Nigeria’s fiscal position to force reforms post – election

While the outcome of Nigeria’s presidential elections due by February 2015 aren’t very clear at this time, one thing the nation can bet on is that whomever becomes president next year would be forced to embrace reforms due to a deteriorating fiscal position and unsustainable subsidies.

“Nigeria’s economy will have to make painful adjustments post 2015,” Bismarck Rewane, CEO of research firm, Financial Derivatives Company, said at the Lagos Business School (LBS) finance conference in Lagos on Friday.

“After the elections there will be some interesting decisions made by whoever is elected president of Nigeria,” said Rewane. “The adjustments needed are what we have deferred for so long.”

Reforms to expect next year include the removal of government deposits in the banking system, greater liberalisation and deregulation, a more convertible currency, passage of the Petroleum Industry Bill (PIB) and elimination of subsidies on refined petroleum products , according to Rewane.

Standard & Poor’s(S & P) placed Nigeria’s credit rating on negative outlook on March 27, on heightened political and institutional risks and oil theft and pipeline shutdowns which cost the country $12 billion last year.

Nigeria’s tax revenue as a percentage of GDP fell to 12 percent after the rebasing exercise, one of the lowest in Africa, as well as for a country of its economic size.

The Federal Government’s revenue as a percentage of GDP also fell to 4.6 percent from 8.7 percent previously.

Nigeria’s current account surplus is expected to decline to 3.1 percent of GDP from 7.8 percent at end-2012, according to the IMF.

A move to a more convertible currency may help stem the fall in central bank reserves which are down 13 percent in the first quarter of 2014 as the CBN sold $5.8 billion to defend the naira at the nominal level of N155 plus or minus 3 percent versus the dollar.

Passing the PIB would help reverse the lack of growth in Nigeria’s oil sector which has seen investment of at least $28 billion lost or deferred since 2010.

The bureau of statistics rebased GDP figures show that the value of oil and gas production for 2013 declined to N11.55 trillion post rebasing compared to N13.75 trillion in the old data series.

Oil’s contribution to GDP also fell to 14.4 percent from as high as 32 percent earlier.

“With the oil sector accounting for 75 percent of government revenue and 95 percent of exports, the reduction in oil exports adversely affected the fiscal and external positions in 2013,” the IMF said in an April 2014 report.

Removing Nigeria’s fuel subsidies which are “unsustainable and forment corruption,” according to suspended central bank governor, Sanusi Lamido Sanusi and cost N1 trillion ($6.25 billion) in 2013 would help beef up Government revenues and ease pressure on the naira.

“The imports of refined fuel products create pressure on the current account and on the local currency,” said Gregory Kronsten, an analyst at First Bank’s investment banking arm FBN Capital.

“A recent World Bank study on the ground showed that the poorest 10 percent of the population consumed no more than 1 percent of subsidised fuel. There is no case for product subsidies, and we hope that the government formed after the elections in 2015 will move to deregulation and sit out the expected protest,” Kronsten said.

The government has also hinted it might begin privatising its four state-owned oil refineries, which have a combined 445,000 barrel-a-day capacity but operate at less than 20 percent of their capacity because of poor maintenance and aging equipment, despite billions of dollars spent on turn around maintenance (TAM) by the NNPC.

Investors should prepare for the inevitable adjustments which are positive and more of an opportunity, while companies that will benefit are those that are positioned to provide infrastructure such as refineries, power, roads, bridges and ports, due to Nigeria’s huge infrastructure gap, according to Rewane.

“We have been running a $510 billion economy with $100 billion worth of infrastructure. You cannot push the can down the road; adjustments need to be made. Not doing it does not solve the problem,” Rewane said.

PATRICK ATUANYA