| Nigeria Economy |    8817 VIEWS  |
| Nigeria Economy | |
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Friday,
April 24, 2020 / 7:34 AM / By Bode Agusto / Header Image
Credit: REUTERS/Akintunde Akinleye /File
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Crude oil is one of the principal sources of energy to
the World. In 2018, its market share was 34%, other principal sources of energy
were Coal and Natural gas with market shares of 27% and 24% respectively.
What does crude oil do
for the World?
It helps us to transport our vehicles, power our
factories and heat our homes. According to the US Energy Information
Administration (EIA), in 2018, the US consumed 20 million barrels of oil per
day - 69% on transportation, 25% to power her factories, 3% to heat their homes
and the remaining 3% in other areas.
A further breakdown of the 69% or 14.2mbpd on
transportation shows that motor gasoline is 45%, Kerosene-type jet fuel is 8%
and the remaining 16% is mainly for diesel powered vehicles.
The US is 25% of the World economy, the rest of the
Organization for Economic Co-operation & Development (OECD or the rich
World) another 25% and China 14%. This means that China and the rich World
represent about two-thirds the output of the World. We believe that the pattern
of oil consumption in the US is not materially different from that in these
countries and indeed the rest of the World.
This means that it is safe to assume that the
principal uses of crude oil in the World are transportation, powering industry
and heating our homes. It is also safe to assume that about half of the
consumption is for transporting vehicles.
What is happening in the automobile industry?
Automobile
companies in the World are investing heavily in Electric Vehicles (EV) and
Hybrids that will reduce gasoline and diesel consumption and Co2 emission
significantly consequently reducing the demand for crude oil significantly.
According
to OPEC, the demand for crude oil grew from 77mbpd in 2000 to 100mbpd 2019.
This represents a 30% growth during this 20-year period. However, a breakdown
shows that all of this growth came from China and the developing World. In
fact, the demand for crude oil from the OECD countries was 48mbpd in 2019 same
as in 2000. The demand for crude oil in the rich World peaked at 50mbpd around
2005, has dropped to a current level of 48mbpd and is projected to drop even
further as the World embraces EVs and Hybrids.
On the
supply side, OPEC controls 80% market share of the crude oil reserves of the
World, but has only 32% market share of supply. Why? This is because OPEC
pursues a strategy of price optimization. This means that the cartel acts as a
swing producer of crude oil, bringing just enough crude oil into the market to
balance supply after the non-OPEC production (NOPEC) is accounted for. Over the
years, this has meant loss of market share to NOPEC members.
NOPEC
production has increased from 46mbpd in 2000 to 64mbpd in 2019. This represents
a growth of 18mbpd and 13mbpd of this has come from the USA, largely from the
fracking of shale. What has this meant for the USA? In 2000 the USA consumed 20
million barrels of oil per day and produced only 7mbpd making it a net importer
to the tune of 13mbpd. In 2019 she still consumed 20 million barrels of oil per
day but produced 18mbpd and net import was only 2mbpd. Sometime during the next
two years, the USA, the largest consumer of crude oil will become a net
exporter of this product.
The
balance of power in the World crude oil market is shifting from the Saudi-led
OPEC to the USA largely as a result of the fracking of shale. OPEC has enlisted
the support of Russia in an alliance that is labelled OPEC+ but they are yet to
exercise significant control on the price of crude oil. In fact, it seems as if
the era when the average annual price of crude exceeded US$100 per barrel has
gone for some considerable period and OPEC members must learn to live with an
average annual price in the region of US$60 per barrel. What is the outlook for
crude oil price over the next decade?
In my
opinion, the long-term outlook for the demand for crude oil is weak because as
the World continues to be more concerned about the environment, embrace EVs and
Hybrids, the World demand for crude oil will begin to fall. This, with rising
NOPEC production will therefore continue to put a downward pressure on the
price of crude oil. Even if OPEC changes strategy and starts pursuing market
share, at best the cartel will sell a little more oil at much lower prices.
Nigeria and The Oil Curse
What
does this grim outlook mean for Nigeria?
Let's
first understand what crude oil has done and still does for the Nigerian
economy.
