Border closure, VAT, minimum wage will fuel inflation —EFG Hermes
As experts say Nigeria’s economic risks in 2020 are still the same since 2015, and they include weak economic growth, increasing poverty levels, and foreign direct investor apathy, PAUL OGBUOKIRI reports that President Buhari’s promise of taking 100 million Nigerians out of poverty in 2023 will face stiffer challenge this year
A challenged economy
According to Bismarck Rewane, a member of the Presidential Economic Advisory Council, and Managing Director/Chief Executive Officer, Financial Derivatives, Nigeria will likely achieve a higher economic growth of 2.3 per cent in 2020. He however said that this growth projection is subject to how the authorities respond to three major factors. These factors he said include investors’ concern about the current trend of negative real interest rates, external sector vulnerabilities and infrastructure.
Other economists who spoke to Sunday Telegraph on the expected performance of the Nigerian economy in 2020, said the Nigerian economy stated that the economy is challenged but there is a way out for the country and it is by implementing economic reforms that can spur investment, boost growth and create jobs.
They economist who spoke to Sunday Telegraph in different interview at the weekend, said in 2020, much will depend on six things if the economy is to look better than it was in 2019.
“First is whether private capital will remain ironically shut out of Nigeria; whether the government will retain full ownership of redundant assets that can be transformed with an influx of private capital and expertise?”
This they said could have the single biggest impact on economic growth this year, seeing that the main driver of growth in 2019 and perhaps each year in the last decade- the oil sector- could run into troubles of its own in 2020.
They said that there is need to open up new sectors to private capital as a way of boosting economic growth is hardly new counsel in Nigeria but nothing has changed.
The next factor to consider they said for 2020 is whether the country’s multiple exchange rates practice will remain, even though estimates set in the 2020 budget that show an exchange rate peg of N305 per dollar suggests the practice- said to be deterring investment- will indeed stay.
The N305 rate is to be for government transactions while a much weaker rate of N360 is the market rate for investors and exporters.
The next is whether initial steps to gradually phase out the costly petrol subsidy will be taken and if electricity will be priced on market terms.
They were however of the opinion that given that President Muhammadu Buhari has fought off pressure to implement these reforms for the most part of his five year administration gives little optimism for change.
The next is for how long the current financial repression in the market, whereby local investors have been handed big headaches by CBN policies that have forced government bond yields below inflation, will continue.
There are two positive implications of the CBN’s determination to force yields down. First is it reduces the government’s borrowing costs and second is it has improved credit to the private sector. Whether it is sustainable and is without long term damages to lenders’ asset quality remains to be seen.
What happens to government finances in 2020 is the other factor to consider in making predictions about how the economy will fare.
There will be more focus on driving taxes in 2020. The increase in VAT to 7.5 per cent kickstarts this year and a mulled communications tax could boost tax revenues.
Finally, much will also depend on whether Nigeria continues with a raft of protectionist policies that contradict signing the African Continental Free Trade Area agreement.
Economy strengthening this year
Meanwhile, in a bid to shore up non-oil revenue and improve the business environment, President Muhammadu Buhari signed into law a finance bill in mid-January which raised the Value Added Tax (VAT) rate from 5.0 per cent to 7.5 per cent, though exempting it on certain foodstuffs, and provides tax breaks for small businesses.
Economic growth is seen strengthening only slightly this year, mainly driven by firmer household spending on the back of the minimum wage hike. Conditions remain challenging, however, with overall activity weighed on by power shortages, elevated unemployment, high inflation, insecurity and a more subdued global economy. FocusEconomics panelists see GDP growing at 2.5 per cent in 2020, which is up 0.1 percentage points from last month’s estimate, and 2.7 per cent in 2021.
Inflationary trends to remain
This is coming the declaration of the Chief Executive Officer (CEO) of EFG Hermes Nigeria limited, Lilian Olubi in her capital markets outlook for 2020, that foreign participation in the Nigerian Stock Exchange in 2019 tilted to the ‘sell’ side as concerns remained about the macro economy, inconsistent policies and the stability of Nigeria.
According to her, government policies are expected to remain the same in this year and the currency stability objective of the Central Bank of Nigeria (CBN) firmly pursued.
“The macroeconomy is expected to remain challenging in 2020 with growth forecasted to be about 2.4 per cent driven by non-oil activity.
“Non-oil activity to be boosted by growth in agriculture and increased credit to the private sector with the later growing by 1.9 per cent in December 2019
She said inflationary pressures are expected to remain due to the border closure, increased VAT and implementation of increased minimum wage, adding that currency would remain stable throughout the year with no imminent risk of devaluation as far as oil price remains above the $50pb mark.
Buhari’s plan to lift 100 million Nigerians out of poverty
President Muhammadu Buhari says the All Progressives Congress (APC) government can move 100 million Nigerians out of poverty by 2023.
In his Democracy Day address in Abuja last year, the president said a database of the poor and vulnerable Nigerians as well as that of unemployed youth was being developed to address the problem of socio-economic inequality in the society.
According to him, for Nigeria to progress, a collective resolution to address corruption and foster broad-based prosperity is required to create a country that is not only for a few privileged, but for all Nigerians.
“In the face of these challenges, our government elected by the people in 2015 and re-elected in March has been mapping out policies, measures and laws to maintain our unity and at the same time lift the bulk of our people out of poverty and onto the road to prosperity,” he said.
“This task is by no means unattainable. China has done it. India has done it. Indonesia has done it. Nigeria can do it. These are all countries characterised by huge burdens of population.
“China and Indonesia succeeded under authoritarian regimes. India succeeded in a democratic setting. We can do it. With leadership and a sense of purpose, we can lift 100 million Nigerians out of poverty in 10 years.”
Buhari, who pledged to move the nation to the next level of prosperity, peace and stability, said his administration would fulfill its promise of securing the country, improving the economy and fighting corruption to a standstill.
Citizens cannot be lifted out of poverty at below 3 per cent growth rate
For Nigeria to achieve its ambition of lifting 100 million of its citizens out of poverty within the next 10 years, it must achieve economic growth within the range of 7-10 per cent.
This growth must be independent of the oil sector, in order for it to translate to broad base income for Nigerians and create jobs for its youthful citizens which accounts for over 50 percent of its population, according to various economists who spoke at a recent forum in Lagos.
The economists argued that at the current growth rate of below 3 per cent, more Nigerians would only continue to get poorer, per capita income would also decline while investment would continue to fall.
“What Nigeria needs now is sustained economic growth, job creation and improved standard of living that is away from the influence of oil,”
Also speaking, the Lead Director at Centre for Social Justice, Barrister at law, Mr. Eze Onyekpere, Buhari’s goal on poverty eradication is not achievable for now unless he has other plans not known to Nigerians. But based on the information available to most citizens, it would be difficult to achieve his ambitious targets in a country with little or no infrastructure battling huge unemployment, inflation and unprecedented corruption in various spheres of life.