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Things to watch out for in Nigeria in 2022 – EIU

Things to watch out for in Nigeria in 2022 – EIU

Analysts at the Economist Intelligence Unit, EIU are gazing into the future of Nigeria and have provided some insight into what they expect to play out in Africa’s most populous country in the next year. The key things to watch according to the analysts are the forthcoming party primaries ahead of the 2023 presidential election, the growing path of ungoverned spaces in the country, action on fuel subsidies, planned tax increases and the expected court ruling on the vexed issue of who can collect VAT in Nigeria. The EIU also expect banks in Nigeria to move to boost their capital levels. Here is the report.

• On the political front, there will be internecine and party-political wrangling ahead of presidential and legislative elections in February 2023.

• The president, Muhammadu Buhari, who is stepping down after two terms, has not signalled a favourite to succeed him, and has not revealed his true position on a shift of power to the south, in line with a customary power-sharing agreement, after the north’s eight years in power during his presidency.

• Regarding economic policy, the government is proposing a sharp reduction in subsidies. We remain sceptical about these moving ahead as planned, especially so close to elections. The same issue will effect tax policy, with only small adjustments likely ahead of the poll.

• The implementation of the Petroleum Industry Act will face challenges as sub nationals insist on their full rights and oil producing host communities demand more compensation.

• There will also be a crucial court ruling in 2022 on whether local authorities or the federal government is allowed to collect value-added tax (VAT) in state jurisdictions.

• On the financial front, banks will move to boost their capital levels; forbearance by the Central Bank of Nigeria (CBN) on restructured bad loans may well be extended beyond March 2022.

Unruly party primaries

A shift in power between Nigeria’s divided majority Muslim north and predominantly Christian south every eight years is an unwritten custom that both of the main political parties have respected for the sake of national unity. Ahead of the 2023 elections, however, the ruling party, the All Progressives Congress (APC), remains equivocal on whether this tradition should be maintained as Mr Buhari (a northerner) completes his second and final term in office. The main opposition party, the People’s Democratic Party (PDP)—for which the main contenders for the party’s flag in the 2023 presidential election are mostly northerners—are also being non committal for now.

However, we expect both political parties to ultimately field southern presidential candidates. For the PDP to do otherwise would give an edge to the APC, which still holds sway over much of the north. This was tried and tested during the last election in 2019, when both of the PDP’s candidates were from the north and low voter turnout in the party’s southern heartland cost them the election. For the APC, the final decision is more uncertain in our view, but ditching the power-sharing custom would risk an internecine feud that the party cannot afford, given that it will already be trying to defend a dismal term in office. Beyond bad optics for its opponent, the PDP would be handed a separate public relations gift by allowing them to present their party as being more inclusive and fair.

Gubernatorial polls in two south western states, Ekiti (June) and Osun (July), will be bellwethers for the 2023 presidential election, signalling both the level of preparedness of the Independent National Electoral Commission (INEC) and the relative standing of the two main political parties. They will also be the first real tests of electronic voting and electronic transmission of results, which would be provided for in a new electoral law that is awaiting executive approval. Any losses by the APC on the governor level can be interpreted as ominous signs for its prospects in the 2023 poll. A national census that is planned for 2022 will probably be pushed back until after the 2023 elections, as enumeration will be near to impossible in large swathes of the country, especially in the north, owing to widespread insecurity.

Ungovernable regions

The security situation in large parts of northern Nigeria will remain abysmal as overwhelmed armed forces battle multiple and contending threats by well armed groups motivated by criminal opportunism and extremist ideology. Boko Haram and the Islamic State West Africa Province (ISWAP) continue to extend their influence over the north east, and are increasingly forming linkages with Fulani bandits in the north west. Although initially motivated by economic goals, bandit networks are becoming increasingly ambitious, to the extent of imposing levies on local populations. There is not much that the government can do before the elections to restore order from such a dismal starting point.

There will be increased security and economic co operation between Nigeria and its international partners, especially the US, which signalled intent for a stronger relationship when it removed Nigeria from a religious freedom watchlist in November. The US has been an important arms supplier for the Nigerian military, and Nigeria’s delisting, against the recommendations of a federal committee on religious freedom, could be a step towards the increased weapons sales that are needed for the Nigerian military to check the advance of Islamist militants, which have encamped just a few hundred miles from the capital, Abuja. Military aid and sales between Nigeria and the US could mark the beginning of a turn in Nigeria’s war against militants, with the army often being outgunned at present.