On the
external side, crude oil has provided Nigeria with a sizeable amount of USD
revenues which we have used to trade with the rest of the World. According to
the CBN, during the past 20 years, total USD inflows into Nigeria on the trade
side was US$1.5 trillion; US$1.1 trillion or 79% came from selling crude oil
and natural gas to the rest of the World and US$0.3 trillion came from
remittances from Nigerians working abroad.
Businesses
in Nigeria have used these USDs to equip their factories, buy raw materials and
some have imported finished goods for resale. Households have used these USDs
to buy cars, houses in the UK and the USA, educate their children abroad, buy
healthcare from UK and the USA and fly foreign airlines to and from key capital
cities in the World. In short, crude oil has helped Nigerians finance a
lifestyle that is significantly above our productive capacity.
Even
with crude oil, our 200 million people produce goods and services worth only
US$0.4 trillion annually, the 320 million people in the US produce US$20.5
trillion annually.
On the
fiscal side, crude oil has provided the government with a large amount of oil
revenue in the form of oil taxes (PPT, Royalties and rents paid by oil
companies on their share of the crude oil produced) and proceeds of the sale of
the Government's equity crude. During the past 20 years, the federation account
received NGN 87 trillion in oil revenues and NGN 29 trillion in non-oil taxes
making a total revenue of NGN 116 trillion. This money was shared NGN 53
trillion to the FGN, NGN 40 trillion to State Governments and NGN 23 trillion
to Local Government Areas.
The NGN
53 trillion of the FGN was spent paying interest on loans (NGN 15 trillion),
payroll and pension (NGN 26 trillion) and capital expenditure (NGN 15
trillion).
With
respect to money and banking, average annual rate of inflation in Nigeria for
the past twenty years is 12%. This means that knowledgeable investors who want
to lend money to the FGN for any considerable period will seek a return higher
than 12%. If the FGN, who can print money to repay its loans, borrows ten-year
money at around 14%, most households will have to borrow for the same tenor at
about 20%. How many households can service a ten-year mortgage at this interest
rate? Mortgages do not work in high inflation environments!
The
long-term rate of inflation in Nigeria NGN is 12% compared with 2% for the USD
resulting in a difference of 10%. In spite of this difference, successive
Governments have been promising Nigerians stable NGN/USD exchange rates. In
reality, exchange rates have moved from NGN110/ US$1 in the year 2000 to a
current rate of NGN360/US$1.
In
periods of high crude oil prices, Nigeria uses her USD earnings to support the
exchange rate but in periods of weak prices she allows sharp currency
depreciations. Therefore, exchange rates move in steps instead of a gradual
depreciation of close to 10% per annum.
Severe
devaluation of the NGN is usually accompanied by a banking crisis. This is
because weak crude oil price drives the economy into recession, devaluation
increases the financing needs of businesses and those who owe hard currencies
suffer large exchange losses. All these weaken the ability of businesses in the
real sector to repay their loans resulting in large credit losses that erode
banking industry capital.
Government
should then use these three sectors - external trade and investment, tax
revenues and the financial sector to help businesses and households to thrive.
What happens in Nigeria is that we experience economic booms in periods of high
oil prices and recession when prices fall.
How Should We Prepare for Life After Oil?
Our
goals are threefold
These
three things are the key determinants of peace and prosperity in a Nation. The
output is what is shared amongst the residents of a country, if it is large and
growing, there is a lot to go around. If the population is not growing as fast
as the output, there is even more to go around on a per person basis.
Therefore, both the numerator and the denominator determine the prosperity of
nations. If the output is fairly spread, this adds peace to prosperity as
people would not need embrace violence in order to access basic services.
Therefore,
with respect to output, our objective for the next decade should be to increase
output at least two and a half times from USD 400 billion to at least USD1.04
trillion within a decade. This translates to a compounded growth rate of around
10% per annum. During the same period, population growth should not exceed 1.5%
per annum. This means that by the end of the decade, Nigeria's population will
be around 232 million and average income per person will be US$4,500 compared
with US$2,000 today. With respect to income distribution, the objective should
be to use the tax system to ensure that no adult earns less than half the
average income per capita.
