ThinkBusiness Today - June 21st

E kaaro o, Ututu Oma, Barka da Safiya - Good morning, and a warm welcome to ThinkBusiness Nigeria, your Monday – Friday dose of commentary, contexts, and insights on business and economic news that matter to you.

Nigeria’s finances is broken, more taxes to the rescue

The federal government has started the implementation of 7.5% VAT on diesel. It forms part of the ongoing reforms of the new government, though the plan was concluded in 2020. There are many dimensions of these reforms, but two are becoming very clear. First, an increasing direction towards market determined prices. The removal of fuel subsidies and the aggregation of all CBN’s exchange rate windows into I & E are two great examples.

The second dimension of the ongoing reform is because it helps to improve government finances, improving Nigeria’s fiscal position, and increasingly reliance on taxes. The implementation of the 7.5% VAT on diesel is solely for this purpose.

Nigeria’s government finances is broken, and it has to be fixed. No problem. But two issues. First, the reason most Nigerians are affected is because the electricity system is broken. Fix that and the burden will be less. Second, I hope President Bola Tinubu will also remember to call for sacrifices on the part of those in government and reduce such optics as that of the Senate President moving around in large convoys and tens of people waving government officials because they are “jobless”.

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Markets

• The benchmark NGX All-Share Index (ASI) inched up 95.17 (0.16%) points to close at 59,110.02, a 1-week gain of 1.63%, a 4-week gain of 13.26%, and an overall year-to-date gain of 15.33%. Some of the big share price movement include Skyway Aviation Handling (+10%), Academy Press (+10%), Chams (+10%) and Guinea Insurance (+10%).

• Oil futures slid about 1% in choppy trading on Tuesday on forecasts for slower oil demand growth in China, the world's second-biggest oil consumer, and disappointment with the size of cuts in China's key lending rates. Brent futures for August delivery fell 25 cents, or 0.33%, to $75.84 a barrel and U.S. West Texas Intermediate (WTI) crude for July delivery fell 84 cents, or 1.17%, to $70.94 on its last day as the U.S. front-month contract.

• The Naira depreciated at both markets. At the I & E window, Naira was down 11.15% to N756.61, also, depreciated at the street market, down 0.46% to N759.50. This brings the difference between the two rates to 0.40%, or N4.

• US natural gas futures fell more than 4% to around $2.5/MMBtu from a 3-month high as investors continue to monitor the amount of gas flowing to US LNG export plants and weather forecasts.

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National Headlines

• VAT on Diesel – The implementation of the VAT 7.5% on diesel will squeeze further three groups of people. First, it will squeeze businesses that power their operations and premises with diesel due to poor electricity supply. Second, it will squeeze middle- and upper-income earners that use diesel generators in their homes. Third, it will squeeze heavy transporters that use diesel engine vehicles for logistics. This will be passed on to consumers. Combined, Nigerians are further squeezed by this fiscal policy.

Global Headlines

• Boosting UK trade with developing countries – The UK has started the implementation of its new trading scheme for developing countries to boost trade, growth, and jobs in these countries. It came into effect two days ago. The Developing Countries Trading Scheme (DCTS) replaces the European Union generalized scheme of preferences, the trade rules applicable as member of the EU. DCTS is applicable to 47 countries in the least developed country (LDC) framework and 18 additional countries or territories classified by the World Bank as low-income countries and lower middle-income countries, including Nigeria. The overall aim is to improve these countries goods access to the UK market. However, following the scheme, India will lose close to US $1 billion concessional duty access to the UK market.

• Demoralized workers everywhere – It is not only in Nigeria that workers are demoralized. A new global survey by PwC shows that about 25% expect to change jobs in the next 12 months, up from 19% last year, while 42% says they will demand for pay rises. In the last 18 months, most economies have been battling rising costs of living, tightening financial conditions, and weak growth.

• UK underinvesting – A new report from center-left think tank Institute of Public Policy Research (IPPR) estimates that the U.K. has underinvested by about US $638 billion, compared with other G7 members. The report shows gross fixed capital formation, a measure of public and private investment is about 18%, dragging growth and jobs down. Nigeria’s gross fixed capital formation is currently 33% of GDP.

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News Analysis – Diesel Prices and its VAT

The price of diesel since the start of the Russia / Ukraine war February 2022 is dramatically up. In Nigeria, the price of diesel stood at N312/litre in Feb 2022. However increased to N539 in March 2022 and currently stood at an average of N842. This shows that the price of diesel has increased by 170% in one year.

Diesel Prices in Naira

The implementation of a 7.5% VAT on diesel prices will further hike the prices that consumers pay. There are three major consumers of diesel in Nigeria. They are companies and businesses using diesel generators to power their operations and business premises, middle and upper middle-income earners that largely use the 30KVA type diesel generator to power their homes, and transporters with large diesel type engine vehicles.

The Former Minister of Finance, Budget and National Planning, Zainab Ahmed, first raised the VAT to 7.5% from 5% in the Finance Act 2020 on commodities, including automobile gas oil. This was implemented since February 2020, except for diesel.

This Week

• The Bank of England Monetary Policy Committee meets tomorrow Thursday 22 June 2023. Ahead of that, inflation figures for May will be released today.