The federal government plans to double its value-added tax
(VAT) and cancel government projects if oil prices continue
to slide.
Coordinating Minister for the Economy/Minister of Finance,
Dr. Ngozi Okonjo-Iweala said this in an interview with The
Wall Street Journal. According to OKonjo-Iweala, the
country is reviewing some 6,000 ongoing projects to see
which will be kept, delayed, or scrapped.
“It will be a huge exercise,” she said. If oil prices continue
to sink, it will also raise its value-added tax, which at five
per cent to 10 per cent she said.
Nigeria faces a test of whether or not it can raise revenue
and cut spending as quickly as oil prices are tumbling. The
collapse in global crude rates has arrived at a particularly
inopportune moment for Africa’s largest economy and
country by population. The government earns about 80 per
cent of its income from petroleum exports.
Also, the Central Bank of Nigeria (CBN) on Tuesday kept its
key interest rate on hold, betting that recently imposed
capital controls would be enough to arrest the damage
caused by tumbling oil.
The country’s drop in oil income has come just as spending
is rising. The country of 174 million is locked in a costly war
against Boko Haram, an Islamic insurgency that has
conquered a Belgium-sized swath of its north-east, forcing
the military to purchase new helicopters and tanks to
respond.
Next month, Nigeria will hold a general election that looks
likely to be the country’s closest ever. The cascading oil
prices had pushed the naira, to a record low N190 to a
dollar on Monday.
It is against that backdrop that the country’s finance
ministry has been trying to build a budget that reflects a
realistic assumption on where crude prices will stand.
Nigeria’s 2015 budget initially assumed oil would trade at
$78 per barrel, a projection the finance ministry cut to $73
in November and then again to $65 in December.
On Tuesday, prices for Brent crude settled just below $48
per barrel.
“We don’t know where the bottom is,” Okonjo-Iweala said.
"Should it be $50? Should it be $45? Should it be $40? Is the
bottom $30? I have no idea.”
The country, she added, will hold off on issuing a new
budget with a revised oil price benchmark until crude prices
stabilize.Also, the CBN Governor, Mr. Godwin Emefiele said
the key interest rate would remain at 13 per cent, its level
since a 100-basis point increase in November. Aside from
the recent rate increase, the bank has tested less
conventional measures to stem the local currency’s slide. In
November the bank curtailed U.S. dollar sales and bought
naira to stoke demand. But defending the naira’s peg
against the dollar has been costly. The country’s foreign
currency holdings have fallen to $34.5 billion from nearly
$40 billion in July.
The central bank had also lowered its target trading band
for the naira in November — a sign that it wasn’t able to
defend Nigeria’s currency at stronger levels.
When those measures and the rate increase didn’t check the
naira’s decline, the central bank had also moved to curb
currency speculation.
Emefiele on Tuesday defended the extraordinary measures
the central bank is using to try to stem the naira’s slide.
“We will continue to provide liquidity for legitimate
transactions, and people should stop speculative attacks on
the Nigerian currency,” he added.
"We will continue to provide liquidity for legitimate
transactions, and people should stop speculative attack on
the Nigerian currency."
But economists cautioned that those moves can’t
compensate for Nigeria’s core challenge which is to
diversify the economy away from oil revenues that fund
more than 70 per cent of the public budget.
The government’s heavy reliance on revenues from oil
production are raising concerns that the steep drop in
prices could crimp its ability to pay for overdue
infrastructure projects and fight the intensifying Islamist
insurgency. In December officials acknowledged they would
need to rein in spending by lowering the anticipated average
oil price on which the country bases its budget to $65 from
$75.
“Irrespective of the monetary policy response, the economy
will be subject to painful adjustments,” an analyst at Rand
Merchant Bank in Johannesburg, Nema Ramkhelawan-
Bhana said.
In the short term, the bank appears intent on allowing the
fresh capital control measures time to shore up the naira,
according to the chief investment officer of the Africa Fund
at Duet Asset Management, which manages more than $5.5
billion, Ayo Salami.
“It is understandable that the bank now wants to evaluate
the impact of what they have already done,” he said.

wordcat:
The increase in VAT will actually affect the price of garrii and this one go concern me walla ooooooo.