Macroeconomic Report & Economic Updates

Internally Generated Revenue (IGR) for the 36 states and the Federal Capital Territory (FCT) increased by 15.78 percent in the first half of 2019 relative to the second half of 2018. IGR increased from ₦596.91 to ₦691.11 billion in the review period.¹ Income tax (62.45 percent) was the major source of revenue for the states. Other sources of internal revenue for the states include road tax, revenue from MDAs, direct assessment, and other forms of taxes. Further disaggregated data shows Lagos state generated the most revenue, accounting for 29.6 percent of the total internal revenue generated. Rivers, FCT, Delta, Ogun, Kaduna and Akwa Ibom generated over ₦20 billion each in the first six months of 2019. Gombe, Yobe, Taraba and Borno – all north eastern states – generated the least (less than ₦4 billion each) in the review period. In as much as states intend to increase the level of IGR generated, careful consideration should be made with regards to taxing households and firms in order not to undermine productivity and in turn, economic growth. Other sources of revenues from ‘state-owned’ enterprises such as recreational centres and real estates can be explored. Particularly, revenues from tourism can be strengthened.

Market indices at the Nigeria Stock Exchange closed downward in the trading week ended October 4, 2019. The bourse recorded a  meagre 2.48 percent decrease in twin market indices– All Share Index and Market Capitalization. Both indices closed at 26,987.45 and N13.137 trillion respectively.¹ All of other market indices depreciated with the exception of NSE Insurance and NSE Industrial Goods Indices. The worst hit was Consumer Goods Index NSE Banking Index which declined by 4.92 percent and 3.94 percent respectively, while the NSE Insurance Index increased by the most percentage of 5.71percent. The depreciation can be linked to profit taking on gains made the previous week.² We expect market sentiment to turn around as discerning investors start buying stocks that are now trading at lower levels. We also expect that the swift approval of the 2020 budget will have a positive impact on investor’s sentiment, consumer spending and companies’ earnings; and thus on the future market value of the outstanding shares, especially in the consumer goods market.

The Central Bank of Nigeria (CBN) reviewed upward the minimum Loan to Deposit Ratio (LDR) target for all Deposit Money Banks (DMBs) from 60 percent to 65 percent.¹ This is to sustain the momentum gained from a 5.33 percent (N829.40 billion) increase in the industry gross credit between end of May 2019 and 26^th September 2019. If Nigerian banks abide by the new regulation, this should translate to increased lending to Nigerian businesses  thereby supporting private sector growth. Regulatory enforcement or incentives may be needed to ensure that banks follow through with the regulation, as many of the biggest banks fell short of the regulator’s initial 60 per cent LDR threshold.

The government’s new fiscal projections have been revealed in the Medium-Term Expenditure Framework (MTEF) 2020-2022¹. The GDP growth projection was revised downwards from 3.6% to 2.9% for the 2020 fiscal year. Benchmark crude price was also revised from $60 to $55 per barrel, which could weigh on expected revenues. However, while recurrent expenditure is expected to rise in 2020, capital expenditure is projected to fall. The new MTEF shows a projected budgeted increase in recurrent expenditure from NGN4.3 trillion in 2019 to NGN4.7 trillion in 2020 (excluding debt service payments); and downward revision of capital expenditure to NGN1.7 trillion in 2020. While the early design of the MTEF could influence a return to the January-December budget cycle which will improve budgetary predictability for line ministries, the reduction in capital expenditure will likely lead to a deterioration in the much-needed infrastructure and other long-term investment. Failure to meet these needs will likely hinder economic growth in the long run.

The federal government has proposed an increase in Value Added Tax (VAT), from the current 5% to 7.2%³. The increment is linked to the implementation of Nigeria’s new minimum wage which has informed the need for an increase in revenue, particularly from taxation. Although the new policy awaits approval by the National Assembly, it is expected that the additional revenue obtained would help states in meeting their wage payment obligations given the frequent difficulties in salary payment for some states. The additional tax burden has the potential to change people’s economic behaviour by making them save more. Moreover, the VAT rate of other lower middle-income African countries including Cote d’Ivoire, Senegal and Lesotho at 20%, 18% and 15% respectively is significantly higher than Nigeria’s proposed VAT rate. However, households and firms will be negatively affected as the proposed increase would reduce the disposable income of consumers, and a portion of the recent gains in minimum wage will be eroded.