Removing subsidies will increase Nigeria’s economy by 5%

Nigeria’s total revenues are expected to increase by 5% by 2024 if the federal government is able to remove the costly fuel subsidy by 2022, according to a report by the Economist Intelligence Unit (EIU).

This would mean a significant increase in Nigeria’s income relative to gross domestic product (GDP). In 2020, the general government revenue as a percentage of GDP in Nigeria was 6.3%.

Finance, Budget and National Planning Minister Zainab Ahmed said the government wanted to end oil under-recovery, known as the fuel subsidy, but noted that the removal of oil help is unpopular. The subsidy payment is expected to engulf 900 billion naira in 2022.

The EIU in its national report on Nigeria said that while there may be a new impetus to divest from loss-making state-owned enterprises as a way to alleviate fiscal pressures, the proceeds from privatization will not compensate for an overwhelming tax. low or excessive dependence on income oil.

In the recently published report, The Economist predicted that Nigeria’s public debt would reach 35.4% of GDP by 2025. The government raised its public debt ceiling to 40% of GDP to accommodate larger budget deficits in the medium term. and to account for the securitization of the deficit financing of the Central Bank of Nigeria (CBN) as long-term debt.

The Economist also forecast that the federal government would increase its value-added tax (VAT, currently 7.5 percent) to 15 percent by 2025 at the latest to fill public finance deficits.

“We are forecasting three equal increases in the VAT rate, bringing the rate to 15% by 2025. The first is expected in 2022, before the next elections, but apparently inevitable given the increasing debt burden, with further increases in 2024 and 2025 “, he added. the report said, stating that “Even so, we expect tax revenues to peak at just five percent of GDP in 2024, which also assumes no fuel subsidies (the costs of which are deducted from revenues) beyond 2022. “

The London-based research unit said increases in the VAT rate and rising oil prices would reduce Nigeria’s budget deficit to 2.6% of GDP in 2023-24, but lower average world prices oil in 2025 will cause the deficit to widen to three percent of GDP that year.

The report predicts that the government will end its pro-market reform program to avoid making the situation worse, with long-term implications for critical inputs such as electricity supply.

“Short-term economic growth will be dampened by high inflation and unemployment, as well as weak nominal wage and consumption growth. Monetary policy will tighten from 2022. A current account deficit in 2021 and low short-term interest rates will lead to a devaluation of the naira.

“The Economist Intelligence Unit expects the balance to turn into a surplus in 2022, and the naira will remain fairly stable until 2025, when we expect another devaluation,” the report said in part. obtained yesterday by LEADERSHIP.

Noting that budget overruns have rarely come close to the original plan for many years, analysts said the policy is clearly geared towards austerity, with the expenditure-to-GDP ratio declining by around 8% in 2021 in the MTEF / FSP. , at 7.6. percent in 2022, following cuts in the capital budget of just under 760 billion naira, allowing the recurrent budget to increase for items such as personnel costs.

Political stability

Economist Intelligence Unit Chairman Buhari will come under immense pressure to stabilize Nigeria, but a myriad of security threats will prove unmanageable as the military and police are overwhelmed and unable to cope with security crises simultaneous.
“The government will be unable to regain full dominance over the northeast,” he said.

Noting that Nigeria has a system resilient enough to keep the government in power, the EIU said it would, however, leave many parts of Nigeria very dysfunctional. “Security concerns will be pronounced in many parts of the country, with unrest in the southeast attributed to secessionist groups in Biafra and a further increase in kidnappings by organized criminal networks.
“Banditry and violent crime will remain pervasive, and other parts of Nigeria may begin to resemble the northeast as, essentially, lawless areas, neglect of the periphery may eventually reach a point of implosion for overall stability, but we do not expect this during the forecast period 2021-25. “


The EIU said foreign exchange restrictions on various imported products, including staple foods, and currency movements are cost push factors, but the base effects will reduce domestic food prices in the second. half of the year.


Analysts at The Economist magazine’s research arm said they expect annual inflation to start falling from 2022 to an average of 10% in 2024 if the exchange

the rate stabilizes and the CBN tightens its monetary policy.
He said exchange controls on imported goods, conflicts in the middle belt – Nigeria’s breadbasket – and a possible return to market prices for fuel will be
avoid faster deflation.

He also claimed that the devaluation of the currency in 2025 would cause the average rate to rise again, to 12.5%.

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