Economic Issues that Will Shape 2016

For a government which is implementing its first budget after it rode into power via a general election last year, the President Muhammadu Buhari-led administration is expected to do whatever it takes to make the 2016 budget work as much as it needs to show Nigerians the direction of his administration’s economic policy, writes Festus Akanbi

Foreign Exchange Market
One issue that will occupy the attention of leadership of the Central Bank of Nigeria is how to address the inadequacy of the current policy in the foreign exchange market. Owing to the unabated slide in value of naira, the CBN had introduced a raft of policies, which the organised private sector is blaming for the growing difficulty in accessing the dollars and the attendant closure of factories.

President Muhammadu Buhari, in realisation of this problem, assured the business community that the central bank was “currently fine-tuning its foreign exchange management to introduce some flexibility and encourage additional inflow of foreign currency to help ease the pressure” on the naira.

Elaborating on the challenges businesses, traders and Nigerians had encountered accessing foreign exchange to meeting their international obligations; the president said he was aware of their difficulties.

“From our traders and business operators who rely on imported inputs; to manufacturers needing to import sophisticated equipment and spare parts; to our airlines operators who need foreign exchange to meet their international regulatory obligations; to the financial services sector and capital markets who are key actors in the global arena.

“These are clearly due to the current inadequacies in the supply of foreign exchange to Nigerians who need it. I am however assured by the Governor of Central Bank that the Bank is currently fine-tuning its foreign exchange management to introduce some flexibility and encourage additional inflow of foreign currency to help ease the pressure,” he said.

He, however, added that the federal government was assessing the exchange rate regime, keeping in mind government’s willingness to attract foreign investors but at the same time, managing and controlling inflation to the level that would not harm the average Nigerian.

“Nigeria is open for business. But the interest of all Nigerians must be protected. Indeed, tough decisions will have to be made. But this does not necessarily mean increasing the level of pain already being experienced by most Nigerians.

The President therefore promised to ensure the nation’s monetary and fiscal policies are aligned, saying when this is done; the problem of foreign exchange inadequacy would be solved.

Foreign Reserves

The downward trend in the crude oil price and the resultant slide in earnings accruable to Nigeria have consistently depressed the Nigerian foreign reserve account.

Nigeria’s external reserves continued its massive decline hitting a new low of $29.746 billion on December 9, while naira value deteriorated in the unofficial foreign exchange market. The amount of dollars in external reserves could barely finance four months import.

With the crude oil selling for $35.6 per barrel as at last week, it is obvious that it will take a while for the external reserves position to attain a height good enough to relax the current tension in the foreign exchange market.  So, Nigerians will like to know how the current administration intends to wade through in this New Year.

Privatisation of Keystone Bank

As the last of the three banks slated for sale, Keystone Bank is expected to get a buyer this year. The other two rescued banks, Mainstreet Bank and new owners, leaving Keystone as the only bank yet to sort out its privatisation issues, had since acquired Enterprise Bank. While Mainstreet Bank was acquired by Skye Bank Plc, Enterprise Bank was taken over by Heritage Banking Limited.

The drive to conclude the acquisition of Keystone Bank, according to the Managing Director, Asset Management Company of Nigeria (AMCON), Alhaji Ahmed Kuru, is ongoing and a new owner for the bank may be unveiled in the first quarter of this year.

Nigerian Banks and 2016 Budget

There is no doubt that Nigerian banks will be looked upon to fund the deficit part of the 2016 budget. President Buhari had disclosed that the Federal Government planned to finance the deficit of N2.22tn by borrowing N1.84tn from domestic and foreign sources.

“Our deficit will be financed by a combination of domestic borrowing of N984bn and foreign borrowing of N900bn, totalling N1.84tn,” the President had said.

Managing Director, Wema Bank, Segun Oloketuyi, told THISDAY that Nigerian Banks had what it takes to rise to the occasion, although the facilities would largely be done through debt issuances.

Therefore, members of the finance community will watch out to see whether or not the budget financing will not hamper banks from carrying out their normal role amidst concerns that the federal government may crowd out private sector from banks.

Managing Excess Liquidity

In spite of a harvest of restrictive policies rolled out so far by the current leadership of the Central Bank of Nigeria, indications from the banking sector show that the sector is grappling with liquidity glut.

Expectations were rife that the implementation of the Treasury Single Account policy would rid the industry of excess funds, however, a combination of lowering of cash reserve requirement and suspension of Open Market Operation (OMO) brought about a financial market awash with funds, with the CBN expressing concerns that banks are currently holding large excess reserves averaging over N300 billion.

Emefiele pointed out that there are ample opportunities for productive and profitable lending to the real sector of the economy by banks, instead of the financial institutions to be placing such funds in government securities.

According to the CBN governor, the concern in the system was further strengthened by the reality of injecting an additional N866 billion into the system through the redemption of maturing Asset Management Corporation of Nigeria (AMCON) bonds in October.

He also noted that given the apathy to lending, banks might be inclined more to placing these new funds in the Standing Deposit Facility or use it to increase pressure on the exchange rate.

The committee also advised the central bank to explore ways of encouraging banks to lend such excess reserves to the real sector.

Therefore, the concern of stakeholders in the financial system is how to prevail on banks to open their doors to prospective customers seeking financial assistance for the needy, especially operators in the productive sector of the economy.

