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Nigeria May Adjust VAT Rate To 15% In Next Three Years ~EIU



Value added tax - Investors King

In a bid to raise its revenue profile, Nigeria may hike its Value Added Tax (VAT) rate to 15 percent from the current 7.5 percent, according to a projection by the Economist Intelligence Unit (EIU), London.

According to the EIU report titled, “Country Report Nigeria,” an increase in the consumption tax becomes inevitable given the rising public debt burden and the likelihood that the Petroleum Industry Bill (PIB) might not be able to deliver a considerable increase in the government’s revenue.

The Unit also projected that increase in VAT rate would be implemented in installment in the next three years to 2025.

“We expect three equal VAT rate increases, taking the rate to 15 percent 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.

“Even then we expect fiscal revenue to peak at just five percent of the GDP in 2024, which also assumes no fuel subsidies beyond 2022.

“The federal government’s tax take is among the world’s lowest, undermined by widespread evasion and a large informal sector.

“The PIB is likely to be balanced between the interests of the treasury and investors, and so not deliver a considerable increase in revenue.

“Consequently, the VAT, currently at 7.5 percent, is likely to be used as a means of repairing the public finances,” the report stated.

The report also projected that public finances would remain in deficit till the year 2025, because an average global crude oil price of $63.8/barrel in 2021-25, which makes up for more than 50 percent of the federal government’s retained income, would be insufficient to balance the budget.

It added that the percentage of public debt to the GDP would stand at 35.4 percent of the GDP in 2025.

“Overall, we expect the fiscal deficit to narrow to 3.3 percent of GDP in 2021 (from 3.7 percent of the GDP in 2020) as international oil prices rise.

“Also, the VAT rate increases and rising oil prices will push down the deficit to 2.6 percent of the GDP in 2023-24, but a decline in average global oil prices in 2025 will cause the shortfall to widen to 3.0 percent of the GDP in that year.

“The government has raised its public debt limit to 40 percent of GDP to incorporate higher budget shortfalls over the medium term and to accommodate securitisation of the Central Bank of Nigeria’s deficit-financing as long-term debt. We expect public debt to reach only 35.4 percent of the GDP in 2025,” the report added.

It further projected that “high debt-servicing costs, a large public wage bill, and the purchase of COVID-19 vaccines will elevate expenditure.

“Capital investment will be emphasised to compensate for the disappearance of petrol subsidies once the PIB is enacted (which is expected in late 2021).

“The government will justify price deregulation by promising to invest the savings in infrastructure and will face pressure to match rhetoric with action,” it said.

It, however, hinged the hope of market-determined petrol pump price on the Dangote Refinery, a new 650,000-barrel/day refinery near Lagos expected to come on-stream in 2022.

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Goldman Sachs Urges Bold Rate Hike as Naira Weakens and Inflation Soars



Central Bank of Nigeria (CBN)

As Nigeria grapples with soaring inflation and a faltering naira, Goldman Sachs is calling for a substantial increase in interest rates to stabilize the economy and restore investor confidence.

The global investment bank’s recommendation comes ahead of the Central Bank of Nigeria’s (CBN) key monetary policy decision, set to be announced on Tuesday.

Goldman Sachs economists, including Andrew Matheny, argue that incremental rate adjustments will not be sufficient to address the country’s deepening economic challenges.

“Another 50 or 100 basis points is certainly not going to move the needle in the eyes of an investor,” Matheny stated. “Nigeria needs a bold, decisive move to curb inflation and regain investor trust.”

The CBN, under the leadership of Governor Olayemi Cardoso, is anticipated to raise interest rates by 75 basis points to 27% in its upcoming meeting.

This would mark a continuation of the aggressive tightening campaign that began in May 2022, which has seen rates increase by 14.75 percentage points.

Despite this, inflation has remained stubbornly high, highlighting the need for more substantial measures.

The current economic landscape is marked by severe challenges. The naira’s depreciation has led to higher import costs, fueling inflation and eroding consumer purchasing power.

The CBN has attempted to ease the currency’s scarcity by selling dollars to local foreign exchange bureaus, but these efforts have yet to stabilize the naira significantly.

“Developments since the last meeting have definitely been hawkish,” noted Matheny. “The naira has weakened further, exacerbating inflationary pressures. The CBN’s policy needs to reflect this reality more aggressively.”

In response to the persistent inflation and naira weakness, analysts are urging the central bank to implement a more coherent strategy to manage the currency and inflation.

