Report: Why FG Must Adjust Electricity, Petrol Prices
Analysts at FSDH Merchant Bank Limited have said electricity and the pump price of premium motor spirit (PMS) are two key prices that the federal government will need to adjust this year in order to free up funds for developmental purposes.
They stated this in the firms economic outlook for 2019, obtained on Monday.
According to the bank, while the adjustment may increase the inflation rate in the short-term, it would benefit the economy in the long-term.
FSDH noted that the fiscal deficit in 2019 may be higher than in 2018, and higher than what was projected for this year.
“In order to execute certain plans that will move the economy forward, government may have to increase borrowing or partner with private sector operators on key projects. An increase in borrowing will increase the interest rate, while partnership with the private sector will expand economic activity and create new job opportunities.
“Already, the ratio of government’s debt service to revenue is high and at an unsustainable level. Therefore, additional debt, in an environment of rising interest rates, may reduce government’s ability to execute critical programmes that will improve the business environment. While fixed income investors may enjoy higher yields in 2019 than in 2018, businesses may suffer under rising interest costs,” they stated.
According to the firm, more investments would be required in the power sector than currently available.
However, the sector may not attract investment in the absence of a cost-reflective tariff, they argued.
“Government already allows an off-grid power supply arrangement based on ‘willing buyer, willing seller’. The tariff at which this arrangement is settled is higher than the tariff for the power from on-grid supply. Appropriate policy responses from government and strategies from the business community may ameliorate the likely negative impacts of these key events in 2019,” FSDH added.
The report noted that the expected hike in interest rates in major advanced countries would lead to an increase in global yields and may put pressure on currency in Nigeria.
There are strong indications that the US Federal Reserve, Bank of England and European Central Bank would increase interest rates in 2019. The expected increase in the interest rate in the international market may also lead to an increase in the interest rate in Nigeria because of monetary policy adjustments to reduce capital flight.
SOURCE: Thisday
