Minimum Wage, VAT Increases To Drive Up Inflation, IMF Warns

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President Muhammadu Buhari (left); Mohammed Sagagi (second left); Iyabo Masha (middle); Prof Chukwuma Soludo (second right), and Shehu Yahaya, all members of the Economic Advisory Council, inaugurated by the president at State House, Abuja on Wednesday..psd

Lagos – The International Monetary Fund (IMF) has said that the Federal Government’s implementation of N30,000 new national minimum wage and increase in value-added tax (VAT) rate from 5% to 7.5% will drive up inflation in 2020.

President Muhammadu Buhari on Tuesday presented N10.33 trillion 2020 budget to the National Assembly, saying the 2020 Appropriation Bill is based on this new VAT rate of 7.5%. He noted that additional revenues from VAT will be used to fund health, education and infrastructure programmes. He also earmarked N620.28 billion for the new minimum wage.

IMF also stated that the pace of Nigeria’s economic recovery was slow just as it said the country required “a comprehensive package of measures” to reduce vulnerabilities and raise economic growth in the country.

The IMF stated this in a statement it released Tuesday night at the end of a visit by its team, led by the Senior Resident Representative and Mission Chief for Nigeria, Amine Mati.

IMF staff team led by Mati had visited Lagos and Abuja from September 25 to October 7, 2019, to discuss recent economic and financial developments, update macroeconomic projections, and review reform implementation.

“Inflation will likely pick up in 2020 following rising minimum wages and a higher VAT rate, despite a tight monetary policy”, the body said, noting that

“the outlook under current policies remains challenging.”

Mati pointed out that the pace of economic recovery remained slow, saying depressed private consumption and investors’ wait-and-see attitude “kept growth in the first half of the year at two percent, a rate significantly below population growth”.

It added: “Headline inflation has fallen, reaching its lowest level since January 2016, helped by lower food price inflation.”

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According to the report: “Spurred by one-off increases in imports, the current account turned into a deficit in the first half of 2019 after three years of surpluses.

“Gross international reserves have fallen to below $42 billion at end-August 2019, mainly reflecting a decline in foreign holdings of short-term securities and equity.

“The exchange rate in various windows remained stable, helped by steady sales of foreign exchange by the Central Bank of Nigeria (CBN).

“Carryover from 2018 to 2019 helped increase public investment spending in the first half of 2019, but revenue underperformed significantly relative to the budget target in the first half of 2019.

“Over-optimistic revenue projections have led to higher financing needs than initially envisaged, resulting in overreliance on expensive borrowing from the CBN to finance the fiscal deficit. Federal Government interest payments continue to absorb more than half of revenues in 2019.

“The outlook under current policies remains challenging. Growth is expected to pick up to 2.3 percent this year on the strength of a continuing recovery in the oil sector and the regaining of momentum in agriculture following a good harvest.

“Revenue initiatives planned under the 2020 budget—including a VAT reform that increases the rate, introduces a minimum registration threshold, and exempts basic food products—will help partially offset declining oil revenues and the impact of higher minimum wages, thus keeping the overall consolidated fiscal deficit elevated.

“The current account’s shift to a deficit is expected to persist while the pace of capital outflows continues to weigh on international reserves.”

The reported added: “A comprehensive package of measures—whose design and implementation will require close coordination within the economic team and the newly-appointed Economic Advisory Council—is urgently needed to reduce vulnerabilities and raise growth.”

The team noted that elevated fiscal deficits relied on central bank financing, which complicated monetary policy.

“The increasing CBN financing of the government reinforces the need for an ambitious revenue-based fiscal consolidation that should build on the initiatives laid out in the Strategic Revenue Growth Initiative.

“A tight monetary policy should be maintained through more conventional tools.

“Managing vulnerabilities arising from large amounts of maturing CBN bills—including those held by non-residents—requires stopping direct central bank interventions, the introduction of longer-term government instruments to mop up excess liquidity and moving towards a uniform market-determined exchange rate.

“Banking sector prudential ratios are improving. However, new regulations to spur lending—which has recently increased—should be carefully assessed and may need to be revisited in view of the potential unintended consequences on banks’ asset quality, maturity structure, prudential buffers and the inflation target. Continued strengthening of banks’ capital buffers would enhance banking sector resilience.

“Structural reforms, particularly on governance and corruption and in implementing the much-delayed power sector recovery plan, remain essential to boosting prospects for higher and more inclusive growth.”

World Bank Cuts Nigeria, Others’ 2019, 2020 Growth Forecast

Meanwhile, the World Bank on Wednesday cut its economic growth forecast for Nigeria and other sub-Saharan Africa for 2019 to 2021 by 0.2 percentage points from its earlier projection, citing a slowdown in fixed investment and policy uncertainty in the global economy, reports Reuters.

The bank said the region’s economy was expected to grow 2.6% this year, from a 2.8% projection in April. It said growth would rise to 3.1% in 2020 and 3.2% in 2021.

“Despite some improvements, the external environment is expected to remain difficult and uncertain for the region,” the bank said in its October Africa’s Pulse report.

China and the United States, the world’s leading economies, this year imposed new tariffs on each other’s goods as part of a long-running dispute over Beijing’s trading practices, which Washington says are unfair.

Those tensions, plus softening global growth and falling commodity prices, compounded by the slow pace of reforms in African countries, “are weighing on activity across the region”, the bank said.

On the continent, drought, security threats, increases in the cost of public borrowing and private investment are also slowing growth.

Nigeria, South Africa and Angola, which make up about 60% of sub-Saharan Africa’s annual economic output, are all facing various impediments, the bank said.

Nigeria’s economy is expected to grow 2.0% this year, compared with the previous forecast of 2.1% in April and to expand 2.1% percent in 2020 and 2021, which are 0.1 and 0.3 percentage points lower than the April forecasts, respectively.

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Source: independent.ng