NLC, TUC And Forex Market: Matters Arising
In spite of Organised Labour’s recognition of the real advantages that a deregulated downstream oil sector would bring to the economy, there is yet no sign that Labour’s opposition to this policy has waned! Labour, of course, recognizes that NNPC (Nigerian National Petroleum Corporation), like all monopolies (especially state run monopolies) create price and market distortions which do not generally favour the masses. Thus, even when it is clear that deregulation will not only release at least N600bn revenue annually for critical infrastructural upliftment, but also reduce the space for corrupt enrichment within the petroleum sub-sector and induce keen competition with improved consumer services, Labour is not convinced that deregulation would translate into cheaper or stable petrol prices, especially when global crude oil prices follow an upward trajectory.
In truth, this column shares Labour’s apprehension and I will even make bold to say that any assurance from any quarter that deregulation as proposed in its present jaundiced form will bring down petrol prices from its current level even when crude oil prices continue to rise must be a calculated attempt to deceive Nigerians, before our income values are taken to the cleaners! Indeed, Deregulation within the context of our current monetary framework will be suicidal! In their eagerness to encourage Labour to embrace deregulation, government and its agents have been quick to point to the gains in the telecom sector with the advent of liberalisation. In truth, prices of mobile handsets and cell rates have tumbled endlessly over the past five years and Nigerians are urged to be patient so that the same favourable scenario would play out in the downstream oil sector; but, sincere and insightful analysts will be quick to caution against such expectation. In the first place, competition may indeed have impacted favourably on consumer prices, but the more important fact is that it is the increasing size of the market (the cost benefit of mass production/service) that has been the main driver of the favourable prices! Secondly, and certainly of equal significance, price reductions are made possible with an expanding market in the telecom sector by the nature of its revenue base; for example, telecom operators receive their incomes in local currency (i.e. naira) from Nigerian based customers, and furthermore, the telecom operators do not have any direct influence on the determination of the naira purchasing power!
Meanwhile, deregulation of the downstream sector may mean more suppliers, but the demand for petrol as in the case of telecom is unlikely to enjoy an astronomical increase, so the relatively static size of local demand for petrol will not increase and thereby instigate the cost savings that will ultimately reduce prices of petrol, especially when the crude oil market is buoyant! Thus, more refineries with increased capacities and an influx of importers will not necessarily increase demand such that prices will come down with the advantages of large scale production. Furthermore, it is clear that the universal driver of petrol prices is actually the international crude oil price movements. This is certainly the most significant factor in the pump price of fuel.
Yes, the distance between refineries and the market, and the index of efficiency in each refinery would also contribute to the price level, but in reality, these two factors may not account for more than 20% in the price structure of petrol; however, the most critical factor that could induce wild swings in petrol prices is certainly the market price of crude oil. The price of crude oil is, however, denominated in dollars and unlike telecom, our export revenue is consequently received in dollars and not in naira. Meanwhile, the naira value derivable from this dollar revenue is in turn determined in a market which is inexplicably dominated and controlled by the worst form of monopoly (i.e. government parastatals).
Thus, the foreign exchange market which determines how much our hard earned dollar income will command in the market, by its monopolistic nature, is plagued by price distortions, corruption, and market dislocations!! In spite of vastly increased export revenue, the monopolistic posturing of the Central Bank in the foreign exchange is in fact at the root of our underdevelopment! The CBN in its role position as the nation’s banker is the prime custodian of our currency; i.e. the naira, and it is appropriate that it controls all naira issues and it is, by its mandate expected to maintain price stability which also includes an appropriate monetary framework which ensures that the naira we all earn does not continue to buy less and less in the market! Thus, while a Central Bank’s monopoly of a nation’s currency issue and management is universally accepted as inevitable, the waters become seriously muddied when the same Central Bank becomes not only a major player but also a monopolist in the supply of foreign exchange to the domestic market; this would lead us into a very poisonous matrix that guarantees that our people become poorer with increasing dollar export revenue.
Currently, the CBN is annually responsible for about 70% of all dollar revenue that enters into the domestic forex market. The balance 30% or less is supplied by oil companies and a few exporters outside the oil sector! While these private dollar suppliers are legally permitted to approach the banks directly for the exchange of their dollars to naira, the owners of public sector dollar revenue in our reserves are not so lucky! Over the last three decades or so, the CBN has played the role of the all-knowing big brother with our dollar earnings. In the present framework, the CBN actually captures the monthly distributable dollar revenue, and proceeds, with no serious attempt at a market-determined naira/dollar rate, to print and supply loads of naira to the three tiers of government at its own unilaterally determined exchange rate! Consequently, with such framework, increasing dollar revenue will mean increasingly worthless naira value, as more and more naira will be pumped into the system with the attendant problems of excess liquidity, high interest rates, heavy government borrowing (not for infrastructural development but for reduction of excess cash in the system) increasing unemployment, lower demand and comatose industrial landscape as a result of CBN’s monopoly of the people’s dollar revenue!
