In line with our expectation, February headline inflation rate further moderated to 11.31% year-on-year (from 11.37% in January 2019), printing two consecutive months of decline. The sustained fall in annual inflation rate was driven by decreases in food prices, especially in Abia, Delta and Lagos States – food inflation in the respective states moderated y-o-y to 10.81%, 11.51% and 12.94% in February 2019.
The pressure on general price level of food eased y-o-y to 13.47% (slower than 13.51% in January 2019), amid harvest season which lasted till the end of February. In the same vein, core inflation rate grew slower, on an annual basis, to 9.80% (from 9.91% growth in Jan 2019) and on a monthly basis, slowed to 0.65% (against 0.81% growth in Jan 2019).
This was partly driven by y-o-y fall in the costs of transport (-0.22%), clothing & footwear (-0.06%) and energy cost (-0.11%). Although the change in price level for imported food remained above headline inflation rate of 11.31%, we saw it slow y-o-y to 15.61% in the month under review (from 15.66% in Jan 2019) amid monthly average appreciation of the Naira against USD across market segments (FX rate fell m-o-m by 1.72% to N357.50/USD at the BDC market).
Inflation rate in the urban area dropped y-o-y to 11.59% (from 11.66%) as well as in the rural area, to 11.05% (from 11.11%) in Feb 2019.
In the fiscal space, the Chairman of the Federal Inland Revenue Service (FIRS), Mr. Babatunde Fowler, on Tuesday, March 19, 2019, hinted on ambitious plans to increase in tax revenue target to N8 trillion for 2019 (higher than N6.75 trillion it set for 2018; of which it realized only 60.44%) and to increase Value Added Tax rate (VAT) from the current 5% before the end of 2019 to further enhance the capacity of the Federal Government to fund the N30,000 new minimum wage bill.
He gave the hint during an interactive session with the Senate Committee on Finance on the Medium Term Expenditure Framework (MTEF) for the 2019 budget. He also noted that his agency will improve on its VAT, Company Income Tax (CIT) and Petroleum Profits Tax (PPT) collections in 2019 from levels recorded in 2018 when revenue collections rose by 32.01% y-o-y to N5.32 trillion. The collections were comprised of non-oil taxes amounting to N2.84 trillion or 53.57% and Petroleum Profit Tax (PPT) of N2.48 trillion or 46.43% in 2018.
The 2018 PPT collections which increased y-o-y by 63.82% was partly due to higher crude oil output and prices which is to be sustained above USD60 a barrel benchmark set for 2019. 2018 actual non-oil taxes (N2.84 trillion) constituted 60.78% of 2018 projected non-oil revenue of N4.08 trillion (which accounts for 60.44% of total projected revenue of N6.75 trillion).
The breakdown of the non-oil revenue collection, which rose y-o-y by 13.55% (from N2.51 trillion in 2017), revealed that Capital Gains Tax spiked y-o-y by 296.23% to N12.6 billion (from N3.18 billion); Value Added Tax (VAT) increased y-o-y by 14.43% to N1.11 trillion (from N0.97 trillion); Company Income Tax (CIT) grew y-o-y 15.57% to N1.41trillion (from N1.22 trillion); stamp duty collection increased y-o-y by 76.93% to N15.8 billion (from N8.93 billion); while education tax rose y-o-y by 31.18% to N203.28 billion (from N154.96 billion).
We expect headline inflation to further maintain its lower tragectory in March 2019 amid delayed implementation of minimum wage, early stage of planting season and stability of the foreign exchnage rate. Meanwhile, we fear that the proposed increase in VAT by the FIRS could lead to a reduction in purchasing power (from an effective increase in price of final goods and services), reduce business sales and slow down economic growth.
This however provides an opportunity to reallocate economic resources more efficiently and to explore the reduction of socialist policies – current leakages – such as transfers. This is because an increase in minimum wage could have a multiplier effect on the economy and hence provide support to less economically privileged citizens.