The security situation in the south east will remain an entirely separate challenge. Nnamdi Kanu, the leader of the Indigenous People of Biafra (IPOB), a secessionist group, is incarcerated and will remain a symbol of the Biafran independence struggle among his supporters. Mr Buhari, whose northern base would frown at an any amnesty for Mr Kanu, will not put his political capital at risk to appease the IPOB ahead of crucial elections, and his government has not shown any inclination to do so. A Yoruba nationalist leader, Sunday Igboho, will meanwhile be extradited back to Nigeria from neighbouring Benin to face prosecution, which could be another source of controversy. Although the trial will be something of a cause celebre, southern politicians eyeing the presidency will be careful not to damage their credentials with grandees in the north and so undermine their prospects for nomination by fanning the flames of separatism.

Read also: Nigeria must address insecurity, naira depreciation to tackle rising prices – FSDH

Major fiscal reforms

Regarding economic policy, the authorities plan to remove fuel subsidies by early 2022. The logic for doing so is powerful. Not only is cheap fuel becoming a heavy fiscal burden against high world oil prices, but a new mega refinery will be starting up during the year, with the potential to eliminate Nigeria’s entire import requirement. To ensure that the facility can supply the local market—and not the export market—local pump prices will need to reflect the refinery’s production costs. Petrol is currently being sold at less than half the market price.

Ending the import bill for fuel would, all things being equal, shave about a sixth from total imports, delivering a big win for the CBN in its perennial ambition to protect the value of the naira through import substitution. The government plans to distribute cash through a monthly “transportation allowance” to the lowest income Nigerians as a way of compensating for costlier fuel. However, the poorest Nigerians are not those most likely to be affected by higher pump prices in a country with 0.06 cars per head. It is relatively more affluent Nigerians—those ineligible for compensation—that stand to lose out the most. As past attempts to increase petrol prices have demonstrated, the political reaction can be intense. The government had to backpedal on an attempt to increase prices in 2020 after mass protests, and any repeat so close to elections would prompt a similar drift in policy. Besides this, unions have rejected the proposal, and the global spread of the Omicron variant of the coronavirus adds another possible hitch to plans that might compromise political or macroeconomic stability.

Another topic that warrants close watching in 2022 is the outcome of a legal battle between Rivers state and the federal government on who can collect VAT within state jurisdictions. In a broad sense, the dispute relates back to Nigeria’s north south split. Many in the south want more revenue generated within states to be spent locally, viewing the region as excessively subsidising the relatively poorer north. For their part, northern governors are backing the federal government’s claim to VAT collections. The matter has been sent to the Supreme Court, with the outcome uncertain. Talk has arisen of a possible out of court settlement, but governors on both sides of the debate will be weighing in and using their pre election clout as sponsors for different presidential candidates to affect the outcome.

We remain convinced that sizable tax increases will be needed over the medium term whatever happens. The Ministry of Finance has already stated that Nigerians should prepare for higher rates and levies, and the finance law is due for an update by mid 2022, when changes to the tax code will be outlined. With the Omicron variant spreading globally, creating uncertainty abroad and at home, Nigeria’s government is unlikely to alter corporation tax (which is currently at 20 30%) or VAT, especially so close to elections. Excise duties and capital gains (which are currently taxed at 10%) are more likely contenders for an increase. However, over the longer term VAT (set at 7.5%) is an obvious pick for tax reform, and we provisionally expect increases after the elections, to 15% by 2026, depending on the result of the litigation.

Banking sector consolidation

Implementation of Basel III capital rules and a new banking law will be a major focus for commercial banks in early 2022, with the process to be completed by May, although it may be extended until August. It will be a tricky time for capital positions, as forbearance measures that were introduced in 2020 in response to the coronavirus shock, which directed banks to restructure problematic loans, expire in March 2022. They could be extended, depending on the situation with Omicron, but if expiry goes ahead as planned a sharp uptick in non performing loans will almost certainly result. The impact on the real economy will be muted by regulations that compel banks to lend, notably a loan to deposit minimum of 65%. This stands to prevent banks from derisking their loan portfolios and so from meeting capital requirements. Undercapitalised banks, mostly Tier 2 institutions at present, will raise equity and pursue mergers, with several likely to issue Eurobonds, to raise the necessary funds.