructure, and education.
“Despite combined state budgets totalling N26.6 trillion, many subnational governments remain heavily indebted while essential public services remain underfunded,” the report stated.
The Nigeria Economic Summit Group (NESG) has also raised concerns over the potential implications of postponing a VAT rate adjustment. At a media session in Abuja, the Group’s Chief Executive Officer, Dr Tayo Aduloju, warned that delaying the hike could weaken the overall objectives of the tax reform process.
“Without those rate hikes, it means that the government might lose some revenue,” Aduloju said, according to Punch.
“You can’t simplify the tax system without simultaneously stabilising revenue. The VAT system reform must go hand in hand with a gradual rate adjustment.”
In a separate interview published by Voice of Naija, Aduloju warned that eliminating multiple taxes without addressing VAT would “weaken the government’s revenue base.”
Headline inflation in Nigeria remains elevated. The National Bureau of Statistics (NBS) reported that inflation stood at 22.97 per cent in May 2025, down slightly from 23.71 per cent in April.
Food inflation, a key driver of economic hardship for most Nigerians, was recorded at 21.14 per cent year-on-year, underscoring the fragility of household purchasing power.
These conditions help explain the government’s reluctance to increase the VAT rate at this time. Yet, fiscal experts argue that in the absence of a clearly articulated reform roadmap, prolonged hesitation may erode long-term public finance stability.
“This is not just about tax rates,” said Dr Tolu Osasona, a development economist. “It’s about sending the right signals and ensuring fiscal clarity to investors and the public.”
To support Nigeria’s ongoing reforms, the IMF confirmed it is providing technical assistance, including the deployment of a resident advisor to aid in revenue mobilisation. Priority areas include modernising VAT and CIT frameworks, eliminating redundant exemptions, and rolling out digital compliance systems across Ministries, Departments, and Agencies (MDAs).
Analysts believe that if effectively implemented, these reforms could raise Nigeria’s tax-to-GDP ratio currently around 10 per cent, among the lowest globally to at least 15 per cent by 2027.
However, experts stress that without a fully operational cash transfer mechanism or targeted social protection programmes, the country’s most vulnerable populations may remain exposed.
“The cost of delaying reform would fall on already stretched public finances, especially at the subnational level,” the IMF reiterated.
Nigeria faces a pivotal moment in its fiscal trajectory. The choice to freeze VAT rates may reflect compassion in the face of economic hardship, but it also carries the risk of further weakening state finances.