Nigeria treading a dangerous subsidy route

Ike Chioke, Group Managing Director, Afrinvest

Afrinvest (West Africa) Limited, a local investment bank, has described Nigeria’s oil subsidy initiative as a huge moral hazard.

This is as the bank expresses concern over the status of the non performing loans of the financial sector over the past three quarters.

Ike Chioke, Group Managing Director, Afrinvest who stated this at a pre-launch Press Conference of 2018 edition of its Annual Nigeria Banking Sector Report in Abuja tagged ‘An Economic Agenda for a new Government’ said: “Oil subsidy is a huge moral hazard to the nation. I will rather believe in subsiding production than consumption. Fuel subsidy is consumption and has made difficult for us to fix our refineries.

“Every year we spend about N1.6 trillion on fuel subsidy. We have spent about N2.5 trillion on subsidy since the present administration came to office. The government needs to address the issue”.

He noted however that the government cannot just remove the subsidy without counterbalancing it with palliatives such as investing in power sector and coming up with electric vehicles to boost mass transit.

“The downstream sector continues to be heavily regulated with price controls. In the absence of adequate local refining capacity, this has worsened as the country relies on the importation of 80 per cent of its petrol needs. Fuel subsidies have been in place for a while, and although this eased off following the sharp adjustment in petrol prices in April 2016, there is now resurgence of subsidies due to the recent increase in international oil prices and the devaluation of the Naira.”

“If local refining capacity expand by 2019 as planned,  we expect reduced importation. As the private refineries reach peak capacities, we believe sourcing challenges will ease. What remains unclear and will continue to be militating factor if unresolved is the pricing of petroleum products. Deregulating the downstream sector will allow private operators to develop the local value chain and even serve regional markets,” he said.

Chioke said given the implementation of IFRS9, the investment bank expects pressure to be exerted on credit and NPLs.

He noted that while the risk of the oil and gas sector has somewhat dissipated with the rise in crude oil prices, there are still risks on the horizon for the banking  sector such as the power sector, which continues to be plagued by liquidity concerns as well as inefficiencies across the value chain.

“Given that banks have now adopted the ECL model, we expect provisions for exposures to these high-risk sectors to surge as well as increased NPLs.

“We expect the implementation of IFRS 9 to result in downward pressure on capital buffers across banks in the sector .while the impact will be more pronounced on banks with weaker regulatory risk reserves and Tier 1 capital levels, the impact should still results in either a new bout of debt raising or increased retention of profits to boost Tier 1 capital by FY 2018,” Chioke said.

He disclosed that the 2018 Nigeria Banking Sector Report comes at a critical time in Nigeria’s political calendar, as it is being launched on the eve of an election year.

Chioke noted that there is an opportunity to reset the dynamics of the economy and build new growth levers that will propel Nigeria on the path of progress in 2019.

According to Chioke: “While there are some positive signs of growth in the economy, certain key vulnerabilities have been identified as drawbacks to the nation’s growth potential. It is on this premise that we have articulated a multi-sectoral economic agenda which, we believe, can provide the needed direction for an incoming government post-2019 elections, and ensure inclusive and sustainable development.”

“The report presents an analysis of current economic challenges and proposes structural reforms as the key to building a strong and sustainable foundation. It offers critical insights into how we can attain annual double-digit growth by substantial, sustained efforts across seven (7) critical areas of development including human capital development, power, oil & gas, trade, transport & infrastructure, security and good governance.”