– Tougher times ahead, as tax rates tends to increase
There are signs that Nigerians may face tougher times as the Federal Government aims to repay the $3.4 billion (N1.224 trillion) loan from the International Monetary Fund (IMF) at the weekend, as they repay by the end of the 2025 stipulated time.
The Executive Board of the IMF on Tuesday, approved the loan request for emergency financial assistance of US$ 3.4 billion under the Rapid Financing Instrument (RFI) to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic.
Although loans under RFI are not usually accompanied by normal IMF preconditions, government has committed to certain policy implementations in order to strengthen its ability to fully repay the loan within stipulated time.
Some of these conditions include complete removal of petroleum subsidies, which it said will never be rescinded; full removal of electricity subsidy by 2021; further increment of value added tax (VAT) rates among others.
In order to further shore up government revenue, President Muhammadu Buhari has ordered the immediate implementation of the Orosanye Report through which thousands of workers will be retrenched as their ministries, departments or agencies may be either scrapped or merged.
Minister of Finance, Budget and National Planning, Zainab Ahmed, disclosed that the Federal Government had set up machinery to borrow at least $7 billion (N2.5 trillion) from the International Monetary Fund (IMF), World Bank, African Development Bank (AfDB) and others to fight the twin evil of the coronavirus pandemic and depressed crude oil price.
She said Nigeria applied for $3.4 billion loan from IMF, devoid of any normal conditions; $2.5 billion from World Bank and $1 billion from AfDB, but refused to disclose how much government applied for from Islamic Development Bank and other multilateral agencies.
Although the, Debt Management Office (DMO) said as of December 2019, the Federal Government’s domestic debt stood at N14.2 trillion, while external debt was $27,676.14 (N10 trillion).
DMO said in addition that between January and December 2019, the Federal Government paid N480.4 billion on servicing external debts.
However, although the IMF loan expected to have been released through the Central Bank of Nigeria (CBN) on Friday was without the usual IMF preconditions, observers see it as nonetheless both expensive and choking.
Professor of Capital Market, Uche Uwaleke, described the loan as non-concessional with commercial terms being disbursed under the IMF’s Rapid Financing Instrument (RFI) which, in addition to a basic interest rate charge, attracts a commitment fee, service charge and a surcharge on outstanding credit.
“The facility is for a short period due within three and one quarter to five years which means repayment will be done in eight quarterly instalments starting in the third quarter of 2023, assuming disbursement is made before end of Q2 2020.
The IMF Country Office in Abuja told Sunday Tribune during the week that “outstanding fund drawings under the RFI are expected to be repaid in eight quarterly installments, starting three quarter years and ending five years from the original drawing date, while interest rate on outstanding Fund credit (including RFI credit) is comprised.
“A basic rate of charge that is based on a market-determined special drawing right (SDR) interest rate (0.05 percent for the week ending April 30, 2020), plus a margin set by the Executive Board every two years (currently at 100 bps).
“Charges are billed on a quarterly basis and are payable in SDRs. The IMF’s financial quarters end in July, October, January, and April,” she said.
In addition, a service to the above interest payments, a service charge of 50 basis points of the amount drawn at the time of each drawing will also apply.
In the application for the loan, the Federal Government promised to repay the loan by beefing up its revenue generation.
“First and foremost, we will revert to our government’s planned medium-term fiscal consolidation path—which includes increasing revenue to 15 per cent of GDP through further VAT reforms, rise in excises, and removal of tax exemptions— once the crisis passes.”
The recent introduction and implementation of an automatic fuel price formula will ensure fuel subsidies, which we have eliminated, do not re-emerge.
The existing stock of overdrafts held at the CBN will also be securitised.
“We will move towards full exchange rate unification and greater exchange rate flexibility, which would help preserve foreign exchange reserves and avoid economic dislocation.”
In 2020, the Federal Government will reduce its electricity subsidy to a maximum of N380 billion and remove it completely in 2021.
Government has also committed to strengthening powers of Auditor General of the Federation to ensure public officers fully declare their assets.
“In line with IMF safeguards policy, we commit to undergoing a new safeguards assessment conducted by the Fund.
“To this end, we have authorised IMF staff to hold discussions with external auditors and provide IMF staff access to the CBN’s most recently completed external audit reports.
“We do not intend to introduce measures or policies that would exacerbate the current balance of payments difficulties.
“We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance of payments purposes, or multiple currency practices or to enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF’s Articles of Agreement,” she said.