FG to Raise VAT to 15% By 2027 to Fund Fiscal Deficit – EIU

Value Added Tax

FG to Raise VAT to 15% By 2027 to Fund Fiscal Deficit – EIU

The federal government is expected to raise the Value Added Tax (VAT) to 15 per cent from the current 7.5 per cent by 2027 to enable it fund its fiscal deficit and debt service obligations, including social and job creation projects. International business research firm, Economist Intelligence Unit (EIU), stated this in its Country Report.

EIU said the deficit could widen to five per cent of Gross Domestic Product (GDP) in 2024, slightly above the estimate for 2023. It said this was expected to average 4.5 per cent of GDP annually between 2025 and 2028 – more than the legal limit of three per cent of GDP and representing an unusually lax period of fiscal policy for the country.On the foreign exchange (FX) regime, EIU predicted the naira to weaken to N2, 381 to the dollar, stating that the spread with the parallel market will be five per cent to 15 per cent.

The report added that persistently high inflation, deficit monetisation, negative short-term real interest rates, low foreign reserves, and a backlog of foreign-exchange orders would continue to sap confidence in the naira, despite a 45 per cent devaluation in February.

It said traders will continue to be concerned that controls on the currency could be tightened at any point, adding, however, that another step devaluation is unlikely.

The report forecasted foreign borrowing to be used to rebuild foreign reserves and said the local currency would stabilise towards the end of 2024.It pointed out that given that the naira was increasingly appearing undervalued in real terms, the rate could end up stronger if the Central Bank of Nigeria (CBN) tightened monetary policy more aggressively than expected.

EIU further predicted a fresh 100 basis points hike in Monetary Policy Rate (MPR) to 23.75 per cent from the current 22.75 per cent in 2024, should deficit monetisation continue and imported inflationary pressures remain strong.

“However, our core view is that the CBN will fail to deliver a positive real short-term interest rate, as doing so would cause unemployment at a high political cost.”

The report stated, “Accounting for further near-term losses, we expect an end-2024 rate of N1, 770: $1, compared with about N1, 600: US$1 at end-February. However, this forecast is finely balanced.

“Any number of knocks to confidence could cause a sharper weakening. Alternatively, given the naira is increasingly appearing undervalued in real terms, the rate could end up stronger, if the CBN tightens monetary policy more aggressively than we expect.”

EIU stated in the report that following a sizable real-terms correction, naira’s outlook for 2025 was relatively stable, and might close at N1, 817 to the dollar in the review year.

Nonetheless, the EIU report said, “We maintain our view that a lax monetary-fiscal policy mix will undermine the longer-term value of the naira. In line with a slide in world oil prices from a cyclical peak, we forecast that the currency will end 2028 at N2, 381: $1 and that the spread with the parallel market will be 5-15 per cent.”

The report further predicted the country’s foreign exchange reserves to gradually rise over the forecast period, aided by a more market-driven exchange rate system and greater access to foreign borrowing. It added, however, that this would still provide only about seven months of import cover in 2028.

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