Emefiele: Better to Boost Revenue By Raising VAT than Borrowing

Godwin Emefiele
CBN Governor, Mr. Godwin Emefiele
  • No going back on cashless policy  
  • Wants redundant public assets privatized

James Emejo in Abuja 

The Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele yesterday justified the proposed move by the federal government to increase the value added tax (VAT), which is currently at 5 per cent to 7.5 per cent.

He said the government was apparently left with no other option than to raise taxes to meet its obligations- amidst criticisms over the country’s rising debt profile as well as the burden to service such debts.

The CBN governor also assured Nigerians that the planned nationwide implementation of the cash policy scheduled for March 2020 would be of immense benefits to the people and the country in general.

Addressing journalists at the end of the two-day meeting of the Monetary Policy Committee (MPC), Emefiele said government’s current drive to increase VAT had the potential to improve fiscal revenue to support expenditure and reduce the budget deficit as well as government borrowing, when implemented. 

Notwithstanding public outcry over the proposed increase, the MPC noted that the rate of VAT increase “was too little to close the gap in government finances.”

Accordingly, the MPC urged the government to, as a matter of urgency, adopt what it termed a ‘Big Bang’ approach towards building fiscal buffers by purposefully freeing-up redundant public assets through an efficient, effective and transparent privatisation process.

This, according to the committee, would raise significant revenue for government and resuscitate the redundant assets to generate employment and contribute effectively to national economic growth. 

The MPC further noted the unstable oil prices, its implications on accretion to external reserves and its persistent call on the government to build fiscal buffers. 

Consequently, the Committee urged the National Assembly to exercise restraint from increasing the oil price budget benchmark to avoid budgetary overruns at the implementation stage of the budget. 

It noted that projections from the oil futures market indicate that oil prices will remain tight around the budget oil price benchmark in the medium term.

The apex bank, however, resolved to retain the Monetary Policy Rate (MPR) otherwise known as interest rate at 13.5 per cent.

The MPR is the rate at which the CBN lends to the real sector and often determines the cost of borrowing in the economy.

It further retained the asymmetric corridor at +200/-500 basis points around the MPR while the Cash Reserve Requirements (CRR) and Liquidity Ratio remained at 22.5 per cent and 30 per cent respectively.

Emefiele said the Committee decided by a unanimous vote to hold the MPR and all other policy parameters constant. 

According to him, “In its considerations regarding the policy options to adopt, the MPC as usual, felt compelled to review the options of whether to tighten, hold or loosen.

“The Committee noted the positive moderation in inflation, though slowly from 11.08 per cent in July to 11.02 per cent in August 2019. Given that this was still above the target range of 6-9 per cent, and considering the pressure on reserve accretion caused by the relatively weak crude oil price, the MPC felt the imperative to tighten.”

He added: “On the contrary, the MPC was of the view that doing so in the midst of a fragile growth outlook, would increase the cost of credit, and further contract investment and constrain output growth.

“On loosening, the Committee felt that this would result in increased system liquidity and hence, heighten inflationary tendencies in the economy. In particular, the MPC was of the view that loosening would drive growth in consumer credit but without a corresponding adjustment in real sector output. 

“The Committee was also convinced that increased liquidity and interest rate moderation would result in exchange rate pressures as money supply rises.

“As regards the option to hold, the MPC opined that the option requires a clear understanding of the quantum and timing of liquidity injections into the economy, before deciding on possible adjustments to the stance of monetary policy. 

“The Committee was also of the opinion that retaining the current position of policy offers pathways to appraising the effects of the suit of heterodox monetary policy to encourage credit delivery to the real sector, especially in the light of the subsisting implementation of the Loan-to-Deposit Ratio policy.”

On the proposed VAT hike, the CBN governor said: “My response here is that the government has a responsibility to fend for everybody. In fending for everybody means it has to spend money to provide infrastructure, roads, airport and different things that will improve the lives of our people.

“But there are two ways through which the government can fund this expenditure: It is either it raises revenue or it goes for debt.  

You all know that the government has been criticised that the debt stock is too high. You all know that government has been criticised that its debt service ratios are too high.”

He further added: “When you say the debt service ratio is too high, it means that your interest rate is too high to revenue and what that also means is that your revenue is small because if your revenue is large, then your debt service ratio should be lower.

“Government unfortunately will not have any options if we say government should not borrow- then government must raise revenue. If government must raise revenue and we think that this should be one way through which the government can raise revenue to meet its obligations, I think it calls to a rationale that what we are saying is that it is the right decision to say that government has to increase VAT from 5 per cent to 7.5 per cent.”

He further clarified: “Yes, we agree that this may be painful but it is important that we understand that government also has an obligation that it must meet and so it must raise revenue.

“And what is this VAT rate? 7.5 per cent: compare the VAT rate in Nigeria to VAT rate in any part of the world. Nigeria’s VAT rate even at 7.5 per cent stands at one-off if not the lowest in the world.

“I think I will just have to appeal to Nigerians to please try to show understanding. It may seem painful but again, it’s important for us to know that when government spends because you are looking at the adverse consequences it has on the purchasing power of the person who will spend.”