On January 13, Nigeria proposed to call an emergency meeting of OPEC to help stabilize oil prices. Oil prices on 12 January 2016 fell below $30 a barrel. Despite low oil prices OPEC will likely keep oil production at the same levels which could push prices further down. Part of this is part of a long-term strategy to reduce and eliminate North American oil production especially from the United States.
The decrease in oil prices has had a negative impact on Nigeria’s economy as it derives over 70% of its tax revenue from oil exports. The IMF has recommended Nigeria increase the VAT rate and improve the tax collection.
Nigeria is Africa’s largest economy and has one of the lowest VAT rate’s in the world at 5%. Nigeria is a member of the Economic Community of West African States (ECOWAS) and follows the ECOWAS model VAT law. Most of its neighbors in ECOWAS have VAT rates between 10% and 20% and have considerably smaller economies with Nigeria being three times the size of all the other members combined. So, there is room for the VAT rate to increase but this would need to be combined with more efficient revenue collection to maximize the impact.
In 2015, there was a discussion of doubling the VAT rate from 5% to 10% to deal with the new normal of low oil prices. However, no proposals have been approved to double the VAT increase. Japan is still working to double its VAT rate from 5% to 10% and this will be expected to be completed only in 2017. An economy as large as Nigeria an overnight doubling of the VAT rate is unlikely and most there will be a gradual increase if any.