These
objectives might appear ambitious, but I believe with honest and competent
management of our economy, we can achieve them. Currently, more than 40% of our
working population is either unemployed or underemployed. Getting these people
to work alone will boost output significantly.
What's Next?
The
next step will be to fix infrastructure principally - electric power, railways
and roads.
The FGN should not reverse the privatization of the generating companies (GenCos) and distribution companies (DisCos). She should complete the Power Sector reform focusing on the following three key areas:
With
respect to gas, the FGN should stop regulating the domestic price of natural
gas. We understand that the principal reason for this regulation is that government
wants the poor to be able to access electric power. However, setting gas prices
at uneconomic levels discourages investments in gas infrastructure. The owners
would rather treat and export the gas at market price and for USD. Again, we
have always been told that Nigeria is a gas province that has some crude oil.
This means that if we encourage the owners of gas to invest in gas
infrastructure, it wouldn't take them long before they realize that
infrastructure cost is sunk cost and start discounting the price of domestic
gas surplus to their requirements.
Government should work with the industry operators and evolve a tariff with two principal objectives in mind
A poor
household could be defined as one who lives in one or two rooms, has a few
light bulbs, one electric fan, an electric iron and a refrigerator. It is easy
to estimate the monthly consumption of such a household and possible to
subsidize consumption up to that threshold heavily. Once the household buys an
air conditioner, it begins to pay market price! In substance, we let businesses
and affluent households pay for poor households. In my opinion, this will still
be cheaper than burning diesel to generate electricity!
The
final piece in the electricity reform is the national grid. We need a grid that
is more efficient and with greater capacity to carry electricity. Should the
government own it fully and manage it? Again, No! The reason often adduced for
government ownership of the national grid is - Security.
In the
UK, their NEPA was called the Central Electricity Generating Board and had
responsibility for generation and transmission in England and Wales. In the
1990s, the generation activities were transferred to three companies and its
transmission activities to the National Grid Company plc.
National
Grid Company plc was first listed on the stock exchange in 1995 and today, it
is privately owned and one of the FTSE100 companies in the UK. It also operates
14,000 km of electricity transmission delivering electricity and gas to
Massachusetts, New York and Rhode Island in the USA and Mr. Trump has not
raised any security concerns! Of course, the national grid can be owned by the
private sector as long as they are not enemy aliens.
Even if
the FGN wants to own the grid, does she have the money required to improve the
efficiency and capacity of the grid? Will the NASS approve these sums for
investment in the grid instead of their constituency projects? Will government
have the presence of mind to allocate enough resources annually for the
maintenance of the grid? In decision making, will political exigencies not have
priority over economic considerations?
Once we
have a tariff that allows efficient players to cover their cost of capital, gas
to use to generate electricity and a national grid that can evacuate
electricity generated, supply of power will improve significantly.
With respect to railways, the FGN should, unbundle the industry into
The
railway infrastructure should link Abuja to all state capitals and all the
ports. The FGN, State governments and private sector businesses should own the
railway infrastructure and again, the private sector businesses should own
majority stake. Rolling stock should be owned 100% by the private sector. In
substance, tracks and signals are like inter-city highways while the rolling
stock is like having buses that ply the highways. If government is not
competing with Ekene Dili Chukwu on the intercity highways, why would they want
to own and manage trains?
Government
should act as an independent regulator, divide the country into zones and have
these private sector businesses bid for these routes. In agreeing passenger
tariffs with them, the regulator will negotiate discounts for the young, the
elderly and the physically challenged. Subsidies obtained in this manner do not
blow big holes in government budgets.
With respect to education, there are two principal groups that we would need to focus on
There is urgent need to re-train those who have "completed" their education embracing the following steps
For the
second group, that is those currently in school and new entrants, we need to
review our curriculum, better align it to the needs of the Nation and re-train
teachers to ensure they can deliver, again using technology to scale.
The
government should then act as a strong independent regulator of schools
ensuring compliance with standards agreed.
The
challenge on the healthcare side is huge and resources are limited. However,
the population is young and lifestyle changes can help reduce the amount of
money the country would need to fund healthcare significantly.
