The International Monetary Fund has called on Nigeria and other Sub-Saharan African countries to urgently reform their tax systems and strengthen debt management frameworks to tackle rising fiscal vulnerabilities and unlock financing for development.

It warned that the region’s fragile economic stability could be jeopardised if reforms continue to stall.

In its latest Regional Economic Outlook for Sub-Saharan Africa titled “Holding Steady”, obtained on Friday, the Fund said the region faces rising fiscal vulnerabilities, stubborn inflation, and weak access to finance, which threaten to derail post-pandemic recovery gains.

The Fund noted that the region must adopt innovative financing tools, such as blended finance and debt-for-development swaps, while improving domestic revenue collection to sustain growth amid tightening global financial conditions.

According to the Fund, Africa’s development financing gap remains wide, with total blended finance inflows to the region averaging just $6bn annually, barely enough to meet mounting infrastructure, health, and green energy needs.

Blended finance combines concessional funding such as grants, low-interest loans, or guarantees with private capital to de-risk investment in key sectors like renewable energy, healthcare, digital infrastructure, and agriculture. Examples include renewable energy projects in Tanzania, agriculture in Senegal, and health initiatives in Nigeria.

The report read, “Debt management reforms can also support innovative financing mechanisms. Blended finance, combining concessional finance, such as grants, concessional loans, or guarantees, with commercial capital, can help reduce risk for private investment in sectors including green energy, digital infrastructure, and health (for instance, renewable energy in Tanzania, agriculture in Senegal, infrastructure in Mozambique, health in Nigeria, and microfinance in Ethiopia).

“But total blended finance flows to sub-Saharan Africa remain small (about $6bn per year). Similarly, debt-for-development swaps, where appropriate, can boost investment in support of social development as well as climate adaptation and biodiversity. Examples include Côte d’Ivoire’s 2024 Debt for Education swap and Gabon’s 2023 Debt for Nature swap. But, again, debt swaps remain rare and comparatively small (typically below $1bn per year globally).

“Scaling up these flows requires credible policy and regulatory frameworks, data and debt transparency, improved public financial management and, for debt swaps, less costly and more streamlined processes.”

However, the IMF warned that Africa’s access to such mechanisms remains constrained by weak regulatory frameworks, opaque debt data, and high domestic borrowing costs. “Scaling up these flows requires credible policy and regulatory frameworks, data and debt transparency, and improved public financial management,” the report noted.

On tax policy, the IMF identified Nigeria and several peers as countries that need to “rationalise costly and opaque tax expenditures”, such as exemptions, preferential rates, and deferrals that erode accountability and public trust.

It urged governments to simplify value-added tax regimes, reduce arbitrary exemptions, and bring the fast-growing digital economy into the tax net. Excise taxes, it said, should be redesigned to promote public health and environmental sustainability.

The IMF advised that sustainable revenue mobilisation and prudent debt management are critical for Nigeria to reduce its overreliance on expensive borrowing and to fund development priorities such as infrastructure, education, and healthcare.

“Two policy priorities spotlighted here can alleviate these constraints. First, strengthening domestic revenue mobilisation can create durable fiscal space to finance development while reinforcing macroeconomic stability. Second, enhancing debt management can improve access to finance, lower borrowing costs, and reduce the risk of debt distress.”

“There is significant scope for the region to rationalise costly and opaque tax expenditures, including exemptions, deductions, credits, preferential rates, and deferrals, which undermine accountability and trust in institutions.

“A tax system perceived as fair and understandable reduces noncompliance,” the report noted. “Building public trust that tax authorities will safeguard resources and spend efficiently is an important driver of the willingness to pay tax report,” the IMF stated in the report.

It cautioned governments to assess the social impact of new tax policies, citing the backlash against Uganda’s 2018 mobile money levy and Zambia’s abandoned plan to replace VAT with a non-refundable sales tax.

Nigeria, Africa’s largest economy, continues to grapple with low tax revenue and high debt servicing costs. According to the IMF, domestic financing has become increasingly expensive across the region, raising concerns about “crowding out” of private investment.

The report revealed that in several African countries, including Nigeria, “new domestic public borrowing is significantly more expensive than external borrowing,” partly due to underdeveloped capital markets and inflationary pressures.

“Domestic bank holdings of sovereign debt are large and growing faster in sub-Saharan Africa than in the rest of the world,” the Fund warned. “This creates a vicious potential feedback loop: deteriorating sovereign creditworthiness affects the soundness of the banking sector, reduces private credit, and worsens fiscal challenges.”

The IMF’s warning comes as Nigeria’s Presidential Fiscal Policy and Tax Reforms Committee, led by Taiwo Oyedele, accelerates plans to simplify the country’s complex tax structure and double its tax-to-GDP ratio from under 10 per cent to 18 per cent within a few years.

Oyedele recently said the government aims to make tax payment easier, cut overlapping levies, and increase compliance through digital tools.

“Nigeria doesn’t have a revenue problem; it has a collection and efficiency problem,” he told journalists earlier this month. “The goal is not to burden citizens but to make the system simpler, fairer, and more transparent.”

The Fund concluded by urging African leaders to show stronger ownership of reforms and engage citizens through transparency and communication.

“Broad-based consultations, transparent communications, and framing reforms in local terms, with city services financed by your tax’, increase the likelihood of reform success.

“Given the complex challenges, a strong ownership of reforms and deft handling of the political economy will be needed,” the Fund concluded.