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Nigerians grapple with pains of reforms amid optimism
BY EMEKA EJERE
Soaring inflation occasioned by the fuel subsidy removal and unification of foreign exchange rates is raising doubts about the capacity of early reforms of President Bola Tinubu-led Federal Government to address the nation’s economic crisis as early as envisioned.
On one hand, the resultant escalating costs of production has left the manufacturers and service providers with raising the prices of their products as the only way to remain in business. On the other hand, eroding purchasing power is shrinking the demands of the consumers, leaving the producers with low patronage.
President Tinubu had during his inaugural address on May 29, 2023 declared that he would do away with the petrol subsidy, multiple foreign exchange rates, multiple taxations and initiate fiscal reforms that would accelerate the growth of Nigeria’s gross domestic product (GDP).
Subsequent removal of subsidy and collapse of the multiple exchange rates into the investors and exporters (I&E) window by the Central Bank of Nigeria (CBN) were closely followed with the release of the Policy Advisory Council Report (PACR) on the economy in mid-June by the National Economy Sub-committee of the PACR. The report, which was prepared on May 17, 2023, gave an outline of Tinubu’s fiscal, monetary, industry and trade policies amongst others.
Fuel subsidies had imposed a significant financial burden on Nigeria, leading to a debt profile with high sustainability question. But the announcement of subsidy removal has seen notable increase in the prices of various commodities, impacting Nigerians, who heavily rely on fuel for essential activities especially transportation.
However, government is upbeat that the policy step will yield long-term benefits as the funds previously allocated to finance subsidies can now be utilized to alleviate the debt burden and redirected towards vital sectors of the economy. This, according to government, includes investments in education, healthcare, and infrastructure, which can contribute to sustainable development and improve the overall well-being of Nigerians.
Last week, operators within the downstream oil and gas sector said the Federal Government had raked in N400 billion due to fuel subsidy removal in the 30 days.
Also, like any significant policy shift, the unification of all segments of the foreign exchange (FX) market, and adoption of a currency float system promises both positive and negative implications. On the positive side, it is expected that the unification will attract foreign exchange inflows, particularly from portfolio investors, foreign direct investment (FDI), and proceeds from remittances and exporters.
However, recalculations based on the new rates will increase Nigeria’s external debt, import duties and electricity tariffs, raising transport, energy and consumer goods costs.
Little wonder the Bank of America said last week that the Monetary Policy Committee (MPC) of the CBN may need to increase interest rates by at least 700 basis points before the end of the year to prevent inflation from getting to 30 percent from 22.4 percent in May.
In an interview with Bloomberg last week, the bank’s sub-Saharan Africa Economist, Tatonga Rusike, said the hike was necessary to tackle soaring inflation occasioned by the fuel subsidy removal and unification of foreign exchange.
He further warned that if this decision was not taken, foreign investors might exercise caution before investing in the country.
“Inflation may quicken to 30% by the end of the year from 22.4% in May and that will require a monetary policy response from the central bank – effectively, interest-rate hikes by at least 700 basis points.
“If the negative real interest rate is not reversing, then it is less likely to see foreign inflows coming into the country,” Rusike said.
But the CBN, in record-breaking moves, has been increasing the benchmark interest rates since last year. At its last MPC meeting held in May 2023, the MPR was further pushed forward by 0.5 per cent to 18.50 per cent from 18.00 per cent in March. The raise has, however, not slowed Nigeria’s soaring inflation,
which hit 22.41 per cent in May 2023 compared with 22.22 per cent in April 2023.
Managing the outcome
Expectedly, critical sectors of the economy are making necessary adjustments to maximize the benefits of the reforms on one hand and reduce the costs to the barest minimum on the other hand.
Maritime
Meanwhile, the Nigeria Customs Service (NCS) has responded to the FX rates convergence, which has raised the official rate from about N462/$ to near N800/$. This has seen the Service to be a adjust official exchange rate on duties and levies on imported vehicles and other commodities from N422.3/$ to N589.45/$, translating to about 40 percent upward review.
The new charges have taken effect across the board, compelling importers of goods awaiting clearing to cough out additional money to get their cargoes out of the ports.
Stakeholders say the policy would cripple businesses in the maritime sector, leading to job losses and a drastic fall in the number of imported vehicles, all of which would conspire against economic growth. But the National Public Relations Officer, NCS, Abdullahi Maiwada, said the agency was only implementing a CBN policy.
Oil & Gas
In the oil and gas sector, stakeholders have expressed divergent views on some of the proposals put forward by President Tinubu’s Policy Advisory Council, which are intended to reposition the sector for rapid growth and increased value addition.
While some industry players backed all the proposals, others advised the government to jettison some of them in order to avoid causing chaos in the sector, particularly on the proposal to merge the regulatory agencies.
The council proposed the sale of the major stakes of the Nigerian National Petroleum Company Limited (NNPC) in the upstream, midstream and downstream sectors of the oil and gas industry.
The Policy Advisory Council Report dated May 2023 had stated that the Federal Government would earn about $17.4 billion from the sale of the NNPC’s majority stakes in the oil and gas assets.
