This week, we dissect the major events with economic implications, from growth downgrade by the International Monetary Fund (IMF) to the outlook on next week’s Monetary Policy Committee (MPC) following strong June inflation print. We also examined the implications of the proposed ₦6.2tn supplementary budget for 2024 by President Bola Ahmed Tinubu and his request to the NASS to amend the Finance Act of 2023 to allow for the taxing of half of bank’s realised FX gains in 2023.
To start with, the IMF in its July 2024 World Economic Outlook published on Wednesday, revised the current year growth projection for Nigeria to 3.1% against a prior upgrade to 3.3% in April. Accordingly, real GDP forecast for SSA region was trimmed to 3.7% from 3.8% previously. The downgrade in domestic growth highlights the Fund’s concerns around weaker than expected Q1:2024 growth (which came in at 2.98% y/y). We suspect that optimistic appraisal on reforms gains and record high oil output in January (1.6mbpd, highest in the prior 23 months) might have played a role in the previous bullish projection of the Fund as against our conservative estimate of 3.0%.
Our cautious stance is premised on subsisting challenges in the oil sector and slow progress on fixing lingering structural challenges. From another perspective, household consumption (c.60.0% of GDP) is estimated to have been constrained further by the strong inflation pressure which averaged 32.8% in H1:2024 (from 24.5% in 2023 year end), as firms contend with issues in the operating environment such as exchange rate instability, rising energy cost, and customer base with weaker purchasing power.
Elsewhere, on Wednesday, the National Assembly received President Bola Ahmed Tinubu’s request for fresh injection of ₦6.2tn into the budget for the year to bring the total to ₦34.9tn (₦28.7tn was initially signed on January 1st). As part of the plans to fund the supplementary budget, a proposal was made to amend the Finance Act of 2023 to charge windfall taxes on banks, levying 50.0% on their realised profits from FCY transactions within the 2023 financial year. The amendment suggests a penalty of an additional 10.0% for banks that have not remitted this payment or gotten an approval for installment payment from the CBN by December 31st, 2024. Additionally, principal officers of defaulting banks would face imprisonment for up to three years.
Our View
In our view, though the FG is constitutionally empowered to impose taxes (including on windfall gains) to strengthen fiscal wall chest, the timing of the policy’s announcement is problematic, as its abruptness naturally creates a sense of uncertainty and unpredictability among investors and industry practitioners. For instance, Italy in August 2023 announced a one-off 40.0% windfall tax on increase in banks’ net interest margin for the fiscal year 2023. Although the plan was eventually modified, the announcement was made during the 2023 operating year – in contrast to the abruptness of the proposed tax on Nigerian banks, which is to be applied outside of the 2023 fiscal year. Unsurprisingly, the banking index shed a total of 3.0% in the final trading sessions of the week, following the announcement. In summary, lingering concerns about uncertainty around the sector could present some headwind amidst the ongoing recapitalisation exercise.
Furthermore, there is need for clarification on the wind-fall tax adjustments to be made for banks that already remitted income tax for 2023. Given the five-month window for compliance, the FG should provide a clearer template that would take into consideration some of the nuances around implementing the tax. Lastly, there is the issue of fairness from the perspective of capital owners, given that the CBN already barred access to FCY earnings via dividend payments, meanwhile the FG is seeking access to 50.0% of the same profit. In light of the ongoing recapitalisation, the broad steps by the regulator and the FG to tighten the noose around FX income for banks might disincentivise new capital inflow into the sector, thereby prolonging the current episode of lacklustre foreign capital inflows into the country.
Finally, domestic headline inflation rate nudged higher to 34.2% y/y in June 2024 from 34.0% y/y in May. The uptrend was stoked by a 40.9% y/y jump in food prices (May: 40.7%) driven by sharper m/m growth of 2.6%. Likewise, the core inflation sub-component expanded by 36bps to 27.4% y/y (up 5bps m/m to 2.1%). We attribute the spike in food inflation to higher demand that surrounds festivities, coinciding with the main planting season in the North. For core prices, we suspect that negative inflation expectation and currency movements (FX depreciation: 0.9% m/m) played some role in the m/m uptick.
Looking ahead, we expect the 150-day relaxation of taxes on select food imports, coupled with ongoing green harvest in the South to support softer food inflation. More importantly, we expect high base effect to amplify these positive drivers with headline to moderate to 33.12% in July. Upside risks to our forecast include recent PMS pump price hike to c.₦800.00/litre due to product scarcity in some states, as well as disruptive impact of flooding on farm and logistical activities. That said, at the upcoming MPC meeting next week, we perceive that the committee would likely sustain hawkish tone with further 50bps to 100bps hike in the MPR even though we believe a policy hold is more appropriate at this point on the balance of factors consideration.
Afrinvest
