Macroeconomic Report & Economic Updates

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.

Capital importation into Nigeria dropped significantly in first quarter of 2019 with more than 26 states unable to attract any form of foreign investment during the quarter. At $5.82 billion, total capital imported declined significantly by 31.4% relative to $8.49 billion capital imported in the previous quarter¹. By type of investment, while other investments (loans, and other claims) increased QOQ by 19% to $2.4 billion, both foreign direct and portfolio investments declined during the quarter. Foreign direct investment fell by 8.41% to $222.89 million, however, portfolio investment, Nigeria’s biggest source of capital importation, declined the most by about 40% from $7.15 billion in 2019Q1 to $4.29 billion in 2019Q2. The numbers suggest that investors seem weary of the weak economic and business environment and are taking a risk-averse stance. With the presence of internal push factors such as rising government debt, declining economic performance, and static business climate, we expect a continuous decline in foreign capital inflows. To attract capital inflows, there is need to boost investor protection by improving regulations on protecting minority investors, as well as managing conflict of interest between the government and investors in order to reduce the risk exposure to foreign investors.

Nigeria’s economy performed poorly and witnessed a second consecutive quarter of weakened growth as real GDP slowed to a year-on-year growth rate of 1.94% in the second quarter of 2019¹. The rate is lower than the revised 2.1% growth rate reported for the previous quarter (2019Q1) and particularly underlines slow paced growth in the non-oil sector. While the oil sector leveraged on oil price rebounds and expanded by 6.61 percentage points to record a growth rate of 5.15% (from -1.46%), the non-oil sector slowed to 1.64%, declining from 2.47% posted in the last quarter. The trend in the non-oil sector revealed the suboptimal growth state of two major sub-sectors – agriculture and manufacturing. Agriculture subsector fell significantly from 3.17% to 1.79% while the manufacturing sector entered the negative growth rate zone (-0.13%) and contributed less to GDP QOQ (9.1%). The performance of the non-oil sectors is likely to be continually undermined by systemic issues including the lack of large-scale mechanization, inadequate backward and forward integration with local industries, and poor standardization of products. It would be beneficial for the  government to create an environment that encourages  private sector partnerships and public-private partnership for upscaling production, particularly in agriculture and manufacturing sectors. Regulatory agencies such as  Standards Organization of Nigeria (SON) also need to deepen their efforts towards ensuring better quality and standardization of products to boost Nigeria’s domestic sales and exports.

The Federation Accounts Allocation Committee distributed a total of N769.5 billion to the three tiers of government as revenue earned in July 2019³. This amount is slightly higher than the N762.6 billion disbursed as revenue earned in June⁴, by N6.9 billion. For the review month, the Federal, state and local governments received N299.8 billion, N190.38 billion, and N143.57 billion respectively. As 13% derivation, the oil producing states received N42.92 billion and revenue generating agencies received N92.86 billion as cost of revenue collection. Such transparency in revenue disbursement across the three tiers of government should also be reflected in the actual distribution of funds for public services, especially at state and municipal levels. This would strengthen accountability, public financial management and traceable value for tax payers Naira.