Tough Economic Questions Incoming President Must Answer
How will Nigeria’s next president tackle oil subsidy, forex, power, other issues
With the plethora of economic challenges bedeviling Nigeria, it would be difficult for any serious-minded, realistic leader to envy the position of Nigeria’s next president. Nigeria’s many economic woes include the black hole of fuel subsidy, the hydra-headed problem of power blackout, scarcity of foreign exchange, among others.
NATIONAL ECONOMY sought the attention of economists and stakeholders to bare their mind and proffer solutions to some of the manifold economic issues of 2022 Nigeria.
The chief executive officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said the sharp depreciation of the naira exchange rate on the parallel market remains a cause for concern, saying it is a trend that should not be allowed to continue and all necessary steps need to be taken by the incoming government to stem the slide and volatility.
He noted that “these developments should not be ignored. It is as much of an issue to consumers as it is to producers and other stakeholders that create value in the economy. It calls for an urgent review of the current foreign exchange policy.
“My proposition for the incoming government is that we should adopt a flexible exchange rate policy regime.”
He clarified, “This is not a devaluation proposition; rather; is a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market. It is a model that is sustainable, predictable and transparent.It is a policy regime that would reduce uncertainty and inspire the confidence of investors.”
The president of Lagos Chamber of Commerce and Industry (LCCI), Michael Olawale-Cole, said new policy directions, institutional reforms, and sound governance are critical to creating a new economic order in Nigeria.
He noted that the Nigerian economy has been inundated with a myriad of problems among which are oil theft, an unsustainable subsidy regime, insecurity, and foreign exchange crisis. He, however said, despite all these challenges, the prospects and future remains bright for the Nigerian economy, adding that “Nigeria is the largest economy on the African continent with an output in the region of almost half a trillion dollars in nominal terms. The country is also hugely endowed with human and natural resources.”
For the incoming president, Olawale-Cole stated that there is need for well-coordinated fiscal and monetary policies in promoting growth-enhancing and confidence-building policies that would encourage private and foreign capital inflows into the economy.
To achieve these, he recommended that ensuring food security, agriculture output should be sustainably boosted and continued dependence on imports discouraged; oil theft should be curtailed if not eliminated to provide fiscal space for subsidised production of goods and services, as well as for infrastructure, health, and education financing; and transition to a unified exchange rate system and allow for a market reflective exchange rate.
He also said there is a need for friendly supply-side policies to boost productive sectors, bolster investor confidence and help attract foreign investment inflows into the economy.
“There is a need to address structural bottlenecks and regulatory constraints that contribute to the high cost of doing business. A supportive and conducive investment environment is critical in facilitating private sector involvement in the economic recovery and growth process.
“The new government should initiate moves towards having cost-reflective tariffs in the power sector as this will attract the needed investment to boost power supply and possibly end the frequent crashes of the national grid,” he said.
For Professor Akpan Ekpo, former director general at the
West Africa Institute for Financial and Economic Management (WAIFEM) and chairman of the Foundation for Economic Research and Training, there ought to be a gradual phasing out of the subsidy as it would have an adverse effect on the economy.
He noted that the impact of subsidy removal will be felt by both demand and supply, with more emphasis on the demand side. For me once you touch the fuel price, it affects every other commodity, all prices will go up. We call that structural inflation.
“So, I will advise that it should be phased out and the money you would have paid for subsidy, you use that for infrastructure development, education, health, roads, etc., but it should be phased out.”
On debt, he noted that the government ought to reduce its dependence on debt, saying it should explore other means of revenue. Noting the government argues that the debt to GDP ratio allows them to borrow, he said, “We need to consider that we rebased our GDP and with the rebasing, the denominator got larger compared to the numerator and when you divide it of course you have space.
“But does that mean that we should borrow more?” Not necessarily. Secondly, we are using debt to GDP but GDP does not pay debt, revenue pays debt and if you take debt to revenue ratio, we cannot even borrow at all.
“This is because two thirds of our revenue come from oil and it is not sure revenue because we do not control the price or the output, plus the fact that it is a very volatile market. You cannot depend on an exogenous source of revenue to finance development because if anything happens you are in trouble; but we are doing that, and it is wrong. So, in my view I think there should be a cap on borrowing for now.
