‘Subsidy Removal Expected To Generate Fiscal Savings Of N2trn By Year End’
The removal of the PMS subsidy is expected to provide fiscal savings of N2 trillion in 2023 and this, together with earnings from improved oil exports and non-oil sources would buoy government’s revenue.
According to Afrinvest in its newly released report titled; The Turning Point- Positioning for Optimal Return, Nigeria’s inflation rate is likely to touch 24 per cent before decelerating in the fourth quarter (Q4) on the back of the base effect and weakened demand pressure.
Data released by the National Bureau of Statistics (NBS), on Monday, revealed that Nigeria’s headline inflation surged to a new 18-year high, rising by 38 basis points (bps) to 22.79 per cent year-on-year (y/y) in June as against 22.41 per cent recorded in May. Also, food inflation increased by 21bps to 2.40 per cent m/m in June (May: 2.19 per cent m/m) – higher than H1 average of 2.13 per cent month-on-month (m/m) and the highest level since 2.54 per cent m/m recorded in May 2017.
Furthermore, the price of Prime Motor Spirit (PMS) otherwise known as fuel has sky-rocked as some fuel stations in Abuja and Lagos were seen selling fuel at N617–N640 per litre. Assessing the new administration’s reforms, said the reforms taken by the government will help to enhance fiscal consolidation, attract investors to the sector and target key sectors for radical enterprise transformation and organisational repositioning. The report further noted that the removal of the PMS subsidy and the process to stop the electricity subsidy are expected to keep prices elevated for the rest of 2023 as this would spur an improved and more efficient allocation of resources by the FG.
It also added that this could translate to N2 trillion savings by end of the year.
With the next Monetary Policy Committee (MPC) expected to hold with the former Central Bank of Nigeria (CBN)’s Governor, Godwin Emefiele still in captivity, the report stated that monetary policy would tread cautiously by maintaining the status quo.
“The CBN implemented measures to control rising inflation, including raising the monetary policy rate by 700bps and the cash reserve ratio by 500bps since May 2022. However, the monetization of the fiscal deficit through expensive Ways and Means advances and the CBN’s provision of development finance at subsidized rates, have weakened the effectiveness of monetary policy in taming inflationary pressure. So we expect them to tread cautiously at the next MPC meeting”, the report said.
On FX, Afrinvest said the improving FX reserves will be central to FX stability. According to the report, there has been massive improvement to foreign reserves to the tune of over $60 billion – an increase last seen briefly in 2008.
The report further said that to achieve support for FX rate, oil production must be ramped up massively to boost export earnings and stabilize the FX stability and external borrowing is very critical to this goal.
“Hence, yields in the global financial market (particularly Sub-Saharan Eurobond market) must decline to a single digit to make this option attractive for the government”, It said.