The FGN
should not own secondary schools. She should hand these secondary schools to
eminent old boys who will act as Trustees in perpetual succession and manage
these schools. Government (federal, state and local) can of course provide
scholarships to indigent students who qualify to attend these institutions.
Universities
in Nigeria need to overhaul their funding models. They need to be able to
attract funding from users of their services, governments and philanthropists
from Nigeria and above. This means that they must overhaul the way they govern
their institution and ensure greater fairness, transparency and accountability.
The key
areas of focus with respect to healthcare are
Through
advocacy, Nigeria can significantly reduce what is required to fund healthcare
focusing of diet, exercise, safety and environment. For example, reducing salt
and oil intake and taking regular exercise can improve health and productivity
of the Nation. Another low hanging fruit is that improving how we drive can
save numerous lives.
We need
to encourage government, private sector (profit making and charities) to build
and equip facilities and employ clinical and other staff who will manage these
facilities.
These
groups, particularly profit making institutions, will only invest if they can
cover their costs of capital. A good doctor is valuable, marketable and
tradable internationally. This means that he/she is valued in USD or any other
international currency and not in NGN or any other weak currency. This means
that what we pay him locally must be competitive internationally otherwise
he/she moves!
Government
revenue (federal and states) per person per annum is about =N=50,000 or USD140.
This cannot be enough to provide high quality healthcare and education to all
for free.
The UK's
National Health Service (NHS) has a budget of about GBP140 billion (USD196
billion) per annum. About 80% of NHS funding comes from general tax revenue and
the balance comes from NHS contributions by individual taxpayers and their
employers. This means that, in addition to personal income tax, most people pay
about 10% of their salaries plus benefits as NHS contributions; their employers
also pay a similar sum. Therefore, the UK spends about GBP2,100 (USD2,750) per
person per annum on healthcare. Although free at the point of delivery,
residents of the UK pay a significant amount of their earnings for healthcare.
In the
US, healthcare spending is about USD10,000 per person per annum and this is
funded largely through employer assisted health insurance.
Even if
Nigeria, spends a paltry USD500 per person per annum on healthcare, this
translates to USD100 billion per annum or NGN36 trillion per year! How do we
pay for this when aggregate government revenue (all tiers of government) is
about NGN10 trillion?
To fund
healthcare, everyone needs to contribute. In my opinion, the most viable way to
fund healthcare is through insurance. Individuals buy health insurance and
government buys insurance for the poor and weak in society. In my opinion, good
healthcare is a crucial need in our society and once there is capacity and
willingness to pay (through a strong insurance system) service outlets will
grow and quality of services will improve.
Before
we discuss, how we fund Government, let us agree her purpose. What is the
purpose of government?
2.
Provide social services by helping the poor and weak in the society to access
basic services (education, healthcare, mass transportation, food)
3.
Protect the value of the local currency by ensuring that the long-term rate of
inflation does not exceed 3% per annum
4. Help businesses thrive by ensuring
5. Help households thrive through
6.
Regulate businesses to ensure compliance with standards, promote competition
and ensure fair trading
How
does the Government fund all these things if there is no free lunch anywhere?
It is through taxation.
During
the past five years, non-oil taxes collected by all tiers of government in
Nigeria averaged 4% of national income. In Angola it was 8%, Ghana 16%, Kenya
18%, South Africa 24% and in the OECD countries 32%. The World bank says a
nation cannot grow meaningfully if tax revenue is less than 15% of national
income!
Why is
Nigeria, generating significantly lower tax revenues than other key economies
in sub-Saharan Africa? Is it the tax rates, is tax compliance or both? The
principal taxes in these countries are corporation tax, personal income tax and
Value Added Tax (VAT). Corporation tax rate in Kenya and Ghana is 30% and 25%
respectively, in Nigeria it is 32%. the rate of VAT in Kenya and Ghana is 16%
and 15% respectively, in Nigeria it is 7.5%. The top rate of personal income
tax in Kenya and Ghana is 30% and 25% respectively, in Nigeria it is 24%. In
Kenya, you get to the top rate when taxable income exceeds KSH564,709 (USD
5,600), in Ghana it is GHC240,000 (USD 45,300) and in Nigeria it is NGN 3.2
million (USD 8,900).