The council equally advised Tinubu administration to consolidate the regulatory agencies by merging the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) and the Nigerian Content Development and Monitoring Board (NCDMB) under a single regulator, among other proposals.
Aviation
In the aviation industry, players have expressed optimism that the FX rate unification policy would lead to improvement in the sector in particular and the economy in general. They are also hopeful that the exchange rates convergence would erase undue advantage some entrepreneurs have over the others.
The industry players also noted that remittances and foreign direct investments, especially by foreign airlines would experience an appreciable surge once the government sustains the policy.
They, however, agreed that the implementation of the new policy may be difficult at first, but assured that the government was on a right track with the decision.
Health
The health sector is also having its fair share of the impact of the reforms as prices of essential drugs and cost of care in the health sector have spiked lately.
Findings showed that some of the drugs are fast getting out of stock or unaffordable. Though the Federal Government plans to reduce the importation of drugs in the country from 60 per cent to 40 per cent to promote the local manufacturing of drugs, at least 70 per cent of medicines consumed in the country are imported.
For medicines produced locally, the active pharmaceutical ingredients (APIs) are imported from neighbouring countries, especially for those that the country does not have their raw materials developed.
A survey by The Guardian, which was corroborated by medical doctors and hospital pharmacists, showed that prices of drugs and medical services sharply rose by at least 60 per cent to 150 per cent in two months.
Boosting investment
Meanwhile, the Institute of Chartered Accountants of Nigeria (ICAN) has said that the unification of the country’s exchange rate would stimulate the growth of the securities market and attract foreign investments into the country.
The institute in a statement said that the previously adopted double-window exchange rate played a huge contributory role in fueling high inflationary pressure, corruption, high debt burden and reduced investments into the country.
It noted that the unification of the exchange rate would increase the government’s revenue in naira terms, which would result in a higher tax/revenue to GDP ratio.
The statement read partly, “The inflow of capital from foreign portfolio investors into the Nigerian capital market will help grow the market and allow companies to raise capital efficiently to finance their growth ambitions.
“It is expected that the unified exchange rate will serve as a catalyst for investment flows into the country, which will boost our foreign exchange reserve, grow the economy, create employment, and improve the quality of life. Foreign portfolio investors are expected in the near term whilst foreign direct investors that require more investment appraisal time will come in subsequently.”
Incidentally, equity trading on the Nigerian Exchange Limited (NGX) concluded the first half of the year on a positive note, with the NGX All-Share Index gaining 18.9% and closing at 60,968.27 index points. This marks a significant milestone for the index, reaching its highest level in 15 years since March 5, 2008, when it stood at 66,381.20 points.
Threading with caution
The Centre for the Promotion of Private Enterprise (CPPE) said the Tinubu administration is already charting a new and positive course for the economy, which portends bright prospects for recovery and growth, but called for immediate actions to address the social outcomes of the reforms.
“On the outlook for the second half of 2023, there are clear indications of elevated investors’ confidence, improvement in the government fiscal space, higher prospects of exchange rate stability in the near term, and positive expectations of better economic governance,” CPPE noted in its economic review reports signed by its CEO Muda Yusuf.
The report noted that the short to medium-term outlook for forex liquidity is very good and prospects of increased inflow of capital are very bright.
“However, there is an urgent need to address the social outcomes of the recent reforms, especially the inflationary pressure induced by the fuel subsidy removal. Urgent measures need to be put in place to mitigate the soaring cost of living and the escalating operating and production costs, especially for businesses,” CPPE explained.
Also in his reaction, policy consultant, Mr. Teniola Tayo, said “The new administration’s pro-market stance has its benefits, but the ultimate focus should be on improving Nigerians’ welfare and prosperity. The impact of ongoing reforms will become even more apparent in the coming weeks and months, and there have been predictions of a tough adjustment period for Nigerians.
“Tinubu’s government must show how these reforms will benefit Nigerians in the longer term and explain how they will be supported during the transition period. And it must apply similar austerity measures on itself, cutting down or declining salaries and benefits. This will be key to maintaining public support for the reforms.”
On Thursday, President Tinubu signed four Executive Orders deferring and suspending the commencement of certain taxes paid by individuals and companies in the country with the aim of reducing the tax burden.
According to his Special Adviser on Special Duties, Communications and Strategy, Dele Alake, the President signed the Finance Act (Effective Date Variation) Order, 2023, which deferred the commencement date of the changes contained in the Act from May 23, 2023 to September 1, 2023.
He also signed the Customs, Excise Tariff (Variation) Amendment Order, 2023 shifting the commencement date of the tax changes from March 27, 2023 to August 1, 2023 in line with the National Tax Policy.
The President also gave an order suspending the five per cent Excise Tax on telecommunication services, as well as excise duties’ escalation on locally manufactured products. He also ordered the suspension of the Import Tax Adjustment Levy on certain vehicles.
Commenting on the Executive Orders in a statement also sent to our correspondent, CPPE, among other things, said: ‘’The executive orders also demonstrate the sensitivity of the Tinubu administration to the predicament of the manufacturing sector amid overwhelming headwinds and hassles to real sector activities in the Nigerian economy”.
