New Year: High stakes for subsidy, inflation, insecurity

• Deficit financing to hit N12tr amid unending borrowing
• Fuel scarcity may worsen over future of subsidy, ban on Russian crude

With a rising debt profile and fiscal deficit, Nigerians will, this February, decide the future of subsidy at the polls, after many years of expensive spending that crossed the N3 trillion-mark last year alone, just as inflation continues to sink many into poverty.

With the general elections 53 days away, Nigerians will determine at the polls, who takes critical economic decisions for the next four years, amid global challenges that continue to cast aspersions on promises of economic recovery in the country.

After years of debate and agitation, politicians and Nigerians have come to the realisation that subsidy is no longer sustainable, amid an inefficient administration of the programme.

According to stakeholders, the lingering fuel scarcity will likely worsen in the new year as global supply becomes a challenge and the current administration winds down for elections.

Already, leading candidates in the upcoming elections have declared their intentions to remove fuel subsidy without explaining measures to mitigate inflationary effect the decision might have on Nigerians.

For many analysts, the country’s inflation level, though at 21.5 per cent, has yet to peak as local prices continue to reflect import pass-through costs. Subsidy removal is expected to compound inflation levels except drastic measures are taken to hedge the risks.

With insecurity keeping investors on edge and many farmers staying away, there are concerns Nigeria’s food import bill will continue to rise without improved local production and access to critical raw materials for the manufacturing sector.

Similarly, there are worries that the Federal Government’s resolve to explore new measures of raising revenue through tax reforms might stifle the private sector, amid concerns that no amount of tax revenue will be enough to finance the magnitude of fiscal indiscipline by the executives, if the cost of governance is not addressed, even as debts mount.

Debt has become the default option for the government in addressing gaps in its financing, raising concerns about repayment capacity and abuse by the executive. With new loans, Nigeria’s fiscal deficit is expected to surpass N12 trillion for the year, amid rising cost of subsidy and debt financing.

Though the Senate rejected President Buhari’s proposal for the restructuring of N22.7 trillion Ways and Means advances given to the Federal Government by the Central Bank of Nigeria (CBN), it nonetheless approved that the Federal Government should source the N819.5 billion from the N1 trillion it was requesting from the apex bank for funding for the 2022 supplementary budget.

Rating agencies have equally warned that Nigeria’s economic growth this year will be slow as the oil sector, which has been a key drag on growth in recent years, will continue to struggle during the year.

According to Fitch Solutions Country Risk & Industry Research report, the country’s economy might continue on a sluggish growth trend in 2023, owing to activities leading to the general elections next year, adding that the economy would likely pick up in 2024, with growth rising to 3.3 per cent.

“At Fitch Solutions, our oil and gas team estimates that Nigerian crude oil production will fall by 15.2 per cent in 2022 and by another 14.9 per cent in 2023.”

The contraction, it said, is being driven by unplanned outages at onshore production facilities, a deteriorating security situation, and the cumulative effect of years of underinvestment. “In 2024, however, we expect that production will essentially stabilise,” Fitch said.

With EU embargoes on Russian sea-borne crude oil already in force from December 5 and on refined oil products in February, analysts warned that there may be freight volatility from January in advance of February ban on Russian long-term diesel, as diesel contracts run out in December.

According to analysts, demand for diesel in Europe will mean less volume coming into West Africa, just as high freight, especially on long range and medium range tankers, are likely to persist through the first half of 2023.

“Freight moved from about $10 per tonne to about $80. Volatility in the freight market is affecting the cost of petrol and diesel. As Nigeria moves towards a deregulated market, freight costs need to be put into consideration as oil prices are not the only indicators that determine the retail price of the product. There should also be transparency in the markets.

“A deregulated market reduces the incentive to smuggle products out of the country and ensures better flow of product into the country,” says Vice President, Crude and African Markets, Argus Media, James Gooder.

Gooder explained that lower oil prices have made deregulation easier to approach, however, freight and other issues remain significant factors to consider as prices are not static.

CITING concerns about rising burden of taxation on businesses, the Centre for the Promotion of Private Enterprise (CPPE), on its part, warned that the current tax regime in Nigeria will further stifle investment as corporate taxes may hit 36 per cent

Chief Executive Officer of the CPPE, Dr. Muda Yusuf, while presenting the organisation’s economic and business environment review for 2022 and setting an agenda for policymakers for 2023, cited the need for an accommodating tax regime.

