Nigeria’s aggregate revenue is expected to grow by five per cent by 2024 if the federal government is able to remove the costly fuel subsidy between now and 2022, a report by the Economist Intelligence Unit (EIU) has shown.
That would mean a significant increase in Nigeria’s revenue to gross domestic product (GDP). In 2020, general government revenue as a percentage of GDP for Nigeria was 6.3 per cent.
Minister of finance, budget and national planning, Zainab Ahmed had claimed that the government wants to end the petroleum under-recovery, popularly known as fuel subsidy, but noted that scrapping the support is unpopular. The subsidy payment is planned to gulp N900 billion in 2022.
The EIU in its country report on Nigeria said while there may be a renewed push to divest from loss-making public enterprises as a means of alleviating fiscal pressures, privatisation receipts will not compensate for an abysmally low tax take or an over-dependence on oil revenue.
In the report that was recently released, the Economist projected that Nigeria’s public debt would reach 35.4 per cent of GDP in 2025. The government has raised its public debt limit to 40 per cent of GDP to incorporate higher budget shortfalls over the medium term and to accommodate securitisation of Central Bank of Nigeria (CBN)’s deficit-financing as long-term debt.
The Economist also projected that the federal government would increase its value-added tax (VAT, currently at 7.5 per cent) to 15 per cent latest by 2025 to make up for shortfalls in public finances.
“We expect three equal VAT rate increases, taking the rate to 15 per cent by 2025. The first is expected in 2022, prior to the next elections but seemingly inevitable given a rising debt burden, with further rises in 2024 and 2025,” the report said, stating that “Even then we expect fiscal revenue to peak at just five per cent of GDP in 2024, which also assumes no fuel subsidies (costs for which are deducted from revenue) beyond 2022.”
The London-based research unit said VAT rate increases and rising oil prices will push down the deficit in Nigeria’s budget to 2.6 per cent of GDP in 2023-24, but a decline in average global oil prices in 2025 will cause the shortfall to widen to three per cent of GDP in that year.
The report predicts that the government will halt its pro-market reform agenda to avoid aggravating the situation, with long-term implications for critical inputs such as electricity supply.
“Near-term economic growth will be muted by high inflation and unemployment, and low nominal wage growth and consumption. Monetary policy will tighten from 2022. A current-account deficit in 2021 and low short-term interest rates will cause the naira to be devalued.
“The Economist Intelligence Unit expects the balance to turn to a surplus in 2022, and the naira will remain fairly stable until 2025, when we expect another devaluation,” the report that was obtained by LEADERSHIP yesterday said in part.
Noting that budget out-truns have rarely been close to initial plan for many years, the analysts said policy is clearly slanted towards austerity, with the expenditure/GDP ratio declining from an estimated eight per cent in 2021 in the MTEF/FSP, to 7.6 per cent in 2022, as a result of cuts to the capital budget of just under N760 billion, thereby allowing the recurrent budget to increase for items such as personnel costs.
The Economist Intelligence Unit President Buhari will be under immense pressure to stabilise Nigeria, but myriad security threats will prove unmanageable, with the military and police overstretched and unable to tackle simultaneous security crises.
“The government will be unable to regain full dominion over the north-east,” it stated.
Noting that Nigeria has a system that is resilient enough to keep the government in power, the EIU said it will however leave many parts of Nigeria highly dysfunctional. “Security challenges will be pronounced in numerous areas of the country, with unrest in the south-east attributed to Biafran secessionist groups and a broader surge in kidnappings by organised criminal networks.
“Banditry and violent crime will remain pervasive, and other areas of Nigeria could begin to resemble the north-east as, in essence, ‘no-go’ zones, Neglect of the periphery could eventually reach an implosion-point for overall stability, but we do not expect this within the 2021-25 forecast period.”
The EIU said foreign-exchange restrictions on various imported goods, including staple foods, and currency movements are cost-push factors, but base effects will reduce domestic food prices in the latter half of the year.
The analysts at the research arm of The Economist magazine said it expects annual inflation to begin to fall from 2022 to an average of 10 per cent in 2024 if exchange
rate stabilises and the CBN tightens monetary policy.
It said foreign-exchange controls on imported goods, conflict in the Middle Belt—Nigeria’s breadbasket—and an eventual return to market pricing for fuel will
prevent faster disinflation.
It also claimed that currency devaluation in 2025 will cause the average rate to increase again, to 12.5 per cent.