Macroeconomic Report & Economic Updates

The Central Bank of Nigeria has cautioned Microfinance Banks (MFBs) against engaging in foreign exchange (forex) transactions and other prohibited activities including wholesale banking.¹ According to the circular issuing this warning, the apex bank has observed the activities of some MFBs that have gone beyond the scope of their operating license. Cautioning MFBs is aimed at protecting them from the dangers of such prohibited transactions, given the banks’ relatively low capitalization. The CBN has noted that it will continue to monitor developments among MFBs and apply severe sanctions for breaches of extant regulations, including revoking the license of MFBs that fail to comply with the 2012 Revised Regulatory and Supervisory Guidelines for MFBs. Monitoring the activities of MFBs would ensure overall financial stability which is a prerequisite for sound macroeconomic policies, In particular, ensuring that all players in the banking system act within the remit of their operations enables efficiency in the transmission mechanism of monetary policy.

According to the National Bureau of Statistics, the volume of Value-Added Tax (VAT) has risen from ₦496.39 billion to ₦512.25 billion between Q1 and Q2 2021, reflecting a 3.2 percent growth. This is the highest ever quarterly VAT amount generated and reflects a year-on-year 56.56 percent growth. VAT collections have continued to peak, following the increase in VAT rate from 5 percent to 7.5 percent in January 2020 by the federal government. In Q2 2021, the manufacturing sector and professional services sector accounted for 8.76 percent and 5.72 percent of VAT collections with a sum of ₦44.89 billion and ₦29.3 billion respectively. Further disaggregation shows that ₦187.43 billion was generated as non-import local VAT and ₦207.69 billion was generated from non-import foreign VAT. Meanwhile, the balance of ₦117.13 billion was generated from the Nigerian Custom Service import VAT. In light of the economic recovery, there are potentials for increased mobilisation of financial resources through VAT. This will improve the government’s fiscal space and provide funding for critical sectors of the economy such as infrastructure, health and education. It therefore becomes necessary that the government improve its tax administration structure and strengthen its anti-corruption policies to avoid tax evasion.

Between 2015 and 2021, Nigeria’s external debt from the World Bank and the African Development Bank nearly doubled, increasing from US$7.23 billion to US$14.35 billion. ¹ About US$11.097 billion was obtained from the World Bank’s International Development Association (IDA) which provides concessional loans at lower interest rates and longer maturity and grace periods. Other sources include the World Bank’s International Fund for Agricultural Development (IFAD), with a commitment of US$410.23 million. While debt is an important source of revenue for countries, excessive debt can hinder long run economic growth. More specifically, high debt service payments crowds out investment in critical sectors such as education, health, and social protection. Consequently, debt service management strategies such as debt for development swaps – that is the provision of debt relief in exchange for investments in key development sectors – should be considered by the government. In addition, the underlying revenue shortage problem should be addressed by mobilizing domestic resources through curbing tax evasion and avoidance.

According to the National Bureau of Statistics, the total value of capital importation declined by 54 percent from US$1,905.89 million in the first quarter of 2021 to US$875.62 million in the second quarter.⁴ Portfolio investments were the largest amount of capital importation accounting for 62.97 percent of total capital import and valued at US$551.37 million. Foreign Direct Investment accounted for only 8.9 percent of capital imports and valued at US$77.97 million in Q2 2021. The substantial decline in capital importation in Nigeria stems from both endogenous and exogenous factors amid the slow global recovery from the COVID-19 pandemic. Some of these endogenous factors include exchange rate volatility and the double-digit inflation rate which has amplified economic uncertainty, thus increasing pessimism among investors. In view of this, government policies should be tailored towards the reduction in the rate of inflation and stabilising the exchange rate through aggregate supply policies which can be done via boosting local productivity. Additionally, improving security would boost investors’ confidence which should enhance capital importation.

According to the World Bank, the participation in the Nigerian labour force has declined by about 20 million workers between 2018 and 2020.¹ Even for those within the labour force, the inactive population has increased from 29 to 52 million workers between 2014 and 2020. Consequently, unemployment is at record levels as the unemployment rate is 26.3 percent while youth unemployment is 42.5 percent. Owing to the country’s socio-economic challenges as well as high unemployment levels, there has been a rise in migration as young people seek asylum and refugee status in other countries. Going forward, the decline in labour force participation is likely to continue as more young people migrate for better opportunities. Similarly, unemployment is likely to worsen considering the youth bulge and the limitedness of labour-absorbing industries such as agriculture and manufacturing in creating large numbers of high value jobs. Consequently, the private sector which is an important contributor to job creation will have to develop and generate additional opportunities by addressing existing barriers including limited productivity and competitiveness, insufficient diversification, and lack of openness to international markets.