The Federal Government may drive up inflation when it increases a sales tax to partly finance its record 2020 budget and implements a new minimum wage, the International Monetary Fund (IMF) warned.
The country, Africa’s top oil producer and the continent’s largest economy, is faced with the choice of boosting growth in the face of lower oil revenues or fixing its dilapidated road and rail networks, while paying off debts and funding the higher minimum wage.
President Muhammadu Buhari on Tuesday presented a record N10.33 trillion ($33.8 billion) budget for 2020 to lawmakers as he aimed to spur growth at the start of his second term in office.
The spending plan includes a Value Added Tax (VAT) increase from 5 per cent to 7.5 per cent and a minimum monthly wage increase to N30,000 ($98) from 18,000 to implement a change that was signed into law in April.
“Inflation will likely pick up in 2020 following rising minimum wages and a higher VAT rate, despite a tight monetary policy,” the IMF said in a statement late on Tuesday. “The outlook under current policies remains challenging.”
Inflation, which has fallen steadily since May, dropped to a 3-1/2 year low in August on lower food prices, increasing the chances of an interest rate cut. However, the central bank has kept rates tight to support the Naira. The price index peaked at 18.7 percent in January last year, and has been in double digits for three years, outside a central bank’s target of 6-9 per cent. The bank has said it would maintain its tight stance in 2019, and sees inflation at 11.31 per cent, rising to 12 per cent this year before moderating.
The budget unveiled on Tuesday tops the previous record spending plan, which was the N9.12 trillion-budget for 2018.
Buhari’s government has repeatedly rolled out record spending plans but struggled to fund them due to lower oil output and an inability to boost non-oil exports.