Macroeconomic Report & Economic Updates

The federal government has finally approved the proposed increase of Value Added Tax (VAT), from the current 5% to 7.5%1. The increment was passed in the recent 2019 financial bill and included exemptions for food items (agro- and aqua-based stable foods) as well as services rendered by microfinance banks. The bill included a new VAT Company Compliance threshold, exempting  companies with an annual turnover of N25 million or less from filling obligations2. However, the current rate is marginal when compared to the VAT rate in other lower middle-income African countries like Cote d’Ivoire, Senegal and Lesotho with VAT rates of 20%, 18% and 15% respectively. Given that VAT is a consumption tax placed on goods and services, the increase stands to weigh heavily on Nigerians. The negative effect on Nigerian consumers becomes particularly more apparent considering that the government intends to reintroduce tolls to federal roads; imposes steep fines on companies such as MTN, Stanbic IBTC bank (whose customers will bear the brunt); and has recently proposed a 5% online VAT purchase tax. While raising public revenue is critical, it is imperative that the welfare of Nigerians is not negatively affected. Alternatively, other financing options can be explored such as the use of diaspora bonds and remittances.

The latest GDP report released by the National Bureau of Statistics for the third quarter of 2019, indicated a 2.28% year-on-year growth from 2018Q3. Between 2019Q2 and Q3, the GDP also grew by 0.17%1. The growth was predominantly driven by the oil sector which recorded the highest daily oil production in 3 years of 2.04 million barrels-per-day1. This indicated the oil sector real growth rate rise (year-on-year) to 6.49%2.  Meanwhile, the non-oil sector contracted to a 1.85% growth rate when compared to the 2018Q3 of 2.33%, however this indicated a Quarter-on-Quarter rise of 0.2%. The heavy reliance on crude oil is an underlying factor in the country’s flat economic growth. Ensuring that the performance of the non-oil sectors of the economy such as manufacturing and agriculture improves and becomes globally competitive is crucial in not only increasing the national output, but also expanding the foreign currency earnings and the government’s income.

Following the Central Bank of Nigeria’s (CBN) restriction of the Open Market Operations (OMO) purchase by individuals and small businesses, there has been a decline in interest rates to an 18-month low of 13.03%1. Primary market interest rates (particularly the treasury bill market) has also fallen into single digits as recent auctions saw rates as low as 7.7%2. While the restrictive policy resulting in lower interest rates can help reduce government’s borrowing costs, it could have adverse effect on investor confidence -- ultimately leading to a reduction in capital flows, external reserves and thus exchange rate. Although the CBN reassures investors that it would be a buyer of last resort where investors do not find buyers in the secondary market, there may be need to minimize regulator interference. This is on the basis that investors tend to avoid a market structure with over-interference by the regulators.

Crude oil prices declined in October 2019 and is expected to fall further in 2020. The price of Nigeria’s bonny light decreased by 4 percent from $64.02 per barrel in September 2019 to $61.45 per barrel in October 2019.5 The fall in crude oil price can be attributed to rising US crude oil stocks and reduction in crude oil supply disruption. Crude oil price is projected to average $60 per barrel in 2019 and further weaken to $58 per barrel in 2020.6 The downward revision in oil prices is linked to weaker global growth forecast and consequently, weaker oil demand. This has adverse implications for Nigeria’s trade, revenue and overall economy; and emphasizes the need for modernising agriculture, developing tourism, and  promoting entrepreneurship in manufacturing, among other initiatives.

Total transaction at the national bourse increased by 15.95 percent from ₦121.9 billion in August 2019 to ₦141.45 billion in September 2019.1 The increase in total transaction is attributable to a 47.81 percent increase in foreign transactions which outweighed the decrease in the domestic transaction (19.09 percent). We expect foreign portfolio investment (FPI) to continue to drive investment inflows into Nigeria. However, FPI could be a challenge in the near term, especially as external reserve decline and investors become wary of exchange rate stability and political uncertainties. Ongoing efforts to improve the business environment, such as tax relief for foreign investors and higher lending requirements to private sector, should be sustained. In addition, the capital market should be deepened through the introduction of derivatives to shore up investment and reserves.