The recent increase in inflation, from 32.15% to 32.70%, raises concerns for both the fixed income market and the broader economy. This uptick suggests that investors might anticipate further tightening action at the next MPC meeting (scheduled to take place in November). Although some segments of the market believe the last interest rate hike was effected in anticipation of inflationary pressure to come, other analysts fear that the aggressive currency pressure doesn’t help justify any attempt to ease at this time.

In broad economic terms, rising inflation usually erodes purchasing power, potentially leading to reduced consumer spending, which is crucial for economic growth. This environment of higher inflation and uncertainty may deter investment, especially in sectors sensitive to borrowing costs.

Analysts have proposed increasing taxes on imported goods to support local production. While this could help mitigate inflation in the long term, it might also lead to short-term price increases for consumers if local producers cannot meet demand or if their costs rise. Many schools of thought are of the opinion that a lot more needs to be done to promote domestic production. The fixed income market is likely to remain sensitive to these evolving dynamics.

According to the Minister of Finance, there is a need for immediate fiscal reforms due to declining oil revenues, foreign exchange shortages, and budget deficits, stating that the current economic model is unsustainable. He further discussed the strategic reallocation of savings from the fuel subsidy removal to essential sectors as part of the Accelerated Actualisation and Stabilisation Plan, aimed at reducing production costs and supporting social interventions.

The Minister noted plans including transforming Nigeria into a leading food producer to reduce inflation and introducing affordable long-term mortgages to improve living conditions.

In the week under review, the Nigerian Treasury Bills (NTBs) experienced a further increase in average yields in the secondary market. Analysts observed that the tight market liquidity heightened sell interest in short- and mid-dated securities.

In the bonds market, the average yield on Nigerian government bonds surged in the secondary market, reflecting waning investor interest amid widespread selloffs across various maturities. The market sentiment has turned bearish following a recent spike in inflation, which has further increased the negative interest yield on government debt instruments.

In the secondary market, benchmark yields rose significantly on Wednesday, with selloffs affecting all segments: the short end (rose by 6 basis points), mid-segment (rose by 15 basis points), and long end (rose by 17 basis points).

Meanwhile, there was heightened interest in the May 2033 bonds (which will not be re-issued starting this month), which traded between 20.95% and 21.00%, finally settling at 20.80% due to renewed investor demand.

The Presidential Committee on Fiscal Policy and Tax Reform has proposed a new Personal Income Tax Bill aimed at restructuring Nigeria’s tax system. Speaking in Abuja last Monday at the 30th Nigeria Economic Summit, the Chairman of the Committee, Mr. Taiwo Oyedele, said that the Personal Income Tax (PIT) of Nigerians earning above N1.5 million annually will be increased under the new Economic Stabilisation Bill, while those earning less than N1.5 million below would be exempted.

According to the tax expert, the wrong people have been paying taxes like those in the formal sector. He added that those who earn more than that amount would have to pay up to 25%. Oyedele also said the federal government is working on developing a system to automatically get the right people to pay taxes rather than taxing low-income earners.

The bill proposes removing the Consolidated Relief Allowance (CRA), which previously allowed taxpayers to deduct 20% of their gross income plus N200,000. Under the previous system, individuals could deduct the CRA, reducing taxable income. That would mean, for instance, a salary of N10 million would result in a taxable income of N7.8 million—after deductions, on an annual basis.

The current system uses a graduated tax scale in this order: 7% on the first N300,000; 11% on the next N300,000; 15% on the next N500,000; 19% on the next N500,000; 21% on the next N1.6 million; and 24% above N3.2 million.

Going forward, the new system simplifies tax calculations by eliminating the CRA while retaining statutory allowances and introducing an additional rent allowance. Hence, the proposed tax reforms aim to create a fairer tax system, alleviating the burden on lower earners while increasing contributions from high-income individuals, and promoting a more equitable economic landscape.

The proposed system, when approved, will now follow this format: 0% on the first N800,000; 15% on the next N2.2 million; 18% on the next N9 million; 21% on the next N13 million; 23% on the next N25 million; and 25% above N50 million. The key difference is in how the graduated scale is to be applied.