The Economist intelligence Unit (EIU) has said inflation and fiscal pressures will cause political problems for Nigeria.
The EIU, in its latest country report for Nigeria, said the Russia-Ukraine war would push up inflation through higher prices for diesel and for wheat, a staple.
“The fiscal deficit will widen to a multi-decade high in 2022 as high world fuel prices push up the bill for petrol subsidies and as crude oil output remains low,” it said. “Insecurity is chronic in many areas, and inflation and unemployment accentuate the problem. This backdrop makes much-needed but unpopular economic and fiscal reforms more difficult.”
It said economic growth would slow in 2022 owing to power supply issues, high inflation and monetary tightening.
According to the EIU, foreign-exchange scarcity would abate in 2022-25 as the current account moves into surplus in those years, and devaluation of the naira is expected in 2026 as global oil prices dip.
“We expect Nigeria to end monetary tightening from 2023, unlike central banks globally. The central bank is more concerned about output gaps than inflation, and will therefore fail to act aggressively enough to bring inflation down to target,” it said.
It said the federal government’s finances would remain in deficit in 2022 through 2026.
The EIU said: “Crude oil receipts account for half of federally retained revenue, and even an average global oil price of $85.4 per barrel in 2022-26 will be insufficient to balance the budget given the low production.
“The budget deficit will be atypically wide in 2022 as elevated global fuel prices cause the petrol subsidy bill to balloon. The EIU, therefore, expect a budget deficit of 5.7 percent of GDP-the largest since the 1990s.”
It said the next administration would have to deal with the fiscal overhang, given high debt-service costs that in early 2022 exceeded federally retained revenue.
“We view tax increases as inevitable and expect the Value Added Tax (VAT) rate, which is currently low, at 7.5 percent, to be increased to 15 percent in 2023-26,” it said.
The EIU said an ongoing legal dispute over which authorities are permitted to collect VAT revenue means that other forms of tax increase might be preferred.
It said an expected end to petrol subsidies deducted from federal revenue would provide another boost from 2023, adding that federally retained revenue would nonetheless peak in 2024, at just 4.4 percent of GDP.
It said: “Debt-service costs, a large public-sector wage bill and security expenses elevate spending. From 2023 capital investment will be emphasised: the government has justified market-led petrol pricing in the past by promising to invest savings in infrastructure, and will face pressure to match rhetoric with action.
“Overall, we expect tax increases to narrow the fiscal deficit to 2.2 percent of GDP in 2024. Falling oil prices will then cause a steady widening of the deficit to 2.9 percent of GDP in 2026. The government has a public limit of 40 percent of GDP and intends to scrutinise CBN loans that are currently excluded from public debt reporting. We expect federal public debt excluding central bank loans to remain shy of this ceiling as securitisation takes place only gradually. Including all off-budget CBN lending, public debt would exceed the ceiling by 2025.”