IMF Sees Higher Nigeria Inflation in 2020 on Minimum Wage, Tax Rises (Reuters)
Last Modified: 08:23 AM, Wed Oct 09, 2019

Nigeria's government may drive up inflation when it increases a sales tax to partly finance its record 2020 budget and implements a new minimum wage, IMF staff warned today. "Inflation will likely pick up in 2020 following rising minimum wages and a higher VAT rate, despite a tight monetary policy," they said, adding that the outlook under current policies remains challenging. "Over-optimistic revenue projections have led to higher financing needs than initially envisaged, resulting in over-reliance on the expensive borrowing from the central bank to finance the deficit," staff said. Nigeria's economy was recovering, albeit slowly after a 2016 recession, with its dollar buffers declining due to rising capital flight, they said. Bigger deficits make monetary policy complex owing to the government's reliance on central bank for funding, they said. Staff said growth could pick up this year to 2.3% on the back of a good harvest and as the oil sector recovery continues.

- Nigeria's government may drive up inflation when it increases a sales tax to partly finance its record 2020 budget and implements a new minimum wage, the International Monetary Fund (IMF) warned.

The country, Africa's top oil producer and the continent's largest economy, is faced with the choice of boosting growth in the face of lower oil revenues or fixing its dilapidated road and rail networks, while paying off debts and funding the higher minimum wage.

President Muhammadu Buhari on Tuesday presented a record 10.33 trillion-naira ($33.8 billion) budget for 2020 to lawmakers as he aimed to spur growth at the start of his second term in office. (Full Story)

The spending plan includes a value-added tax increase from 5% to 7.5% and a minimum monthly wage increase to 30,000 naira ($98) from 18,000 to implement a change that was signed into law in April. (Full Story)

"Inflation will likely pick up in 2020 following rising minimum wages and a higher VAT rate, despite a tight monetary policy," the IMF said in a statement late on Tuesday. "The outlook under current policies remains challenging."

Inflation, which has fallen steadily since May, dropped to a 3-1/2 year low in August on lower food prices, increasing the chances of an interest rate cut. However, the central bank has kept rates tight to support the naira NGN=.

The price index peaked at 18.7 percent in January last year, and has been in double digits for three years, outside a central bank's target of 6-9%. The bank has said it would maintain its tight stance in 2019, and sees inflation at 11.31 percent, rising to 12 percent this year before moderating.

The budget unveiled on Tuesday tops the previous record spending plan, which was the 9.12 trillion-naira budget for 2018.

Buhari's government has repeatedly rolled out record spending plans but struggled to fund them due to lower oil output and an inability to boost non-oil exports. This has kept the government dependent on expensive borrowing, the IMF said.

"Over-optimistic revenue projections have led to higher financing needs than initially envisaged, resulting in over-reliance on the expensive borrowing from the central bank to finance the deficit," the Fund said.

The IMF said Nigeria's economy was recovering, albeit slowly after a 2016 recession, with its dollar buffers declining due to rising capital flight. It said bigger deficits make monetary policy complex owing to the government's reliance on central bank for funding.

Economic growth slowed to 1.94% in the three months to the end of June, the second quarter in a row to see deceleration. The Fund said growth could pick up this year to 2.3% on the back of a good harvest and as the oil sector recovery continues.


IMF Sees Nigeria’s 2019 GDP Growth Climbing as Much as 2.3% (Bloomberg)

(Bloomberg) -- “Growth is expected to pick up to 2.3% this year on the strength of a continuing recovery in the oil sector and the regaining of momentum in agriculture following a good harvest,” the International Monetary Fund says in an emailed statement. 
• 2020 revenue measures such as a higher VAT rate and introduction of a minimum registration threshold are expected to partially offset declining oil revenues and the impact of higher minimum wages, thus keeping the consolidated fiscal deficit elevated 
• Current account’s shift to a deficit expected to persist, while pace of capital outflows continue to weigh on international reserves 
• Inflation rate will likely pick up in 2020 following rising minimum wages and higher VAT rate
• “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”
• “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”
• New regulations to boost lending by banks may need to be revisited “in view of the potential unintended consequences on banks’ asset quality, maturity structure, prudential buffers and the inflation target”
• NOTE: Sept. 11, Nigeria Finance Minister Sticks to 3% Growth Forecast for 2019
• NOTE: April 3, IMF Says Nigeria Growing Too Slowly, Urges Single Naira Rate
• NOTE: Oct. 8, Nigeria’s Buhari Bets on Revenue Surge Despite Repeated Misses
To contact the reporter on this story: Eric Ombok in Nairobi at eombok@bloomberg.net To contact the editors responsible for this story: David Malingha at dmalingha@bloomberg.net Helen Nyambura, Jacqueline Mackenzie 
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