Nigeria’s decision to maintain its current Value Added Tax (VAT) rate could cost the government up to 0.5 per cent of the country’s Gross Domestic Product in revenue, according to the International Monetary Fund (IMF). The warning comes even as the Federal Government continues to push ahead with ambitious tax reforms designed to modernise its fiscal landscape.

In its latest Article IV Consultation Report on Nigeria, the IMF acknowledged the government’s rationale for not raising the VAT rate—citing high poverty levels and ongoing food insecurity. With the federal cash transfer programme still only reaching 5.5 million out of a targeted 15 million households, the Fund described the timing of a VAT increase as “unreasonable,” but cautioned that the decision would carry significant fiscal consequences, especially for state and local governments.

“Unless alternative financing options are found,” the IMF report noted, “subnational governments may be forced to either reduce spending or raise their own revenues.” The impact is expected to be more muted at the federal level due to anticipated improvements in Company Income Tax (CIT) compliance, but the broader revenue base could face pressure without a clear medium-term plan.

Echoing the IMF’s concerns, the Nigeria Economic Summit Group (NESG) warned that delaying a VAT rate increase could undermine government revenue targets. Speaking in Abuja, NESG CEO Dr Tayo Aduloju said that while simplifying and strengthening tax administration is critical, “without those rate hikes, it means that the government might lose some revenue.” He called for a careful balance between tax reforms and revenue sustainability.

Despite these concerns, the IMF welcomed the reform agenda being pursued by the Presidential Committee on Fiscal Policy and Tax Reforms, describing it as essential to reversing Nigeria’s historically low revenue-to-GDP ratio. The implementation of digital tools, streamlined exemptions, and tighter enforcement could unlock “significant medium-term revenue potential,” the Fund said, but stressed that clarity and commitment to a timeline are vital to ensure policy credibility and investor confidence.

With public debt at 52.9 per cent of GDP and inflation hovering at 22.9 per cent as of May 2025, the government is walking a fiscal tightrope—prioritising social stability over aggressive revenue measures. However, both the IMF and NESG warn that delaying critical decisions, such as VAT adjustments, could raise the long-term cost of reforms and leave states scrambling for solutions.