This
means that with the exception of VAT, tax rates are generally same in these
three countries. Why then does government collect only 4% in Nigeria compared
to 16% and 18% in Ghana and Kenya respectively? In my opinion, it is largely
due to poor tax compliance in Nigeria.
What if
Nigeria were able to increase non-oil tax revenue to 15% of National income?
This means that Nigeria will generate an additional NGN14.4 trillion (US$40
billion) in revenues every year. It also means that total Government revenue
will be 20% of national income or NGN28.8 trillion (US$80 billion) per annum
compared to the current figure of NGN10.4 trillion (US$28 billion).
We
estimate that the obligatory spending (interest, payroll, unfunded pensions and
statutory transfers) of all the three tiers of government is about NGN12
trillion. This means that, if revenue were NGN28.8 trillion, there will be free
cash flow of about NGN14.8 trillion to use to fulfil the purpose of government.
That is to secure life and property, help the poor and weak in society to
access basic services, support young ladies to acquire skills that are valuable
and marketable, partner with the private sector to build railways, repair our
roads and improve electricity supply significantly.
How do
we raise the level of non-oil tax revenue? First, reform the tax laws. Focus on
Personal Income Tax (PIT), VAT and Companies' Income Tax (CIT) and make tax
laws simpler. Increase the top rate of PIT to at least 30%, increase the rate
of VAT to 10% and reduce the rate of CIT to 20% but levy an additional tax of
20% on "Super Profits". Super profits shall be profit in excess of a target
return on equity for shareholders. In today's terms that would be return on
equity in excess of 30%. Government should also abrogate all the numerous other
levies that, in any case, do not generate significant revenues.
The second and more important leg of our tax reform is for the Government to show willingness to enforce tax laws. How should Government show this willingness? I believe the Government should focus on PIT, forgive all past sins and thus look forward and not backwards. The next step is for Mr. President to make his PIT returns public annually, then make it obligatory for all those want to work for him to do the same. He should then look at all of us in the face and say "Woe betides you if you don't comply going forward!
They
should enforce by auditing a sample of individuals, if they have underpaid, ask
them to pay such amounts plus a stiff penalty, if they fail impound their
assets, sell and pay government. Don't waste taxpayers money throwing anyone
into jail and start feeding him.
The
biggest culprits with respect to tax evasion are the wealthy 0.1% of the
population (or 200,00 individuals) who ought self-assess themselves to tax but
fail to do so. The focus should be on them, not businesses and those in
employment who are already largely compliant.
Government
(FGN and States) should create infrastructure funds into which they will pay a
significant proportion of the additional revenues raised. They can then use
these monies to partner with the private sector to invest in infrastructure.
They will also subject these Funds to independent audits and make the annual
report and accounts of these Funds public. Essentially, subject the management
of these Funds to corporate governance rules that public companies observe.
Nigerians
argue that they would start paying taxes when public services improve. I
disagree! My counter argument is that "If you don't buy shares in Nestle
Nigeria, they're never going to send a dividend warrant to you!" You must pay
your taxes first then seek fairness, transparency and accountability in the
management of your taxes. If the Government forces us to comply, we shall be
more interested in what goes on in there.
Lastly,
in partnering with the private sector, Government should use the Nigeria Liquefied
Natural Gas limited (NLNG) model. This means that Government will be a large
minority shareholder, private sector institutions that are knowledgeable in the
industry will own majority and manage the operations using a company
incorporated under CAMA as the vehicle for doing business.
The
Government should therefore implement the NLNG model in the Oil & Gas
(Upstream) industry, Railway Infrastructure and the National Grid. This will
help improve transparency and accountability in these sectors.
Nigeria
can do well in the midst of much lower oil revenues, but we need to make tough
choices, enforce tax compliance, invest in securing life and property,
subsidize only the poor and weak not everyone in town, subsidize in ways that
do not blow big holes in the budget of Government, partner with the private
sector in the key areas that will grow output, re-train and certify our work
force, manage our population, account for taxes collected in a transparent
manner. Finally, like good Nigerians, pray that the good Lord should bless our
efforts.
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