Macroeconomic Effects of VAT in Nigeria: A Computable General Equilibrium Analysis

Olu D. Ajakaiye

Working Papers from African Economic Research Consortium

Abstract: This study analyses the impact of value added tax on key sectoral and macroeconomic aggregates, using a CGE model considered suitable for Nigeria. A survey of VATable Nigerian manufacturers, distributors, importers and suppliers of goods and services, organizations was conducted to gain insights into the way VAT is treated by these organizations. The survey shows that a majority of the VATable organizations treat VAT in a price cascading manner by regarding it as cost contrary to expectations. Evidence from the way VAT revenue is being shared among the three levels of government in Nigeria suggests that this revenue is being re-injected into the economy. Against this background, model simulations were run for three scenarios. The simulation results shows that if VATable organizations treat the VAT in the expected non-cascading manner and the VAT revenue is re-injected via increases in sectoral government consumption expenditure, the general price level will increase by 5%, total private consumption expenditures will fall by over 128, total consumption expenditure inclusive of government component will fall by only 6.7%, total gross output and GDP will fall by about 3% and 5% respectively, but the share of wages in total factor income will increase lightly. Private savings wilI increase by over 14% in order to secure the savings-investment balance because government and foreign savings will fall by about 4% and 11.6% respectively. If the VATable organizations treat the VAT in a non-cascading manner but the VAT revenue is sterilized the results show that although the price effects will be the same, the effects on the other sectoral and macroeconomic aggregates will be more deleterious than in the first scenario. Finally, when VAT is treated in a cascading manner by the VATable organizations and the VAT revenue is re-injected into the economy the price, consumption expenditure, output and income effects will be most deleterious. It turns out that this scenario where VAT will have the most adverse effects on price, consumption, output, employment and income best approximates the Nigerian situation. It will, therefore, be necessary to consider strategies for securing appropriate treatment of VAT by the VATable organizations while taking steps to ensure that the VAT revenue is targeted at sectors most likely to ameliorate the inadvertent adverse effects of VAT on consumer welfare, production, employment and income.

Date: 1999-03
Note: African Economic Research Consortium
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