•IMF urges FG to embark on aggressive revenue mobilisation
•Advises FG to raise VAT to 10% by 2022
By Obinna Chima, Nume Ekeghe in Lagos, Emmanuel Addeh and James Emejo in Abuja
Analysts yesterday forecasted a faster economic recovery for Nigeria as crude oil prices, at $60 per barrel, hit a new high since February 2020.
The International Monetary Fund (IMF) has also stressed the need for the federal government to intensify revenue mobilisation in order to reduce fiscal sustainability risks.
The analysts, however, urged the federal government to be prudent in the utilisation of the extra revenue that may accrue to its purse.
They also cautioned that while the price appreciation could help in meeting and surpassing the $40 per barrel benchmark in the 2021 budget, thereby helping to fund the fiscal deficit, higher fuel price may increase inflation rate which is already at 15.75 per cent as at December.
The analysts, in separate interviews with THISDAY, also advised the federal government to take advantage of the higher prices to boost capital spending as the country cannot guarantee that the price will remain high for a longer period.
The global benchmark crude, Brent rose yesterday, hitting $60.04 a barrel, a development that was last experienced by the global oil market on February 20, 2020.
Also, the United States West Texas Intermediate crude futures advanced 59 cents or one per cent, to $57.44 a barrel, the highest since January last year.
However, the rise in Brent price could mean bad news for many Nigerians who buy petrol from the pumps, with a likely inevitable increase in the retail price across the country.
In response to the new crude oil price, the pump price of petrol rose marginally in many filling stations in Lagos, the nation’s commercial capital, from N159 per litre to N162.
Yesterday’s crude oil price increase was boosted by supply cuts among key producers and hopes for further United States economic stimulus measures to boost demand, according to Reuters.
Saudi Arabia’s pledge of extra supply cuts in February and March on the back of reductions by other members of the Organisation of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, is helping to balance global markets and support prices.
Reacting to the oil price rise, the Chief Executive Officer/Managing Director, Eczellon Capital, Diekola Onaolapo said: “Essentially, it is more revenue for the country hoping the volume of production doesn’t get hampered. Overall receipts from crude sale are price multiplied by volume.
So, if price is going up and all things being equal volume remains the same, it would mean more revenue for the country. Budget performance and the deficit financing becomes easier.”
However, he said the rise in oil prices may lead to an increase in petrol prices and could also impact inflation and Nigerians’ living standards.
An economist and Associate Professor at the Lagos Business School, Dr. Bongo Adi, said the development could translate to full implementation of the budget and upward trend in the price of Brent crude price would be sustained in the medium term.
Adi said: “The increase in Brent price is massive leverage to the budget which is going to reduce the fiscal burden and deficit. It means that government can now meet its budgetary target.
“Nigerians should ideally look forward to full budget implementation and there ideally shouldn’t be any excuses for the inability to meet budgetary provisions.
“Demand for oil would keep going up and we would see oil in the highs. It would not be a surprise if oil hits $100 per barrel or more in the years to come.”
Also, the Head of Research, United Capital, Mr. Wale Olusi, said: “The implications of the upwards trends in Brent makes everything brighter for the budget because if you are projecting $40 per barrel, and you have estimated your revenue based on that, it simply means you have a lot of surpluses.
“Government can now rake in more revenue and more revenue can go into the excess crude account as well as the external reserves. So apart from the budget, it also makes Nigeria look good to foreign portfolio investors who I think the central bank is trying to attract currently.
“It is fantastic news and if the pricing sustains, the impact on reserves would continue to improve over time because the reserves have cruised on a daily basis.”
Speaking on the development, President, Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said while the oil price increase is a welcome development considering that the 2021 budget is based on $40 per barrel, the government should apply the excess oil revenue prudently.
According to him, the new crude oil price provides a good opportunity to build fiscal buffers, increase the excess crude account and possibly invest some in the infrastructure component of the Sovereign Wealth Fund (SWF).
“The government may also consider seizing this opportunity to cut down the budget deficit.
“It will also help external reserves accretion and put the CBN in a stronger position to defend the value of the naira.
“The knock-on effect should be positive for the economy because I see a stable exchange rate moderating inflationary pressure and further boosting the stock market. So, economic recovery effort is made easier,” he added.
Also, an economist and Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, stated that the increase could trigger a rise in pump price of petroleum products, especially diesel and kerosene.
“This is so because subsidy does not exist anymore,” he added.
He said though the increase in oil price will further improve the country’s trade balance and balance of payment, “higher fuel price may increase the inflation rate already looking high.
“So, while the country celebrates the high price, the populace or ordinary citizens bear the negative impacts.”
He, however, explained that higher oil price will reduce the budget deficit figure as well as cut borrowing projections and improve the value of the naira.
On his part, the Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, told THISDAY that it would amount to a travesty if the extra funds are not used judiciously by the government, especially as the country is facing some fiscal challenges.
