Tougher times ahead as rising subsidy weakens FG, states’ revenue
President Muhammadu Buhari and Minister of Finance, Mrs Zainab Ahmed

Adebayo Obajemu (with agency reports)

Nigeria’s economic challenges may be getting more complex as indications have emerged that the global financial environment is taking a serious view on its financial position and policies. Although, NBS figures released last said the gross domestic product, GDP rose to 3.2 percent in 2021, Nigeria’s economy has continued to totter, buffeted by rising inflation, huge debt burden and a N4.7 trillion fuel subsidy, which major multilateral financial agencies have condemned.

The country economic woes went from bad to worse with the invasion of Ukraine by Russia in February 2022, which drove the price of oil, its main source of foreign exchange earnings, to an eight year high with country unable to reap from the windfall.

Ordinarily, the rising price of oil would have provided financial succour to Nigeria’s beleaguered economy, but sadly, it had driven it deeper into crisis, as equally high price of fuel import for domestic consumption and consequent staggering subsidy cost has wiped out any gains from the windfall, which is also compounded by its inability to meet OPEC+ new production quota of 1.7 million barrels per day.

Nigeria, the largest oil producer in Africa, is facing dire consequences from the oil price spike, as other consumer nations, which is a total reversal of fortune and worrisome to international community. This is particularly foreboding in view of the its intention to borrow more from international lenders this year to support its budget deficit of N7 trillion in 2022.

In view of the rising debt profile and other economic considerations JP Morgan, a respected international financial institution has beaten down Nigeria’s economic growth projection, and delisted the country. It has yanked off Nigeria from its list of emerging market sovereign recommendations over its fiscal woes.

In its report on Nigeria, JP Morgan stated that the country has failed to take advantage of high oil prices, which may make it difficult for Nigeria to access global finance, as its rating has been downgraded, thus raising its risk level. Morgan replaced Nigeria in the list with Serbia due to the country’s high reserves and a fiscally disciplined government and also Uzbekistan due to its relatively low debt despite Russian exposure.

On Nigeria, JP Morgan said, “NNPC did not transfer any revenue to the government from January to March this year, due to petrol subsidies and low oil production, as it moved Nigeria’s debt out of the bank’s ‘overweight’ category.

“Nigeria’s fiscal woes amid a worsening global risk backdrop have raised market concerns despite a positive oil environment,” it said.

Nigeria was yanked off from the bank’s “overweight” emerging market sovereign recommendations due to the country’s failure to take advantage of high oil prices, according to information from Reuters. JP Morgan added that Emerging market sovereign debt is at the “mercy” of the Federal Reserve’s interest rate decisions.

JP Morgan explained that the delisting was caused by Nigeria’s NNPC’s inability to transfer any revenue to the government from January to March this year, due to petrol subsidies and low oil production. The bank said, “Nigeria’s fiscal woes amid a worsening global risk backdrop have raised market concerns despite a positive oil environment”.

Serbia was upgraded to ‘overweight’ because risks had been priced in, and the country had large reserves and a fiscally conservative government, according to the report, while Uzbekistan was placed in the same category due to its comparatively low debt despite its Russian exposure.

Economic growth in emerging markets is set to slow “sharply” this quarter weighed by China, Russia, and the spread of tighter monetary conditions, JP Morgan analysts said

It should be noted that the Federal Reserve Bank of the United States recently upped key interest rates by 25 basis points in March 2022 and another 50 basis points in May. It also hinted that it might hike rates more times in 2022 alone, as it tries to keep inflation under control in the United States.

The dollar’s perceived safe-haven status has resulted in a massive flood of savers and investors into low-risk USD assets such as Treasury bills and gold, at the expense of emerging economies.

JP Morgan’s Emerging Markets Bond Index Global Diversified (EMBIGD) index has dropped 16% this year, “with most of the losses having come from rates” and $4 billion in net outflows from emerging markets since mid-April, according to JP Morgan analysts.

According to the influential international financial institution, rising dollar strength would place a gruesome burden on Nigeria, as the country would have to pay a higher interest rate to entice people to acquire dollar-denominated bonds issued by EM sovereigns and corporations.

These damning verdicts on Nigeria came at a time the Federal government was planning another Eurobond sale of $950 million.

Recall that the country in March issued the continent’s first Eurobond in 2022, raising $1.25bn at the cost of 8.375 percent which many financial analysts considered as a premium price. It is expected that the latest plan to tap the international debt market could even be more expensive, according to experts.

Penultimate week, the President Buhari administration upped its benchmark overnight interest rate by half a percentage point, the biggest jump in 22 years, as it is seeking to tame high inflation while its rate increases also buffet higher-yielding emerging markets.