2016 Budget Expectation

Being the first budget to be implemented by this administration, it is taken for granted that President Buhari and his team are aware of the immense pressure on them to ensure that the 2016 Budget meets Nigerians’ expectation.

As it worked on its first full budget, the Buhari administration had to contend with two unfavourable factors inherited from the previous administration.

First, was the unusual, and ultimately deleterious management of the economy during President Goodluck Jonathan’s five years in office? Then there was the drop in oil prices, which accounts for a disproportionately high portion of government’s revenue, beginning mid-2014, which reduced by half the country’s earnings from the sector.

Given this, the challenge for the 2016 budget is how to revamp the economy via increased government spending in the light of dwindling official government revenues.

The new budget seeks to do exactly that. Of the proposed N6.08tn, N3.86tn is revenue projected to come from the much-diminished crude oil sales and what to us seem like excessively optimistic earnings from “non-oil taxes” and “independent revenue”.

In the budget, the administration has allocated N4.28tn for recurrent expenditure and N1.8tn for capital investments. The budget proposal breaks with a long-standing harmful tradition that has seen daily spending consume more of the national budget than the economy’s need for infrastructure and productivity.

Removal of Fuel Subsidy

After much hesitation, the current administration has agreed to halt the revenue gulping fuel subsidy programme. The Minister of State for Petroleum, Dr. Ibe Kachikwu, who disclosed the government’s decision while appearing before the Joint National Assembly Committee on Finance, Appropriation and National Planning on the consideration of Medium Term Expenditure Framework (MTEF), said the subsidy put at over N1 trillion in 2015 was no longer sustainable.

The federal government’s decision to shave off fuel subsidy coincided with reports that tumbling crude oil prices might adversely affect the nation’s 2016 budget.

The subsidy removal, which is being implemented along a sustained regime of regulation, will no doubt affect fuel supply in the country. Given the fact that the decision to put an end to the subsidy arrangement will close the door of cheap funds to some smart fuel marketers is enough to redefine petroleum product marketing and distribution in Nigeria.

What it means is that oil will be sold in accordance with the mood of the international market and there are fears that some marketers may discontinue with the business of oil importation because access to easy money is no longer there. Nigerians will also like to see how the administration will deploy funds hitherto being lavished on fuel subsidy to other productive ventures. There are also fears from certain quarters that the removal of subsidy means an end to regulation given the volatility in the oil industry and the tendency for pump prices moving up and down depending on the crude oil price movement.

Petroleum Industry Bill

Recently, the federal government broke up the Petroleum Industry Bill and replaced it first with a law to overhaul the state sector. This new Bill, entitled “Petroleum Industry Governance and Institutional Framework Bill 2015” aims to create “commercially-oriented and profit-driven petroleum entities” and close loopholes that bred corruption.

Some of the changes reportedly made to the new Bill include amongst others, curtailment of Ministerial powers, the splitting of NNPC into two separate entities: the Nigeria Petroleum Assets Management Co (NPAM) and a National Oil Company (NOC). The NOC will be an “integrated oil and gas company operating as a fully commercial entity” and will run like a private company. It will keep its revenues, deduct costs directly and pay dividends to the government thus putting an end to the era of waiting for Federal allocation for funding and always failing to meet cash call obligations.

Oil industry watchers expect the National Assembly to treat the bill with dispatch so that Nigeria could make a way out of the logjam. It is hoped that the bill will eventually become functional.

Private Refineries

Sometimes in August 2015, there were reports that President Buhari granted licences to 65 Nigerian companies to construct modular refineries.

The companies were selected from about 285 applications that were screened for the purpose.

Modular refineries are mini-refineries with capacities ranging from 1,000 to 10,000 barrels per day, bpd, which can be assembled and separated easily for enhanced performance and efficiency.

The decision to award Licence to Establish, LTE, which was taken within 10 days of his assuming office in June, may not be unconnected with his desire to see the increase in domestic refining capacity to meet local demand, thereby reducing huge import bills for subsidy.

Now that the government has effectively removed fuel subsidy, Nigerians will like to see these operators coming up with the kind of refineries they promised to build. This is because apart from the fact that it would guarantee local production of fuel for consumption, the exercise will also serve as a good means of conserving the little foreign exchange in Nigeria’s kitty.

Taxation and Internally Generated Revenue

Given the structure of the 2016 budget and the continued slide in revenue as a result of the turbulence in the oil market, it is natural for the federal government to expand the current tax bracket in the economy to boost non-oil income for the government.

The Federal Government is planning to raise a total of N9.71tn as revenue for the 2016 fiscal period. A breakdown of the N5.72tn non-oil revenue projection showed that the sum of N1.52tn would be earned from Corporate Income Tax, while N265bn would come in from NLNG taxes.

Others are stamp duties, N66.14bn; Capital Gains Tax, N19.47bn; Value Added Tax, N1.47tn; Customs revenue, N862bn; and Federal Government of Nigeria Independent Revenue (surcharge on luxury items, import, excise, fees etc.), N1.5tn.

Nigerians will have to brace up for tax payment as the Federal Inland Revenue Services embark on an aggressive tax mobilisation.

Capital Market and Foreign Portfolio Investors

It is expected of the federal government to put adequate measures in place to reverse the recent gale of exit of foreign portfolio investors from the nation’s capital market.

So, this year, the finance authorities are expected to take measures, which will stimulate investment and once again make Nigerian economy a safe haven for investment.

Culled from:thisdaylive.com