Subsidy: Postponement Proves Nigeria’s Weak Institutions, Limited Capacity to Implement Challenging Reforms –Moody’s
The decision of the Nigerian government to delay the implementation of subsidies removal as enshrined in the Petroleum Industry Act has been viewed as a reflection of weak institutions and capacity to implement challenging reforms.
Due to pressures from stakeholders, Federal Government last week announced a plan to shift the implementation of the Petroleum Industry Act to the next administration, citing economic concerns on households.
After signing the Petroleum Industry Act, President Muhammadu Buhari had expected that detailed implementation should proceed. The Act which had faced much delay before the executive pend signature for it to become law contains a demand that subsidy payment should be removed in six months.
Stakeholders, including the labour union, kicked against the subsidy removal schedule for January on account of poor economic conditions. Nigeria’s unemployment and inflation rates are abysmally high in an economy where personal leverage remains a luxury, some analysts told MarketForces Africa.
Though some pundits are of the opinion that the implementation would have reduced pressures on fiscal performance. But logistic and average production costs in the country is already heating up, driving the consumer price index higher.
And the local currency’s weak position in the foreign exchange market remains a big issue most Nigerians – individuals and corporates – are contending with. Series of naira devaluation in various FX markets have weakened purchasing power of the local currency, and yet analysts believe naira is still overvalued.
In its latest update on Nigeria, the global ratings agency, Moody’s Investors Services said, “The subsidies have accelerated the recent deterioration in the public finances. The decision also illustrates weak institutions and limited capacity to implement challenging reforms”.
Late in 2021, Moody’s changed the outlook on Nigeria to stable from negative and affirmed its long-term issuer and senior unsecured ratings at B2. The firm also affirmed Nigeria’s (P)B2 senior unsecured medium-term note program rating.
According to the rating note, the change of outlook to stable reflects Moody’s expectation that higher oil prices and some measures taken by the government will help stabilize the sovereign’s credit metrics and support its external position.
“The ongoing improvements in the macroeconomy and the external position are likely to continue in the next few years, supported by the oil price environment, Nigeria’s new Petroleum Industry Act legislation and the opening of the Dangote refinery that will structurally reduce demand for US dollars”, it said.
At the same time, Moody’s expects Nigeria’s fiscal deficit to narrow very slowly, with ongoing efforts to increase non-oil government revenue, although weak governance and institutional capacity are likely to hamper execution.
It projected gradually increase General government debt -including central bank funding and promissory notes- is, towards 35% of GDP by 2025, stabilizing above 400% of revenue. Read Subsidy: FEC Approves 2022 Appropriation Amendment Bill
Moody’s said Nigeria’s credit constraints include fiscal and external reliance on the hydrocarbon sector as well as its very weak institutional framework and governance, reflected in extremely low revenue generation.
The rating note explained that weak institutions indicate a low capacity to adjust to rising social demands from a fast-growing population earning very low incomes and/or to the transformation of the government’s revenue and foreign-currency generation capacity implied by carbon transition.
Moody’s said it expects oil exports to produce less robust revenues at peak oil prices and weaker revenues at trough oil prices because global initiatives to limit the adverse impacts of climate change will increasingly constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources.
Balancing these factors, it was noted that the scale of the economy that is relatively diverse, with services accounting for approximately 50% of the economy, supports the rating.
Moreover, liquidity risk appears manageable with borrowing requirements of around 8% of gross domestic product (GDP) (although relatively much higher as a proportion of revenue) over the next few years. Moody’s expects Nigeria’s economy to grow by 2.8% in 2021 and by 3.5% per year on average until 2025.
This economic recovery is mainly due to low base effects, but also to improved dollar liquidity which has been facilitated by higher oil prices and the support of International Financial Institutions (IFIs) such as the IMF.
“While growth prospects are better than pre-pandemic levels, they remain weaker than before the 2016 oil price shock and insufficient to significantly lift living standards given population growth”.
The report hints that Moody’s expects that oil production (including condensate) will slightly increase in 2022 to reach 1.8 million barrels per day (mbpd) against an estimated 1.7 mbpd in 2021.
Further out, the recent adoption of the Petroleum Industry Act (PIA) has reduced uncertainties that, over more than a decade, significantly weighed on investment in the Nigerian oil and gas sector.
Over the next few years, other sectors including agriculture and services are also likely to perform well because of ongoing government support and improved dollar liquidity respectively. #Subsidy: Postponement Proves Nigeria’s Weak Institutions, Limited Capacity to Implement Challenging Reforms –Moody’s
