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Nigeria may double VAT due to falling oil prices

By on January 23, 2015

The federal government plans to double its value-added tax (VAT) and cancel government projects if oil prices continue to slide.

Coordinating Minister for the Economy/Minister of Finance, Dr. Ngozi Okonjo-Iweala said this in an interview with The Wall Street Journal. According to OKonjo-Iweala, the country is reviewing some 6,000 ongoing projects to see which will be kept, delayed, or scrapped.

“It will be a huge exercise,” she said. If oil prices continue to sink, it will also raise its value-added tax, which at five per cent to 10 per cent she said.

Nigeria faces a test of whether or not it can raise revenue and cut spending as quickly as oil prices are tumbling. The collapse in global crude rates has arrived at a particularly inopportune moment for Africa’s largest economy and country by population. The government earns about 80 per cent of its income from petroleum exports.

Also, the Central Bank of Nigeria (CBN) on Tuesday kept its key interest rate on hold, betting that recently imposed capital controls would be enough to arrest the damage caused by tumbling oil.

The country’s drop in oil income has come just as spending is rising. The country of 174 million is locked in a costly war against Boko Haram, an Islamic insurgency that has conquered a Belgium-sized swath of its north-east, forcing the military to purchase new helicopters and tanks to respond.
Next month, Nigeria will hold a general election that looks likely to be the country’s closest ever. The cascading oil prices had pushed the naira, to a record low N190 to a dollar on Monday.

It is against that backdrop that the country’s finance ministry has been trying to build a budget that reflects a realistic assumption on where crude prices will stand. Nigeria’s 2015 budget initially assumed oil would trade at $78 per barrel, a projection the finance ministry cut to $73 in November and then again to $65 in December.

On Tuesday, prices for Brent crude settled just below $48 per barrel.

“We don’t know where the bottom is,” Okonjo-Iweala said. “Should it be $50? Should it be $45? Should it be $40? Is the bottom $30? I have no idea.”

The country, she added, will hold off on issuing a new budget with a revised oil price benchmark until crude prices stabilize.Also, the CBN Governor, Mr. Godwin Emefiele said the key interest rate would remain at 13 per cent, its level since a 100-basis point increase in November. Aside from the recent rate increase, the bank has tested less conventional measures to stem the local currency’s slide. In November the bank curtailed U.S. dollar sales and bought naira to stoke demand. But defending the naira’s peg against the dollar has been costly. The country’s foreign currency holdings have fallen to $34.5 billion from nearly $40 billion in July.

The central bank had also lowered its target trading band for the naira in November — a sign that it wasn’t able to defend Nigeria’s currency at stronger levels.
When those measures and the rate increase didn’t check the naira’s decline, the central bank had also moved to curb currency speculation.

Emefiele on Tuesday defended the extraordinary measures the central bank is using to try to stem the naira’s slide. “We will continue to provide liquidity for legitimate transactions, and people should stop speculative attacks on the Nigerian currency,” he added.

“We will continue to provide liquidity for legitimate transactions, and people should stop speculative attack on the Nigerian currency.”

But economists cautioned that those moves can’t compensate for Nigeria’s core challenge which is to diversify the economy away from oil revenues that fund more than 70 per cent of the public budget.

The government’s heavy reliance on revenues from oil production are raising concerns that the steep drop in prices could crimp its ability to pay for overdue infrastructure projects and fight the intensifying Islamist insurgency. In December officials acknowledged they would need to rein in spending by lowering the anticipated average oil price on which the country bases its budget to $65 from $75.

“Irrespective of the monetary policy response, the economy will be subject to painful adjustments,” an analyst at Rand Merchant Bank in Johannesburg, Nema Ramkhelawan-Bhana said.

In the short term, the bank appears intent on allowing the fresh capital control measures time to shore up the naira, according to the chief investment officer of the Africa Fund at Duet Asset Management, which manages more than $5.5 billion, Ayo Salami.

“It is understandable that the bank now wants to evaluate the impact of what they have already done,” he said.

 

[ThisDay]