JP Morgan says, “The external and fundamental backdrop has become increasingly difficult for EM sovereigns.”

JP Morgan noted that riskier sovereign yields were now 10.6%, the highest level since the first wave of the coronavirus pandemic in April 2020, reducing market access and increasing the risk of debt defaults.

The delisting should not come as a surprise according to Obaro Obatoyinbo, a professor of economics at Brigham University. He noted that even as at September 2021, Nigeria’s total public debt had risen from N35.465 trillion at the end of the second quarter of 2021, to N38.005 trillion ($92.626 billion) , this has been widely viewed as concerning and a big problem

Statistics from the debt office has revealed startling figures as amounts being owed by the country which, comprised total external and domestic debts of the federal government, 36 state governments, and the Federal Capital Territory (FCT).

According to the DMO, the increase of N2.540 trillion, when compared to the corresponding figure of N35.465 trillion at the end of Q2 2021, largely accounted for by the $4 billion Eurobonds issued by the federal government in September.

The Debt Management, we can recall occurred as at the time the National Assembly approved fresh $5.803 billion and a grant component of $10 million external borrowing for the federal government, which would further elevate the debt level.

Dr. Olufemi Omoyele, director of Entrepreneurship at Redeemers University said with dwindling inflows and the government’s weak revenue generating standing, “we have enormous cause to be disturbed that a further indebtedness would plunge the country into unsustainable path, and could lead to a debt crisis, especially if there is another plummet in crude oil prices, which is the country’s major source of forex exchange earning.

September last year, the Central Bank of Nigeria’s economic report for August 2021, revealed that non-oil revenue had not been impressive as the country recorded significant declines in corporate income tax (CIT) and non-tax revenue of the federal government.

“At N903.63 billion, accrued federation revenue was 17.1 per cent and 11.8 per cent below earnings in July and the budget benchmark, respectively. Movements in the Federation Account was dictated, largely, by shortfalls in non-oil revenue.

“At N480.56 billion, non-oil earnings in August was 29.2 per cent below its level in the preceding month, following declines in all its components.

“However, the largest declines were recorded in receipts from CIT and FGN independent revenue sources, both of which dropped by 42.5 per cent and 52.2 per cent, respectively,” the report added.

During the Spring meeting of World Bank/IMF in Washington, the Bank urged the Buhari administration without further delay to remove the fuel subsidy which had been described as a major drain and waste on the economy could see the federal and state governments unable to pay salaries from 2022, as it also said in December, 2021.

The Lead Economist, Nigeria Country office of the World Bank, Marco Antonio Hernandez, had painted a gloomy picture of Nigeria if the country decides to continue with the controversial fuel subsidy. Hernandez urged Nigeria to remove subsidy on petroleum motor spirit (PMS) in February 2022, as prescribed by the Petroleum Industry Act (PIA), warning that further delay could worsen the precarious revenue situation confronting the country.

If this warning remained unheeded according to Fernandez, the present fiscal condition of the sub-national governments would take a turn for the worse in 2022 with 35 of the 36 states unable to meet their financial obligations.

Hernandez argued that nothing was as unsustainable as N250 billion which goes into fuel subsidy monthly given the paucity of revenue currently confronting the country, especially the sub-national governments.

The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), MallamMeleKyari, had also at various fora bemoaned the huge burden the continuous retention of the subsidy on petrol had been to the corporation, saying that going forward, “the NNPC may have to start invoicing the federation to be able to maintain subsidy.”

In the same vein, the Governor of Kaduna State, Mallam Nasir El-Rufai wondered why the country would continue to allocate more monies to fuel subsidy compared with the allocations to education, roads and the health sectors.

“Is subsidising petrol more important than our health as even in a year we spent significant amount on health due to the pandemic, the budget for subsidy was still higher? Does it make sense?

“Is subsidising petrol about thrice as educating our children and preparing them for the future more important? The capital budget for roads is five times less than our budget for subsidy. We have to ask ourselves as Nigerians whether this makes sense at all,” he added.

El-Rufai said, “this is the first time in Nigeria that oil prices are rising globally, yet, there is no windfall. In fact, we are getting less. Why? Because according to Kyari, subsidy is taking N250 billion per month.”

“So, we have to ask ourselves if this subsidy still makes sense. Who is benefiting from it other than the smugglers and neighbouring African countries and some rich people? We have to stop this thing that will bring Nigeria to its knees,” the governor added.

Omoyele stated that “Nigeria is passing through a balance of payment challenge which is compounded by its high debt level. It is a pity that we are also feeling the strain of high debt service cost with only a small fraction of its financial receipts always available for the much-needed investment in infrastructure.


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