James Marshall of Promeritum Investment Management LLP suggested that the CBN should actively participate in the foreign exchange market to mitigate the naira’s volatility and restore market confidence.

“The central bank needs to be a more consistent and active participant in the forex market,” Marshall said. “A clear strategy to address the naira’s weakness is crucial for stabilizing the economy.”

The CBN’s decision will come as the country faces a critical period. With inflation expected to slow due to favorable comparisons with the previous year and new measures to reduce food costs, including a temporary import duty waiver on wheat and corn, there is hope that the economic situation may improve.

However, analysts anticipate that the CBN will need to implement one final rate hike to solidify inflation’s slowdown and restore positive real rates.

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Currency Drop Spurs Discount Dilemma in Cairo’s Markets



Egyptian pound

Under Cairo’s scorching sun, the bustling streets reveal an unexpected twist in dramatic price drops on big-ticket items like cars and appliances.

Following March’s significant currency devaluation, prices for these goods have plunged, leaving consumers hesitant to make purchases amid hopes for even better deals.

Mohamed Yassin, a furniture store vendor, said “People just inquire about prices. They’re afraid to buy in case prices drop further.” This cautious consumer behavior is posing challenges for Egypt’s consumer-driven economy.

In March, Egyptian authorities devalued the pound by nearly 40% to stabilize an economy teetering on the edge. While such moves often lead to inflation spikes, Egypt’s case has been unusual.

Unlike other nations like Nigeria or Argentina, where costs soared post-devaluation, Egypt is witnessing falling prices for high-value items.

Previously inflated prices were driven by a black market in foreign currency, where importers secured dollars at exorbitant rates, passing costs onto consumers.

Now, with the pound stabilizing and foreign currency more accessible, retailers are struggling to sell inventory at pre-devaluation prices.

Despite price reductions, the overall consumer market remains sluggish. The automotive sector has seen a near 75% drop in sales compared to pre-crisis levels.

Major brands like Hyundai and Volkswagen have slashed prices by about a quarter, yet buyers remain cautious.

The economic strain is not limited to luxury items. Everyday expenses continue to rise, albeit more slowly, with anticipated hikes in electricity and fuel prices adding to the pressure.

Experts highlight a period of adjustment as both consumers and traders navigate the volatile exchange-rate environment. Mohamed Abu Basha, head of research at EFG Hermes, explains, “The market is taking time to absorb recent fluctuations.”

Meanwhile, businesses face declining sales, impacting their ability to manage operating costs. Yassin’s store has offered discounts of up to 50% yet remains quiet. “We’ve tried everything, but everyone is waiting,” he laments.

The devaluation has spurred a shift in economic dynamics. Inflation has eased, but the pace varies across sectors. Clothing and transportation costs are up, while food prices fluctuate.

With the phasing out of fuel subsidies and potential electricity price increases, Egyptians are bracing for further financial strain. The recent 300% rise in subsidized bread prices adds another layer of concern.

The situation underscores the balancing act between maintaining consumer confidence and attracting foreign investment.

Economists suggest potential stimulus measures, such as lowering interest rates or increasing public spending, to boost demand.

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MPC Meeting on July 22-23 to Tackle Inflation as Rates Set to Rise Again



Interbank rate

The Monetary Policy Committee (MPC) is set to convene on July 22-23, 2024, amid soaring inflation and economic challenges in Nigeria.

Led by Olayemi Cardoso, the committee has already increased interest rates three times this year, raising them by 750 basis points to 26.25 percent.

Nigeria’s annual inflation rate climbed to 34.19 percent in June, driven by rising food prices. Despite these pressures, the Central Bank of Nigeria (CBN) projects that inflation will moderate to around 21.40 percent by year-end.

Market analysts expect a further rate hike as the committee seeks to rein in inflation. Nabila Mohammed from Chapel Hill Denham anticipates a 50–75 basis point increase.

Similarly, Coronation Research forecasts a potential rise of 50 to 100 basis points, given the recent uptick in inflation.

The food inflation rate reached 40.87 percent in June, exacerbated by security issues in key agricultural regions.

Essential commodities such as millet, garri, and yams have seen significant price hikes, impacting household budgets and savings.

As the MPC meets, the National Bureau of Statistics is set to release data on selected food prices for June, providing further insights into the inflationary trends affecting Nigerians.

The upcoming MPC meeting will be crucial in determining the trajectory of Nigeria’s monetary policy as the government grapples with economic instability.

The focus remains on balancing inflation control with economic growth to ensure stability in Africa’s largest economy.

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