Macroeconomic Report & Economic Updates

The Monetary Policy Committee (MPC) voted to retain the Monetary Policy Rate (MPR) at 11.5 percent.¹ The Monetary Policy Rate (MPR) has remained at 11.5 percent since September 2020. The committee also decided to retain the Cash Reserve Ratio (CRR) at 27.5 percent, liquidity ratio at 30 percent and the asymmetric corridor of +100/-700 basis points around the MPR. The committee’s decision to take a holding position is already being supplemented by various ongoing government intervention programmes. These programs are intended to facilitate employment generation and stimulate recovery/growth in various sectors of the economy post-pandemic particularly the agriculture and services sectors. While this decision might be suitable for now, it is important for the MPC to closely monitor the evolving economic situation in the country, especially in view of rising inflation rate and the currency devaluation.

Consumer prices decreased for the first time since August 2019, though marginally. Inflation rates decrease from 18.17 percent in March 2021 to 18.12 percent in April 2021.² The decrease in inflation rate is driven by a reduction in food component of inflation from 22.95 percent to 22.72 percent which outweighed a 0.07 percent increase in core inflation within the review period. While the decline in inflation is a good development, inflation rate in Nigeria is still on a high, and double digit which remains counterproductive for economic stability. The Nigeria’s inflation problem is primarily driven by low levels of aggregate supply due to poor productivity levels, and the volatility of the Nigerian Naira emanating majorly from the shocks in crude oil prices. The need to boost productivity remains a priority for a decline in price level. Factors that aid the increase in aggregate supply should be identified and prioritized as well.

Based on recent estimates by the World Bank, a total of $17.2 billion diaspora remittances flowed into Nigeria in the year 2020¹. This represents a decline by 27.7 percent when compared to the previous year. The decrease can be attributed to restriction of movement, lull in business activities and employment uncertainties in host countries occasioned by the COVID-19 pandemic. Also, the decrease was driven by a high premium on the Naira/USD exchange rate in informal markets, coupled with an unexpected policy directive that required agent banks of money transfer operators to effect pay-outs in US Dollars rather than the Naira. Going forward, we envisage that remittance inflows into Nigeria would improve in 2021 since host countries’ economies have begun to recover from the COVID-19 shock. Ongoing policies introduced by the central bank could also encourage increased remittances.

Data from the National Bureau of Statistics shows that Value Added Tax (VAT) revenue for the first quarter of 2021 (Q1 2021) stood at N496.39 billion. This represents 9.17 percent and 52.93 percent increase relative to the previous quarter and corresponding quarter of 2020, respectively¹. Further disaggregation shows that the following sectors generated the highest VAT: other manufacturing sector - N49.41 billon and professional services - N42.50 billion. Mining sector and textile/garment sector contributed the least to VAT collections during the period under review. The sectorial distribution of VAT revenue is an indication of the importance of the manufacturing and service sectors to the Nigerian economy. It is therefore important to continuously improve the business climate in the country to enhance the growth potential of these sectors as they are yet to reach their optimal levels. Enhancing overall business climate would also attract investments in other less-performing sectors of the economy, which should ultimately lead to more tax revenues to fund much-needed infrastructural projects in the country.

Recently released Budget Implementation Report shows that gross total revenue generated in the third quarter of 2020 (Q3 2020) declined by 3.07 percent relative to the previous quarter. Specifically, gross total revenue fell to N1.88 trillion in Q3 2020 from N1.94 trillion in the preceding quarter.¹ Further disaggregation shows that gross oil revenue fell to N813.59 billion in Q3 2020 from N1.02 trillion in the previous quarter while gross non-oil revenue grew to N1.07 trillion in Q3 2020 from N921.53 billion². The decline in total gross revenue was driven by a 20 percent fall in gross oil revenue which outweighed a 15.7 percent increase in gross non-oil revenue. Going forward, government revenue is expected to recover by 2022 as the oil market stabilizes and tax receipts from non-oil sectors increase with improved economic activities. However, a large share of the economy remains informal with implications on the size of tax revenue raised. Even for businesses in the formal economy, a sizeable number of businesses continue to evade tax, leading to leakages in the system. Consequently, informality and tax evasion will have to be addressed using technology to improve data collection and monitoring of firms.