Cowry Asset analyst says planned VAT hike might hurt economy more

Kenneth Afor

An investment analyst has told business a.m. that moves by the Federal Government to raise Value Added Tax (VAT) next year by 50 percent to 7.5 percent, is not coming at the right economic time, owing to the fact that the country’s gross domestic product (GDP) is growing at a slow pace.

Oluwafemi Osinubi, senior investment analyst at Cowry Asset Management, in an interview with business a.m, said the planned VAT increase might do more harm to the economy and will further add to the already high cost of goods and services caused by the high price of factors of production in the country’s manufacturing sector.

Many have questioned the motive of the federal government, but the government has claimed that the reason for the increase is to ramp up the funding of the new minimum wage and increase state governors’ capacity to attend to their obligations.

Osinubi said, “We feel that this is not the right economic period to increase VAT. GDP in Q2 2019 grew year on year (y-o-y) by 1.94 percent, a slower growth when compared with 2.01 percent recorded in Q4 2015. The VAT increase will further hike the already high cost of goods and services, which was engendered by expensive factors of production, thus reducing demand.”

He added, “Yes, the federal government is bent on increasing the VAT by up to 50 percent to 7.5 percent next year in order to increase its revenue and pay its expenses, especially the personnel costs as the wage bill is set to increase given the increase in the minimum wage. Also, the federal government claimed it wants to increase the capacity of the state governors to be able to fund the minimum wage too since the bulk of the proposed increase in VAT would go to the states. We feel that the move by the federal government to increase VAT might do more hurt to the economy than the expected gain.”

However, Osinubi explained that with the slow growth of the country’s GDP, which is at 1.94 percent year on year (YoY) compared to its projected 2.01 percent the increase could further add to slower growth in the GDP.

To avoid the impending downward impact on the GDP, Osinubi suggests that the federal government needs to sort the issue of the high cost of production by addressing the power sector.

“Already, consumer disposable income is weak, which has made aggregate demand for goods and services to slow, so adding another increase in the price of goods in the name of tax could further slow growth. Yes, we all agree that VAT in Nigeria is slow and needs to be increased, but the federal government needs to sort the issue of the high cost of production, especially power, before increasing VAT with the resultant increase in general prices,” he said.

Moreover, with the preparation of the 2020 budget, which is already in the pipeline and ready to be presented to the national assembly, the government has proposed the sum of N9.79 trillion in next year’s budget. The increase of VAT is one of the few avenues which the federal government will source from to fund the budget, but Osinubi suggests that the first step for the government should be on using market friendly-policies to draw private investors to be actively involved in the country’s economy.

“Yes, we agree that the federal government needs to boost revenue but the first thing first, use policy to do that. Make market-friendly policies that will encourage private investors.

Private fund is needed in building infrastructure, it should come up with Build Operate Transfer (BOT) kind of policy. With this, the federal government would have successfully got so much money needed for capital projects which will eventually bring down the factor costs.

“Let’s just imagine private players in the power and transport sectors. See Uber, Bolts, Gokada and the likes, their contribution to the transport sector and the addition to tax revenue from that space. This is the kind of private money and the idea we are talking about,” Osinubi stressed.

Meanwhile, following organised labour’s concern about the proposed increase with Labour Congress of Nigeria saying it is not in the interest of the people, Osinubi has urged the union to engage with the federal government on getting a living wage for civil servants amid the reduction of the wages of public servants.

He advised that the federal government should think out of the box and find other means of increasing revenue than jerking up VAT by up to 50 percent.