Economy faces fiscally hawkish, monetary tightening second half, say analysts

• Eye on Tinubu’s incoming finance Czar‭, ‬CBN chief

Analysts say they now stand in wait to see who the fiscally hawkish President Bola Ahmed Tinubu will appoint to head Nigeria’s treasury as finance minister, to help him operationalise and execute a ‘squeeze policy’ that is all but set to stay in place for the rest of the year even into 2024.

The heightened expectations about who the next minister of finance would be are not unconnected to the fact that in his eight years as president, Muhammadu Buhari’s two appointees to the post, Kemi Adeosun and Zainab Ahmed, appeared to have made the office so anonymous, that it created room for the Central Bank of Nigeria, under suspended governor, Godwin Emefiele, to step in to take the initiative and lead on issues that many saw as the responsibility of the treasury chief.

But as President Tinubu continues to work on his ministerial list, analysts at investment banking group, Lead Capital, in their half year assessment and outlook on the economy for the rest of the year, have projected  a hawkish fiscal policy environment and a further monetary policy tightening for the rest of the year.

In their half year analytical briefing document made available to Business A.M. the analysts wrote: “Fiscal policy will become [more] hawkish as IGR would be vigorously pursued.”

They also projected monetary policy to walk on the path of tightness when they wrote that “Monetary tightening will continue for as long as inflationary pressures are not subsiding – expect further increase in MPR [monetary policy rate],” they added.

They see the administration moving to secure fiscal sustainability after the economy had been thrown under the bus by the former administration which left little headroom for the current regime to do otherwise.

There will be an urgency to achieve fiscal sustainability given that in the 2023 budget, the projected fiscal deficit is 51.9 percent of total expenditure, which exceeds revenue projection. The 2022 (January to November) budgetary performance showed that over 40 percent of government spending went into debt service compared with a projected 22.1 percent.

According to the Lead Capital analysts, Nigeria’s fiscal situation is so tight that the government is likely to dust up the Oronsaye report for implementation. The report had called for the merger of some ministries and the complete sacking of others.

Specifically, they are calling a meeting for the possible  increase on value added tax (VAT), currently at 7.5 percent to 10 percent, and they added that they foresee a situation where the government will, in its quest to expand the tax net, will include products and services previously exempt from VAT to become vatable.

The revenue drive, they also wrote, is likely to also see electricity tariff rise by 100 percent in the second half of this year.

The Lead Capital analysts, however, on a positive note wrote that they expect to see some downward adjustments in import duties on essential items as a form of palliative measure.

But Nigerians will have to brace up to pay more at the pump for petrol. According to the analysts, a further increase in the prices of petroleum products will kick in whenever the next import circle kicks in.

Foreign exchange policy would become more liberal, the analysts wrote, and geared towards attracting FDI and diaspora remittances

The analysts said the positive growth experienced in the first quarter of the year could be sustainable for the rest of the year, noting that the IMF adjusted Nigeria’s growth projections from 2.7 percent to 3.20 percent in 2023 reflecting the hike in commodity prices sparked by the Russian – Ukraine war

“We therefore forecast a growth of 3.0% in 2023 in line with the IMF forecast. The FGN forecast 3.75% for 2023 from the 2023 appropriation bill.

On inflation, they said it would remain as it is, stating that it will remain in the double digit.

Their words: “Inflation will remain in double digits but will likely stabilise between 20% and 25% driven by the following factors: imported inflation due to exchange rate devaluation  –  would likely continue.”

The analysts said that owing to the high rate of inflation ravaging the economy and the unification of the exchange rate, short-term interest rates are projected to rise as naira demand rises.

Also, a persistent inflationary threat would encourage the CBN to maintain a hawkish stance.

In addition, if interest rates rise, borrowing costs for businesses and the government will also rise.

Businesses may fail on loans more frequently as a result of the rising interest costs, which would likely result in higher impairment costs for banks.

“Consequently we project that MPR would rise to 19.5% by the end of the year,” the analyst stated.

On exchange rate, the Lead Capital analysts stated:

“The CBN has standardised the exchange rate and greatly lowered the barriers to accessing foreign exchange, especially those relating to domiciliary accounts.

“Although the adoption of the “willing buyer, willing seller” model denotes a liberalisation of the foreign exchange market, the CBN has not yet made a clear decision regarding whether it would run a managed or unmanaged system.

“In May, the naira’s exchange rate at the I & E window fluctuated between N462.13 and N465.13 dollars.

“It was averaged at N463.27/$, down 0.05% from April’s average of N463.06/$.

They said that with market expectations still driving demand and supply dynamics, the foreign exchange market will continue to be volatile in the near future.