As you may imagine, the above is a veritable paradox, as increasing dollar revenue (whether from crude price rises or additional export revenue) should realistically improve the value of the naira if the increased dollar revenue provides us with longer forex demand cover. For example, our $60bn or more reserves in 2008 gave us over 30 months demand cover according to CBN and our exchange rate hovered between N120 – N150=US$1, but compare this with our $4bn dollar reserves and four month’s demand cover in 1996 and yet our naira exchange in 1996 for just N80/$1.
Some Nigerians have argued that crude oil is our natural endowment and we should therefore enjoy a subsidy akin to agric product subsidies elsewhere in Europe and U.S.A. Thus, even if a subsidy regime cost us N1 OOObn a year (a third of federal budget) or indeed breeds corruption and dislocates the price structure, such Nigerians maintain that subsidy is our birthright! I do not have any quarrel with this argument, but the point is that the concept of incidence of subsidy is misplaced in this instance. It should be a realistic expectation that when crude oil prices increase, our nation’s treasury benefits with increasing dollar reserves, which would in turn improve our dollar demand cover; when dollar demand cover improves as per the above example, we should rationally expect our naira to be stronger against the dollar! A stronger naira, with rising crude oil prices should normally translate into reducing petrol prices locally!!
The cheaper petrol prices will, however, mean higher cost to all cross boarder smugglers of petrol who have contributed to push our daily consumption of petrol over to 30 million litres! What our economic experts do not tell you is that the resultant stronger naira, cheaper petrol prices, the damper on inflation, and a savings ofN600bn erstwhile subsidy are actually the real subsidies that ownership and export of crude oil provides!
FG Makes N10tn VAT Under Buhari
The Federal Government has raked in N10.1tn from the collection of Value Added Tax under the regime of the President Muhammadu Buhari.
Consequently, the Minister of Finance, Zainab Ahmed, had adviced the in-coming government to increase the VAT from the current 7.5 per cent to 10 per cent.
VAT is a 7.5 per cent consumption tax administered by the Federal Inland Revenue Service when goods are purchased and services are rendered, and it is borne by the final consumer.
Revenue generated from VAT is usually disbursed to the three tiers of government through the Federation Accounts Allocation Committee.
An analysis of reports obtained from the National Bureau of Statistics showed that the VAT earnings continued to rise annually throughout the eight-year period.
The country earned N759.4 billion in 2015, N777.5 billion in 2016, N972.4 billion in 2017 and N1.1 trillion in 2018.
VAT collections in 2019 amounted to N1.2tn, N1.5 trillion in 2020, N2.1tn in 2021 while N2.5 trillion was paid in 2022.
The Tide source reports that the significant increase in VAT collection in the past two years is not unconnected with the decision by the Federal Government in 2020 to increase the VAT rate from five per cent to 7.5 per cent. This was part of the tax reforms included in the 2019 Finance Act meant to help the government achieve its revenue projections.
Meanwhile, economists have cautioned against raising the VAT from 7.5 per cent to 10 per cent by the incoming administration, as they argued that it would stifle the country’s economic growth.
The Finance Minister, who made the call during a courtesy visit to the headquarters of Voice of Nigeria in Abuja recently, said, “VAT is one of the ways to increase revenue and we still have to increase VAT because, at 7.5 per cent, Nigeria has the lowest VAT rate in the world, not in Africa, in the world.
“In Sub-Saharan Africa, the African average is 18 per cent, when you increase your VAT, your Gross Domestic Product will grow.
“So, tax compliance has increased. As a result, we have also adjusted our VAT rate from five per cent to 7.5, even though our target was 10 per cent. But you know how it is in Nigeria, we are targeting 10 per cent by the second year, we did so to increase revenue”.
Reacting to the development, the Director, Centre for the Promotion of Private Enterprise, Muda Yusuf, said the advice was coming too early considering the previous increase in 2020.
He said it was better to bring more people into the tax net than to impose more burden on those in the tax net.
“The revenue performance from VAT has generally been excellent in recent years. My view is that it is perhaps too early to review it again, especially in light of all the challenges that businesses are facing.
“Businesses are the main contributors of VAT and there are some other taxes that have already been proposed under the finance bill like excise and telecom tax. So, we have to be careful so as not to increase the burden on businesses.
“The better thing is to bring more people into the tax net than to impose more burden on those in the tax net”, he stated.
Experts Query Expatriate Heading NNPCL Subsidiary
Some industry experts have raised concerns over the announcement of Jean-Marc Codier as the head of the oil trading arm of the Nigerian National Petroleum Company Limited (NNPCL).
A statement issued in Abuja by the Chief Corperate Communications Officer, Garba-Deen Muhammad, said he is to head NNPC Trading Ltd, a subsidiary of NNPCL, a situation which did not go down well with some industry experts.