According to him, an economy that desires job creation, economic inclusion, investment growth and poverty reduction, should have an accommodating tax regime for investors.

Specifically, he stated: “Corporate tax in Nigeria is 30 per cent. But effective corporate tax is much more than that. There is a tertiary education tax of 2.5 per cent of the profit; a NITDA Levy of one per cent of the profit; a NASENI Levy of 0.25 per cent of the profit; Police Trust Fund Levy of 0.005 per cent of the profit.

“This brings effective corporate tax to about 34 per cent. This rate is one of the highest in the world. The average corporate tax rate for Africa is 27.6 per cent; the Asian average is 19.52 per cent; the European Union is 19.74 per cent and the global average is 23.37 per cent.

“Meanwhile, new taxes are still being proposed by the National Assembly. These include a Tertiary Health Tax of one per cent of the profit; and an NYSC levy of one per cent of the profit. There are numerous other taxes imposed on businesses by the states and local governments.”Yusuf noted that the multitude of taxes continue to cripple investment in the Nigerian economy, adding that there is a need for urgent review.

According to him, the current tax regime conflicts with the National Tax Policy, which prescribes that there should be less emphasis on direct taxation to incentivise investment.

“Meanwhile, investors are grappling with numerous macroeconomic, structural and regulatory headwinds. They incur huge expenditures on stuff, which the government should normally provide – electricity, security, water, waste management, human capital etc. These are implicit taxes, as they were. There are also numerous state and local government taxes, which businesses have to pay,” he said.

To unlock growth and investment in 2023, Yusuf said the government must undertake some urgent reforms. He stated that the enactment of the Petroleum Industry Act (PIA) was a major step towards reform of the oil-gas sector.

“It promises to transform the sector through the creation of a legal and regulatory framework that would inspire much higher levels of investor confidence. But we need to see a greater commitment to the implementation of the PIA. The deregulation of the petroleum downstream sector is a major economic reform imperative. This is inevitable if we must unlock investment in the sector and put an end to the perennial fuel scarcity and the monopolistic structure of the sector,” he said.

Co-Managing Partner and Chief Executive Officer, Comercio Partners Asset Management, Tosin Osunkoya, noted that 2023 is going to be an interesting year, adding that inflation will begin to moderate.

“I think moving into the first quarter of 2023, we will peak inflation and will begin to see moderation for two reasons. One reason will be that the base effect will come into play. Then energy prices and food prices will begin to moderate. I think that there are nuances between Russia and Ukraine trying to soft pedal.

“I will look at three major issues the new government should deal with. One is security. Security has also affected harvest in the North and because the North controls or influences our food production and distribution, it is important for them to tackle that in a way that will help food prices, and that could moderate your overall headline inflation. Another thing they need to tackle is restoring confidence, not just to the local market but to foreign investors as well. The foreign investors have lost confidence in Nigeria in terms of policies and in terms of the direction of our currency.

“And not only them, but also local investors or wealthy citizens have lost confidence in our currency and that is why you see them converting naira into dollars. You need to deal with that immediately. They need to come up with policies that will restore confidence to the local investors and foreign investors.

“When that is done, you will see that there will not be any capital flight. And when I say capital flight, I am not talking about foreign investors taking money away but local investors taking money away. There must be policies that will drive local investment in Nigeria. And when that is done you will see foreign investment coming in.”

Head of Equity Research team of FBNQuest, Tunde Abidoye, stated: “Businesses and investors now face difficult conditions including mounting pressures on inflation and exchange rate, constrained disposable income as well growing pressure from the external sector.

“Given the challenges on both global and domestic fronts, it is essential for businesses and investors to have informed views on important macroeconomic variables in order to minimise business risks and develop a long-term strategy to take advantage of opportunities as they arise.”

Analysts at Cordros Capital believe the FX liquidity issues will remain over the short-to-medium term in the absence of any positive signal that denotes improvement in FX supply relative to the pre-pandemic levels.

“Considering the tepid accretion to the reserves, given low crude oil production and elevated PMS under-recovery costs, foreign portfolio investments which have historically supported supply levels in the investors and exporters window will be needed to sustain FX liquidity levels in the medium to long-term. Hence, we think further adjustments in the NGN/USD peg closer to its fair value and flexibility in the exchange rate would significantly attract foreign inflows back to the market,” the analysts added.