Devaluation, Subsidy Removal Among Biggest Predictions For Nigeria In 2020

[Edoman]

The nation’s subsidy on petrol may be around N417 billion in 2020

If President Muhammadu Buhari’s 2019 economic decisions were anything to go by, 2020 could be a wild ride with the government moving all the pieces on whims rather than fact.

The economy experienced slow growth in 2019, an election year where the incumbent retained power and foreign capital flight continued due to the uncertainties of an election in Nigeria.

President Buhari promised a free and fair election contesting against his major challenger Atiku Abubakar of the People’s Democratic Party. As with most elections in the country, the overwhelming theme included violence. There were at least 600 deaths tied to the elections from the political campaign to the main exercise itself. Despite Buhari’s wider margin of victory compared to 2015, there was a more perceivable sense of voters’ apathy, to which puts Nigeria’s democracy in a delicate position with a crisis of legitimacy looming.

Perhaps, the most shocking decision taken by the government in 2019 was to close the border looking to stop the smuggling of goods such as rice and subsidised petroleum products. The move goes against all commercial and freedom of movement treaties signed under the Economic Community of West African States (ECOWAS). It was also a major red flag in a year where the continent was lauded for signing its landmark continental free trade agreement. President Buhari announced the closure on the sidelines of the Seventh Tokyo International Conference for African Development in Japan.

“Now that our people in the rural areas are going back to their farms, and the country has saved huge sums of money which would otherwise have been expended on importing rice using our scarce foreign reserves, we cannot allow smuggling of the product at such alarming proportions to continue,” Buhari said.

The partial closure of the borders wiped out the gains made with the reduction of food and general inflation in the first half of the year. No goods were allowed to move in and out of the country’s land borders with the Benin Republic, Niger and Cameroon.

Nigeria’s revenue problem continued with the average oil prices below $60 and revenue targets, especially from taxes, hardly met. So, the government has continued to borrow to fund its budget, making the mounting debt profile and servicing charges continue to choke the country.

However, this has not affected the appetite to borrow. The Nigerian Government seeks to borrow a fresh $30 billion dollars which will see its service cost to 80% of the revenue of the country, according to SBM Intelligence. The government has thought up several ways to make more money from the Communication Tax Bill on the floor of the National Assembly to the Stamp Duty charge and the VAT increase to 7.5% in 2020. But it has still failed to enforce tax laws and widen the tax base.

In all, the Central Bank of Nigeria has stood valiantly defending the naira and heavily depleting the country’s foreign reserves. Defending the naira cost more than $3.3bn in the second half of 2019.

What to expect in 2020

Devaluation

Experts have continued to stress the need for major changes with the unsustainability of CBN’s Naira defence. The fact is the country has major revenue issues and the artificial measures to prop up the Naira will definitely wear out. “The Federal Government’s revenue position is alarmingly untenable, and with the modest increase in the National Minimum Wage still yet to take effect, the CBN simply cannot continue to defend the Naira at current levels,” SBM Intelligence said in their report predicting the events of 2020.

“The Naira will be devalued,” the report said. The prediction is based on the CBN governor’s triggers for a devaluation– reserves at $25 billion to $30 billion, and oil prices at $50 to $45.

“If the current trend continues, the CBN will have to take a decision regarding devaluing the Naira to relieve some pressure on the reserves.”

Subsidy removal and inflation

When the All Progressives Congress was not in power, they heavily protested for the removal of petrol subsidy but after they won the election in 2015, they soft-pedalled on subsidy removal.

SBM Intelligence believes the current drag on the already lean revenues by subsidy means the government will be forced to trim the fat and let go of or adjust subsidy.

“Despite the populist stance of his administration, we expect President Buhari to announce an increase in the price of petrol at some point in 2020.”

It means an increase in inflation. 2020 could really bite hard on the average Nigerian with increased VAT, a potential electricity tariff increase and the continued effects of the border closure. Although the government has said the border will reopen on January 31, 2020, many believe the government will offer reasons on why the borders should remain shut.

Buckle up, 2020 could be one wild ride!

https://m.guardian.ng/news/devaluation-subsidy-removal-among-biggest-predictions-for-nigeria-in-2020/