The Federal Government of Nigeria is expected to raise the Value Added Tax (VAT) to 15 per cent from the current 7.5 percent by 2027 to enable it fund its fiscal deficit and debt service obligations, including social and job creation projects.

This was revealed in the International business research firm, Economist Intelligence Unit (EIU) Country Report.

EIU said the deficit could widen to 5 per cent of Gross Domestic Product (GDP) in 2024, slightly above the estimate for 2023. It said this was expected to average 4.5 percent of GDP annually between 2025 and 2028 – more than the legal limit of three percent of GDP and representing an unusually lax period of fiscal policy for the country.

On the foreign exchange (FX) regime, EIU predicted the naira to weaken to N2, 381 to the dollar, stating that the spread with the parallel market will be five percent to 15 percent.

The report added that persistently high inflation, deficit monetisation, negative short-term real interest rates, low foreign reserves, and a backlog of foreign exchange orders would continue to sap confidence in the naira, despite a 45 percent devaluation in February.

It said traders will continue to be concerned that controls on the currency could be tightened at any point, adding, however, that another step of devaluation is unlikely.

The report forecast foreign borrowing to be used to rebuild foreign reserves and said the local currency would stabilise towards the end of 2024.

It pointed out that given that the naira was increasingly appearing undervalued in real terms, the rate could end up stronger if the Central Bank of Nigeria (CBN) tightened monetary policy more aggressively than expected.

EIU further predicted a fresh 100 basis points hike in Monetary Policy Rate (MPR) to 23.75 percent from the current 22.75 percent in 2024, should deficit monetisation continue and imported inflationary pressures remain strong.

“However, our core view is that the CBN will fail to deliver a positive real short-term interest rate, as doing so would cause unemployment at a high political cost.”

The report stated, “Accounting for further near-term losses, we expect an end-2024 rate of N1, 770: $1, compared with about N1, 600: US$1 at end-February. However, this forecast is finely balanced.

“Any number of knocks to confidence could cause a sharper weakening. Alternatively, given the naira is increasingly appearing undervalued in real terms, the rate could end up stronger, if the CBN tightens monetary policy more aggressively than we expect.”

EIU stated in the report that following a sizable real-term correction, the naira’s outlook for 2025 was relatively stable, and might close at N1, 817 to the dollar in the review year.

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Nonetheless, the EIU report said, “We maintain our view that a lax monetary-fiscal policy mix will undermine the longer-term value of the naira. In line with a slide in world oil prices from a cyclical peak, we forecast that the currency will end 2028 at N2, 381: $1 and that the spread with the parallel market will be 5-15 percent.”

The report further predicted the country’s foreign exchange reserves to gradually rise over the forecast period, aided by a more market-driven exchange rate system and greater access to foreign borrowing. It added, however, that this would still provide only about seven months of import cover in 2028.

In addition, the report stated that an expected rise in formal borrowing would cause the public debt/GDP ratio to rise sharply in 2024-28. It predicted that a statutory 40 percent ceiling would be breached by the end of 2026, pushing public debt to GDP to 50.4 percent by 2028, from less than 20 percent in 2022.

The report said, “We expect relatively large budget deficits as a consequence of Mr. Tinubu’s ‘fiscally active’ job creation and infrastructure spending agenda, as well as an implicit subsidy on petrol.

“The 2024 budget includes a large increase in non-debt recurrent spending as high inflation necessitates higher public-sector salaries and cash transfers to poor households.”

The report forecast inflation to average 30.3 percent in 2024, from 24.7 percent in 2023, reflecting the fact that petrol price increases in June 2023 will drop out of the year-on-year calculation from mid-2024, and prevent the rate from being even higher.

It stated, “Assuming the naira stabilises, average inflation should fall to 20.7 percent in 2025 and 11.7 percent in 2028.

“Inflation will, thus, remain well above the 6-9 percent target range throughout the forecast period, owing to expected VAT rate increases, insecurity in agricultural regions (raising food prices), Nigeria’s infrastructure deficit, periodic monetisation of fiscal deficits, currency weakness, and a general inflation bias within economic policymaking.”

The report said following the recent hike in MPR by 400 basis points, to 22.75 percent in February, and the cash reserve requirement by 1,200 basis points, “Another 100 basis points is likely to be added to the policy rate in 2024, assuming deficit monetisation continues and imported inflationary pressures remain strong.”

It added, “The CBN has mentioned a switch to inflation targeting, but as this would rub up against government economic policy and given the CBN’s record of unorthodox policy, such a framework would have little credibility in anchoring inflation expectations.

“The MPC attaches a large weight to economic growth, and policy will be subject to political interference. Assuming inflation falls from 2025, we expect the CBN to begin unwinding its tight stance, with rate cuts beginning early in that year, despite inflation remaining above the ceiling of the CBN’s 6-9 percent target range.

“We expect the policy rate to fall to 12.5 percent in 2026 and remain there throughout the remainder of the forecast period.”

The EIU report predicted real GDP growth to slide from 2.9 percent in 2023 to 2.5 percent in 2024. It explained, “Given population growth of about 2.4 percent, this will mean continued stagnation in GDP per head. Sluggish growth reflects a surge in already high inflation, expected monetary tightening, and balance-sheet constraints facing multinationals that earn in local currency, given the naira’s collapse.