Setting The Pace For The Next 4 Years

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Monday, August 26, 2019    / 12:19PM / By Investment-One Research  / Header Image Credit: greenbiz.com

 

The Long Awaited Ministers Have Arrived.. what next?

 

Following the inauguration of the 43 Federal Ministers on Wednesday, we take a look at some crucial policy initiatives (sectorized) that we believe the FG should pursue within the next four years.


A Glimpse into the State of the Nation's Finances

The retention of the (previously acting) Finance Minister, Zainab Ahmed suggests the fiscal continuity of what she began within her 9months of appointment in conjunction with plans to achieve the ERGP targets by the set date, 2020. We believe the priority of the minister, as was before, is to mobilize more funds from the local economy in a bid to fund ongoing and future budgets. The minister previously reiterated the FG's plans to achieve 65% of revenue targets for the 2019 budget and increase the figure to as high as 85% in the next 3 years.



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Speaking of fiscal plans, there have been indications from the Ministry of Finance of an impending increment in taxes and a more cost reflective update of electricity tariffs. With a lot of question marks arising as to how the government would fund the recently approved minimum wage increase from N18,000 to N30,000 in April 2019, we believe the impending VAT increment (from 5% to 7.5%) and the recent cost reflective electricity tariff hike, by an estimated N10 to N41/KWH (average figures) by 2020 across discos, with subsequent reviews set to take place, should provide some buffer for states in meeting their recurrent obligations. Furthermore, we expect the conclusion of the review of the Revenue Sharing Formula for the Federation to also be supportive to this effect.


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More generally, we opine that the focus of the new administration should be in changing the trend of expending the lion share of the funds mobilized (debt and internally generated) towards recurrent expenditure i.e. debt service payments, subsidy payments, and salary payments. More attention should be afforded to the various capital projects required within the economy in order to facilitate economic activities, promote efficiency, and profitability of companies operating within the nation, and create a smoother environment for local prospective start-ups as well as attracting FDI. In our opinion, the long term solution lies in furthering fund mobilization as tax to GDP remains abysmally low (just under 8% in 2018), especially when compared to our peers (SA and Ghana: 25.8% and 13.1%).

As such, the tasks ahead for the minister represent a daunting challenge as the country flirts with a fiscal crisis exacerbated by burgeoning poverty (estimated by the World Bank to be above 90m people; the highest in the world) and youth unemployment (30%, as at Q3 2018%) while it struggles to diversify its revenue source from price volatile commodities.



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Revamping the Oil and Gas Sector

As such, the tasks ahead for the minister represent a daunting challenge as the country flirts with a fiscal crisis exacerbated by burgeoning poverty (estimated by the World Bank to be above 90m people; the highest in the world) and youth unemployment (30%, as at Q3 2018%) while it struggles to diversify its revenue source from price volatile commodities. Source: FIRS, NBS, Investment One Research Figure III: Tax to GDP ratio Without doubt the nation's number 1 revenue source, much is expected of the Petroleum sector in the next 4 years. In tandem with the goals of the NNPC, we highlight that the Ministry should focus on achieving the following:


1. Prioritising oil reforms; focus remains on the Petroleum Industry Bill

2. Attract private sector and foreign investment in local O&G projects

3. Growing the production levels towards the FG's target of 3mbpd by 2023

4. Rehabilitate the existing refineries

5. Becoming a net export of petroleum products


In our opinion, these objectives may be deemed infeasible particularly if the Petroleum Industry Bill (PIB) is not signed in the near term. The 20-year bill is aimed at revamping the overall oil industry and has been split into 4 acts:


(i)                       Petroleum Industry Governance Bill (PIGB),

(ii)                      Petroleum Industry Fiscal Bill (PIFB),

(iii)                     Petroleum Industry Host Community Bill (PHICB) and

(iv)                     Petroleum Industry Administration Bill (PIAB) for faster passage.

 

A key inhibitor to making necessary progress in the Oil and gas space remains the non-passage of the Petroleum Industry Bill. While the potentials for the sector are enormous and could attract billions of dollars in FDI, taxes, royalties, etc., we believe the realization of this may not be materialized if the necessary reforms due to the sector are not put in place.

Regarding the downstream sector, PMS prices are expected to remain flat (at N145/litre); at least until the Dangote oil refinery is functional enough to meet the growing energy demands of the country. The private refinery remains the only major breakthrough in the race to reversing the net importation trend of the country as FG owned refineries have not received much traction in terms of investment.


Power Sector: The Beginning of a New Dawn? Not So Fast


Some moves have been made recently to place the power sector in a more functional position, of which include:

1. Siemens deal signed by the FG to deliver 25000MW by 2025,

2. The approval of the N600bn intervention fund, and

3. The increase in electricity tariff by the NERC to be more cost reflective

These initiatives, we believe, are steps in the direction towards improving electricity generation, transmission and distribution from the current abysmal state.

In addition to these, we highlight that the Ministry of power was unbundled from the Works and Housing Ministry, which may prove to support the efficiency of both ministries as critical infrastructure is becoming more and more crucial for Nigeria's economic recovery.



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With Nigeria currently ranked 171st out of the 190 countries surveyed in 'Getting Electricity' within the broader Ease of Doing Business Index compiled by the World Bank, we highlight the importance of revamping the power sector urgently.


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Verdict: Not Optimistic

Overall, we may not see a significant improvement in policy implementation in the next 3 and half years. Our opinion was arrived at feeding off of the administration's performance in the last 4 years, no pleasant surprises in the selection of personnel and no strong coherent policy direction from the Federal Government to surmount the challenges plaguing the 'African Giant', as the ERGP roadmap seems to be an abandoned framework.

The nation is in dire need of an economic overhaul plan coupled with strict implementation and monitoring; all of which we cannot bet on the new administration to deliver. With that being said, we are hopeful for a substantial level of functionality from the Ministerial heads given the major challenges the nation is facing at this critical period.



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