Supplementary budget, minimum wage may affect economic reform
Rating firm, Agusto & Co., has warned that the N6.6tn supplementary budget, new minimum wage of N70,000 and increased liquidity from monthly federal allocation were likely to derail the economic reforms of the President Bola Tinubu administration.
This was disclosed in their monthly newsletter, which was published on Friday.
The credit rating agency cautioned that a decline in inflation did not equate to falling prices; rather, it indicated a slowing pace of price increases, indicative of easing pressures and a move towards stability.
According to the National Bureau of Statistics, the country’s inflation had moderated to 33.40 per cent in July on the back of a slowdown in food inflation.
The analysts at Agusto posited, “The risk of a renewed inflationary surge is heightened by several factors, including the proposed supplementary budget of N6.6tn, increased liquidity from monthly disbursements to the three tiers of government, and the impending implementation of the N70,000 minimum wage. These factors could potentially offset the positive impact of recent policy measures and prolong the disinflationary process.”
The report added that while the dip in inflation is a welcome respite for Nigerians grappling with a severe cost-of-living crisis, the relief was tempered by the broader economic challenges that have ignited widespread public discontent.
A hunger protest was held across the country in early August, demanding that the government reinstate fuel subsidies, and electricity tariffs, amongst others.
The report added, “We believe inflation has turned a corner and will decline further in the coming months, supported by several developments. The Central Bank of Nigeria has reintroduced the Retail Dutch Auction System to address Nigeria’s chronic foreign exchange shortage and stabilise the naira exchange rate.
“By allowing authorised dealer banks to submit bids on behalf of clients, the RDAS introduces a market-driven mechanism for currency allocation. The inaugural auction on August 6th saw $876.6m allotted to 26 banks at a rate of N1,495/$. This system is anticipated to facilitate efficient price discovery, aligning the naira’s value more closely with market fundamentals.”
It added that Nigeria’s inaugural $500m domestic dollar bond was expected to boost the foreign reserves.
“This five-year bond, offering semi-annual interest payments and a minimum investment of $10,000, is structured to appeal to a broad investor base. By providing a comparable yield to existing Eurobonds, the government hopes to attract both domestic and foreign investors. Ultimately, this initiative is expected to strengthen the naira through increased foreign exchange reserves and a reduction in reliance on external debt markets,” the report added.
In a bid to tackle food inflation, the Federal Government introduced a new fiscal measure; effective from July 15, 2024, to December 31, 2024 (150 days).
The Nigeria Customs Service will implement zero import duty and VAT exemptions on specific items, including grain sorghum, millet, maize, wheat, beans, and husked brown rice, with duty waivers ranging from five per cent to 30 per cent.
Agusto projected that at its next Monetary Policy Committee meeting, the CBN was likely to adopt a dovish stance about inflation tackling.
“While acknowledging the recent progress made, CBN Governor, Olayemi Cardoso, hinted at potential rate cuts in the future if inflationary pressures continue to ease. Given tepid GDP growth numbers in Q1 2024 amid a constrained business environment, worsened by rising borrowing costs, the CBN could decide to ‘wait and see’ and hold the policy rate stable at its next meeting in September.
“This strategic pause would allow it to observe the trend of inflation and the exchange rate in the coming months as well as the Q2 2024 GDP growth numbers before making further adjustments to its monetary policy stance,” it projected.
