Nigeria’s federal government is contemplating a significant hike in the Value Added Tax (VAT) rate, aiming to raise it from the current 7.5 per cent to 15 per cent by 2027. This move is anticipated to bolster government revenues, allowing it to tackle fiscal deficits, service debts, and fund crucial social and job creation initiatives, as outlined in a recent report by the Economist Intelligence Unit (EIU).
According to the EIU’s Country Report, Nigeria is facing a widening deficit, projected to reach five per cent of Gross Domestic Product (GDP) in 2024, slightly surpassing estimates from the previous year. This trend is anticipated to persist, with deficits averaging 4.5 per cent annually between 2025 and 2028, surpassing the legal limit of three per cent of GDP. This signals a phase of unusually relaxed fiscal policy for the country.
On the foreign exchange (FX) front, the EIU forecasts a weakening of the naira to N2,381 against the dollar, with a spread of five per cent to 15 per cent relative to the parallel market. The report highlights persistent challenges such as high inflation, deficit monetization, negative real interest rates, low foreign reserves, and a backlog of foreign exchange orders, which continue to erode confidence in the naira, despite a recent 45 per cent devaluation.
The EIU suggests that foreign borrowing may be utilized to replenish foreign reserves, stabilizing the local currency by the end of 2024. However, it cautions that fluctuations in confidence could lead to sharper depreciation or appreciation of the naira. Additionally, the report anticipates a potential 100 basis points increase in the Monetary Policy Rate (MPR) to 23.75 per cent in 2024, subject to factors such as deficit monetization and persistent imported inflationary pressures.
Furthermore, the report indicates a gradual rise in foreign exchange reserves over the forecast period, supported by a more market-driven exchange rate system and increased access to foreign borrowing. Despite these measures, foreign reserves are expected to provide only about seven months of import cover by 2028.
The EIU underscores the challenges posed by rising public debt, with the public debt-to-GDP ratio projected to surge to 50.4 per cent by 2028, up from less than 20 per cent in 2022. This escalation is attributed to substantial budget deficits driven by ambitious job creation and infrastructure spending agendas, coupled with implicit subsidies on essential commodities.
In terms of inflation, the report forecasts an average of 30.3 per cent in 2024, fueled by various factors including anticipated VAT rate hikes, insecurity in agricultural regions, and Nigeria’s infrastructure deficit. Despite expectations of a gradual decline in inflation, it is projected to remain well above the 6-9 per cent target range throughout the forecast period.
Regarding monetary policy, the EIU predicts a continuation of a tight stance in the near term, with a potential shift towards expansionary policies from 2025 onwards, depending on inflation trends and economic growth objectives.
The report also discusses Nigeria’s economic growth prospects, highlighting challenges such as high inflation, monetary tightening, and security concerns, which are expected to constrain GDP growth to 2.5 per cent in 2024. However, a rebound in domestic demand and net exports is anticipated to drive growth to 3.5 per cent in 2025 and average 3.3 per cent annually in the subsequent years, albeit hindered by infrastructure gaps and security issues.
In conclusion, the EIU report emphasizes the need for coherent policy measures to address Nigeria’s economic challenges, including fiscal consolidation, structural reforms, and enhanced investor confidence. However, it cautions that political considerations and institutional constraints may hinder the implementation of these reforms, underscoring the importance of prudent fiscal management and sustainable economic policies to ensure long-term stability and growth.