The announcement attracted resentments among some analysts and operators on Monday, while other experts see it as normal.
Commenting on the issue, energy expert and Chief Executive Officer of Sage Consulting, Bode Fadipe, said, “It is of concern to most Nigerians that at this time of our life we are still having a foreigner in such a strategic business enterprise in this country.
“The question many people will ask is that, don’t we have Nigerians who can manage that office? Are the expatriates now investors in the business or is it a joint venture that allows a foreigner to hold that kind of position?
“Has NNPC Ltd sold its shares to the public? To the best of my knowledge, it is still the Nigerian government that owns the shares in NNPCL. It is still owned by the government, so when did it start appointing foreigners to such a level?”
According to Fadipe, this was the first time he would see such an appointment in the national oil company, adding that it is abnormal.
“I think it is an anomaly. I don’t know what would have informed that kind of position, but I think it is a situation that calls for further interrogation”, he stated.
On his part, a legal consultant and energy law advisor, Prof. Yemi Oke, argued that under the Petroleum Industry Act 2021, NNPCL should be a going concern, as there were requirements under the law for appointments.
“There are other Nigerian companies that have expatriates as employees, all they need is to comply with the expatriate quota and show that there’s no local manpower skilled enough to man that particular office, due to the technical nature of the position,” he said.
A reliable source in NNPCL, however, disclosed to The Tide’s source that henceforth, most commercially viable subsidiaries of NNPCL will be managed by expatriates.
“I was reliably told that most subsidiaries or units that are commercially viable, the operations would be managed by expatriates, with those in M3 category now limited to administrative schedules.
“This is same with NNPC Retails (the filling stations arm), NETCO (National Engineering and Technical Company), NPDC (Nigeria Upstream Development Company), etc,” the source stated.
According to the source, “If the expatriates are on M3 NNPC grade (Executive Vice President is M2, Group Chief Executive Officer is M1), would that not lead to rivalry and conflict, at the expense of the company’s man-hours?”
The source explained that the decision to use expatriates as heads of viable subsidiaries could be “to instill higher productivity, improved net profit, better efficiency and operational effectiveness”.
Explaining the situation, NNPCL said in its statement that Cordier, served as a former Vice President of the Abu Dhabi National Oil Company, and that his appointment was in furtherance of the ongoing repositioning in the company for improved growth, better performance and service delivery.
“A renowned international oil trader, Cordier, a French/Swiss national, holds a Masters degree in Corporate Finance with Distinction from Paris 9 University.
“He comes into the role with a rich background spanning over 30 years in physical oil, oil derivatives, and risk management, with significant experience in reorganising and creating a trading business”.
Also, the President, Nigeria Consumer Protection Network, Kunle Olubiyo, urgwd NNPCL to promote the local content drive of the Federal Government.
“Does it mean that there are no competent Nigerians who could do the same job, with respect to the promotion of local content? NNCPL has a mandate of refining petroleum products and it is a national company.
CBN’s Lending Facility Falls By 14% To N453.7bn
Borrowings from the Central Bank of Nigeria (CBN) Standing Lending Facility(SLF) has fallen by 14 percent from N528.15 billion in January 2023, to N453.7billion in February 2023.
Findings from the CBN’s Financial Data for January and February 2023 showed that other banks’ deposits in the apex bank’s Standing Deposit Facility(SDF), rose by same margin of 14 percent to N668.86 billion in February 2023 from N584.79 billion in January 2023.
The Financial data revealed that decline in banks’ borrowings from the SLF reflects the current decline in money supply in the economy due to the various economic policies that was implemented since November 2022 to curb inflation and mop up cash in the economy.
Money and Credit data of the apex bank for January showed that Nigerians in response to the initial deadline to the CBN’s redesigned Naira policy deposited N1.81 trillion into the banking system in January.
Consequently, Currency Outside Banks fell by 70 per cent to N788.9 billion in January 2023 from N2.6 trillion in December 2022.
National Bureau of Statistics (NBS) consumer price inflation report for February showed that headline inflation rate, which rose by 0.09 percentage, points to 21.91 percent in February 2023 from 21.82 percent in January, showing an acceleration of the headline index for the second month to a near seventeen and half-year high.
The witnessed acceleration according to some economic analysts, was partly a result of the persistent food shortages and the unprecedented naira scarcity witnessed during the month as an upshot of the central bank’s redesigned Naira policy.
With the CBN’s Monetary Policy Committee meeting this week to decide on various monetary and economic indicators in the face of unabating trend in inflation, they predicted further rise in inflation rate to 22.1 percent this month.
They stated that rising inflation has continued to be a front burner in most economies, including Nigeria, and escalating the price stability plans far from the hands of the monetary authority, pointing that this is an economic growth trade-off that may further drive the central bank’s position for an extended contractionary stance.
The Central Bank’s committee however, projects the headline inflation to be 22.1 percent at the end of March 2023.
By: Corlins Walter
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