“Even if we have to, we should be looking at multilateral agencies like the Africa Development Bank, World Bank and others because they have conditions that must be met and even if you default you can reschedule. But we like to go to Eurobonds, which gives commercial rates with no conditions.”
On his part, head of research, Agusto & Co, Mr. Jimi Ogbobine, noted that the economic implication of the fuel subsidy “is that we spend over N1 trillion every year on fuel subsidy. Asides this the oil and gas industry is losing money, particularly the downstream because it leads to constriction of investment in that sector and constriction of investment leads to weaker profitability of the industry, which also affects what the government will earn in taxes.”
Local Refineries Rejuvenation
Nigeria’s bleeding economy, occasioned mostly by theft in the oil and gas industry, which is the umbilical cord that holds the economy, may likely to not thrive except the next administration creates opportunities for operators to invest across the industry’s value chain.
Key sector operators in the downstream sub-sector of the oil and gas industry have provided a path to end the growing numbers in subsidy payment, address smuggling of products and create value in the industry.
For instance, the group managing director, Rainoil Limited, Dr. Gabriel Ogbechie, has said the country stands to save over N12 trillion, which could be channeled for other areas of development for the country if the downstream sector is fully deregulated
He said the global average price currently for Premium Motor Spirit (PMS) is N516 per litre, which is way higher than the N175 per litre it is being sold in Nigeria and called on government to not only deregulate but also initiate a petrol tax to fund maintenance and construction of critical infrastructure across the country.
On fuel subsidy removal, he noted that Nigerians are not averse to subsidy removal, but noted that PMS consumers only want some level of reassurance on the subject matter, and the cushioning effects by government.
He also noted that the Petroleum Industry Act remains the silver bullet in growing the downstream sector. He, however, decried the huge sum expended on fuel subsidy so far.
Also, the Kaduna State governor, Nasir El-Rufai, who touched on the issue when he addressed stakeholders in the country’s power sector in Lagos on Wednesday said Nigeria has a quests for growth and development, the delivery of affordable, reliable, and sustainable energy for homes and businesses but the country has lost about 15 years on efforts in investment in the energy sector.
El-Rufai said, “The clear roadmaps for structural reforms set up by the Obasanjo government in the electrical, power, and oil and gas sectors were protracted or abandoned by his immediate successors.
“The same trajectory of experiences and disappointments and financial bleeding applies almost exactly to the oil and gas sector. Deregulation has been slow, and clearly indefensible fuel subsidy burdens persist, making the NNPC, even after its conversion to limited liability company, one of the biggest threats to the fiscal health of the FG, state and local governments of Nigeria.”
Also speaking on the issue, head, Gas & Power for Quest Oil & Engineering Services, Engr. George Amara, an indigenous energy provider said the recently-passed Petroleum Industry Act (PIA) will engender trust and enhance investors’ confidence towards achieving a successful transitioning of the Nigerian Oil and Gas industry.
Amara stated that the PIA will enhance investors’ confidence in the sector due to the possibility of recouping such funds. He further said that the stakeholder-based inclusiveness framework and market-driven nature of the Act, provides a transparent platform for both the regulators and operators to work together, where the former acts as partners in progress.
He also harped on the need for stakeholders to collaborate in order to succeed in this transitioning phase of the industry.
While supporting the call for right pricing of petroleum products, Amara opined that it is imperative for market forces to be given the right of way to encourage competition within the industry as in other climes.
According to him, this will drive growth and development of the downstream oil and gas industry.
Amara also emphasised the need for local refining of petroleum products in order to lower the operational/logistic costs, create employment in-country and harness the entire value chain benefits of the petroleum and other related industries.
Also, the president of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), Comrade Festus Osifo, noted that in order to build lasting success in the industry, the government needs to prioritise the refineries.
According to him, this has the potential of producing a multiplier effect of better pricing and ensuring availability of products for the Nigerian people.
BudgIT, on its part noted that the current cost of petroleum subsidy is impacting heavily on the revenue of the government and has therefore called for timely implementation of the Petroleum Industry Act, PIA and dismantling of the subsidy regime.
While speaking on the government’s decision to suspend subsidy removal, Adejoke Akinbode, BudgIT’s Extractive Lead said, “The current cost of petroleum subsidy to Nigeria along with other socio-economic implications necessitates its removal. Nevertheless, a couple of palliative measures must be in place for subsidy removal to gain public acceptance.”