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OUTLOOK 2021: Events most likely to drive the policy direction of the federal government in the coming year

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THUR, 31 DEC, 2020-theGBJournal- The Nigerian policy environment is characterized by a great deal of uncertainty. The inconsistent and unpredictable nature of the policy and regulatory environment continues to hurt long-term investment planning and business projections.

Nonetheless, looking forward, the Lagos Chamber of Commerce and Industry (LCCI) expect the following policies or events to drive the policy direction of the government in year 2021.

Resurgence of Covid-19 Pandemic

A second wave of the covid-19 pandemic in Nigeria could propel governments at all level to enforce strict restriction measures and this poses threat to the recovery prospects of the Nigerian economy. Persistence of the pandemic till Q1-2021 would most likely change the policy direction of the Nigerian government.

African Continental Free Trade Area (AfCFTA)

Implementation of AfCFTA has been re-scheduled for January 1, 2021. The agreement was borne out of the need to boost intra-regional trade in Africa through the removal of tariff on 90% of goods. The trade treaty will also help to fast-track the establishment of the continental customs union and creates the avenue to address the double whammy of tariff barriers and huge trade cost that besets trade across regional economic communities.

For Nigeria, AfCFTA serves as an avenue for local industries to penetrate new markets and establish strong cross-border supply chains with other African countries. The benefits and costs of the trade agreement will not be evenly distributed among participating countries. Only countries with open, friendly, and enabling business environment stand to benefit from the agreement, and this underscores the need for Nigeria to strategically position itself for significant trade gain. The AfCFTA poses new competitiveness risk for Nigeria firms, especially for those in the real sector of the economy.

Petroleum Industry Bill (PIB)

The PIB seeks to establish a framework for the creation of commercially oriented and profit-driven petroleum entities, to ensure value addition and internalization of the petroleum industry through the creation of efficient and effective governing institutions with clear and separate roles for the petroleum industry. It is our belief that PIB presents an opportunity for the needed reform of the Nigerian oil and gas industry. The bill should create a platform not only for preserving existing government revenue but also to incentivise new projects that will increase production and revenue for government and stakeholders, thereby guaranteeing long term sustainability of the industry.

Major propositions of the bill include (a) removal of subsides on petroleum resources; (b) privatization of the Nigerian National Petroleum Corporation (NNPC); (c) scrapping of Petroleum Product Pricing Regulatory Agency (PPPRA) and Petroleum Equalization Fund (PEF). The National Assembly has indicated commitment to pass the PIB before the end of first quarter of year 2021.

The PIB should seek to protect existing investments from value erosion. The assets and operations from these investments are the foundation upon which new projects can be built. It is therefore crucial that projects already underway be able to maintain the conditions under which they were designed and approved. Doing so will incentivise the launch of new projects, grow production and revenue for government and stakeholders, thereby guaranteeing long term sustainability of our oil and gas industry.

In order to make the PIB more impactful in the Nigerian oil & gas industry, it is imperative to have the following areas jointly reviewed by private and public sector stakeholders before passage. The areas are:

Preservation of base business & rights (Sections 92.3, 92.4, 93, 302.3, 311.9.c, 317.4, ThirdSchedule).

Segregation of Upstream and Midstream deemed assets (Sections 302.2 and 317.4).

Capital allowances and deductions (263, Fifth Schedule).

Domestic Gas (Sections 110, 167, 168).

Deepwater (Section 267, Seventh Schedule).

Administrative burden of compliance.

The Lagos Chamber urges the National Assembly to put in place a law that will promote a more effective and efficient governance, administration, host community development and fiscal framework for the petroleum industry. A competitive Bill would help preserve the integrity of the existing projects, whilst also encourage future growth of production and make Nigeria an investment destination of choice.

Finance Bill 2020

The finance bill 2020 was developed by the Federal Government to support the implementation of the 2021 budget through key reforms to specific taxation, customs, excise, fiscal and other laws. The bill seeks to among others adopt appropriate counter-cyclical fiscal policies to respond to the economic and revenue challenges precipitated by the decline in global oil prices while also reforming extant fiscal policies to foster close collaboration with monetary and trade policies.

The Finance Bill 2020 was passed by the Nigerian Senate on December 15, 2020. Some of the key proposals in the Bill include:

-50% reduction in minimum tax rate from 0.5% to 0.25% of gross turnover for financial years ending between 1st January 2020 and 31st December 2021.

-Reduction in rate of import duties payable on tractors and motor vehicles to 10% and 5%, respectively.

-Granting of tax relief to companies that donated to covid-19 relief fund under the Private Sector Coalition against COVID.

-Exemption of small companies with less than N25 million turnover from payment of tertiary education tax under the Tertiary Education Trust Fund Enablement Etc, Act 2011.

National Economic Development Plan

Considering the expiry of the Nigerian Economic Sustainability Plan (NESP) in the first half of year 2021, the Federal Government will most likely come up with a new national economic development plan to succeed the NESP and Economic Recovery & Growth Plan (ERGP). The new economic development plan is expected to guide the policy direction of government in the short to medium term.

The Federal Government must be broad-based in its approach in developing a comprehensive development plan that addresses key economic and policy concerns in the country. We expect the new development plan to cover critical issues including macroeconomic stability, employment generation, investment, poverty reduction, financial empowerment, infrastructure development, ease of doing business, human capital development, industrialization, and security.

POWER SECTOR

The service reflective tariff model, which was introduced on September 1, 2020 to encourage investment in power infrastructure for improved service delivery was suspended temporarily by the Federal Government following agitations by organized labour union. The service reflective model may be re-implemented in year 2020 as the Federal Government lacks adequate financial resources to maintain subsidy on power consumption.

While the policy might have led to some form of hardship for individuals and businesses, however, the reform is the most sustainable policy option needed to attract and sustain investment in the sector. Tariff increment is inevitable due to the rising cost of power generation in Nigeria. Generating companies (GENCOS) need more funding to procure necessary facilities that would help improve power supply, while Distribution companies (DISCOS) need improved liquidity for enhanced efficiency.

The solar power is expected to gain momentum in year 2021. The solarinitiative as contained in the economic sustainability plan is aimed at expanding energy access to some 25 million individuals through the provision of solar home systems or connection a mini grid. Successful implementation of the policy will boost rural infrastructure as well as growth and productivity of Nigeria’s rural economy.

Dangote Oil Refinery

Dangote Oil Refinery worth an estimated investment of $12 billion is expected to commence operation towards the end of year 2021. The refinery is a 650, 000 barrels/day integrated refinery situated in the Lekki Free Trade Zone in Lagos. The refinery is expected to produce up to 50 million litres of gasoline and 15 million litres of diesel daily.

The Dangote Oil Refinery has much significance for the Nigerian economy that is dependent on imported refined fuel products to lack of domestic refining capacity. The refinery is aimed at boosting Nigeria’s refining capacity and help meet the increasing domestic fuel demand, while generating foreign exchange through exports. Official data by the National Bureau of Statistics showed that Nigerians consumed about 57 million litres of petrol daily. Thus, we expect the commencement of operations at the Dangote Refinery to reduce Nigeria’s demand for imported fuel with consequent effect on pump price.

FX Policies

While FX supply will face continued pressure in year 2021 in the light of relatively lower dollar inflows from oil, foreign investment, and diaspora remittances, the CBN is expected to sustain its demand management strategies via rationing and restricting access to FX for food imports. In year 2021, the CBN will most likely maintain and initiate more demand management policy measures to taper growing demand for FX amid weak dollar inflows.

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