He said given that the trickle-down effect of higher oil prices tends to boost GDP growth, potentially, the country may feel the positive impacts if the government funds key areas to stimulate the economy.
He said the federal government should also consider increasing funding to SWF so as to hedge against possible downturns in oil prices in the future.
IMF Urges FG to Embark on Aggressive Revenue Mobilisation
Meanwhile, the IMF has stressed the need for the federal government to intensify revenue mobilisation in order to reduce fiscal sustainability risks.
The Washington-based institution advised the government to rely initially on progressive and efficiency-enhancing measures with higher tax rates, while awaiting a more sustained economic recovery.
The IMF stated this in its latest Article IV Consultation on Nigeria, which was released yesterday.
It added that the report was prepared by a staff team of the IMF for the Fund’s Executive Board’s consideration on January 27, 2021, following discussions that ended on November 17, 2020, with officials of Nigeria on economic developments and policies.
It also highlighted the need for improved social safety nets to cushion potential negative impacts on the poor.
It restated the need for a market-based exchange rate policy to instill confidence.
“Staff recommends establishing a market-clearing unified exchange rate with the near-term focus on allowing greater flexibility and removing the backlog of requests for foreign exchange,” it added.
It advised the central bank to focus more on price stability and called for more financial system vigilance to contain stability risks.
On the upside, it pointed out that recovering oil prices, which hit $60 per barrel yesterday, as well as the expected completion of the Dangote oil refinery could catalyse more domestic crude oil production and boost growth.
The IMF executive directors also commended Nigeria over measures taken to address the health and economic impacts of the COVID-19 pandemic, which have exacerbated pre-existing weaknesses.
The IMF stressed “the need for urgent policy adjustment and more fundamental reforms to sustain macroeconomic stability and lift growth and employment.”
It added: “Directors welcomed notable reforms undertaken in the fiscal sector, including removal of the fuel subsidy and steps to implement cost-reflective tariff increases in the power sector.
“Directors noted that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges. They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.”
The IMF directors observed that the accommodative monetary stance remained appropriate in the near- term, stating that tightening may be warranted if balance of payments or inflationary pressures were to increase.
In the medium term, they advocated that monetary policy operational framework should be reformed and central bank’s financing of budget deficit phased out in order to reduce inflation.
However, they welcomed the resilience of the banking sector and called for continued vigilance to contain financial stability risks.
They noted that COVID-19 debt relief measures for banks’ clients should remain time-bound and limited to those with good pre-crisis fundamentals.
The IMF directors welcomed recent progress in structural reforms and called for continued reforms aimed at promoting economic diversification and reducing the dependence on oil and increasing employment.
In addition, they stressed the need to strengthen governance and anti-corruption frameworks, including compliance with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) measures.
The directors also welcomed the ratification of the African Continental Free Trade Area and underscored that implementing trade-enabling reforms remains critical to rejuvenate growth.
“In the short run, the recommended policy mix is heavily tilted toward exchange rate adjustment given constrained capacity on the monetary and fiscal fronts.
“In the medium term, revenue mobilisation is a top priority. In the short run, fiscal policy should address economic and health impact of the pandemic in a transparent and efficient manner.
“Significant revenue mobilisation will be needed in the medium term to reduce fiscal sustainability risks arising from low debt-servicing capacity.
“With high poverty rates, revenue mobilisation will need to rely on progressive and efficiency-enhancing measures, with higher value-added and excise tax rates awaiting a firm economic recovery,” the IMF added.
It reiterated that Nigeria’s economy has been hit hard by the COVID-19 pandemic, stating that following a sharp drop in oil prices and capital outflows, the country’s real Gross Domestic Product (GDP) was estimated to have contracted by 3.2 per cent in 2020 amidst the pandemic-related lockdown.
IMF Advises FG to Raise VAT to 10% by 2022
In a related development, officials of the IMF have advised the federal government to increase Value Added Tax (VAT) in the country to 10 per cent by 2022, from the 7.5 per cent it is presently, once economic recovery takes root.
They also recommended that VAT in the country should be 15 per cent by 2025.
The IMF stated this in an article posted on its website yesterday, titled: “Five Questions About Nigeria’s Road to Recovery,” that was authored by some staff of its African Department.
They noted that Nigeria has one of the lowest revenue levels as a share of GDP worldwide, stating that a large share of the country’s revenue is spent on the country’s public debt service payments, leaving insufficient fiscal space for critical social and infrastructure spending and to cushion an economic downturn.
In this context, it noted that mobilising revenues through efficiency-enhancing and progressive measures ought to be a top near-term priority.
“Revisiting tax exemptions and customs duty waivers, increasing and broadening the base for excise taxes, developing a high-integrity taxpayer register, enhancing digital infrastructure, and improving on-time filing and payment are important measures.
“Once economic recovery takes root, Nigeria will need to increase the value-added tax rate to at least 10 percent by 2022 and 15 percent by 2025—the average in countries belonging to the Economic Community of West African States—to create effective fiscal space,” they stated.
