Cowry analysts see winter come early for Nigerians, businesses, government

BY Phillip Isakpa.

Nigeria ought to be passing through its own summer of discontent this July, this mid-point of the year, if the picture painted by analysts at Cowry Assets Research in a note seen by Business A.M. is anything to go by. As a matter of fact, it’s clearly a long way from the winter season in Europe and America, but the analysts are already drawing our attention to the fact that all the indices on the Nigerian economy point to that awful season happening on everyone in Nigeria already, and that, indeed, we are in for a long and brutal one, for that matter.

The indices clearly point to the fact that nothing is being spared as far as this matter is concerned, not you as an individual reading this piece and operating in this economy, not you as a business (self-employed sole trader or corporate limited and unlimited), nor even the government, especially the federal government that ought to be taking care of things to make sure that some balance is maintained. The starting point is what you can see, what economists call the tangibles. After all, not all hardships come naked to the eyes; some people go through hardship and people around them would never believe them if they told them how hard things are for them. It is what it is!

So, everyone is going through the pains of what now seems to be fuel scarcity as the queues return to the cities to cause that disruption that very often eats into the souls of Nigerians when they think of the fact that the grounds of their country holds a large amount of crude oil, and that a compliment of four refineries, Port Harcourt Refinery 1 and 2, Kaduna Refinery and Warri Refinery, have not produced any petroleum product for at least 10 years, yet have a full suite of executives, management, board and staff with rolling budgets, including covering trainings at home and abroad.

At the heart of this shenanigan, obviously, is the matter of subsidy and how it has eaten up the resources of the federal government that it is now quite a task managing it in the face of dwindling revenues. The decision as to whether to let it go or not remains one that the rabbit is refusing to jump out of the magical hat of the country’s magician politicians, hence their inability to tackle this matter suggesting how much their heart seems to be stuck in their mouth!

According to Cowry Assets Research analysts, who chose to provide some comparative context to the whole matter, Nigerians pay N174 ($0.42) averagely as the retail price for PMS on the domestic front, referring to data from the National Bureau of Statistics (NBS) per June’22. Comparing with what obtains in neighbouring countries, the analysts let us know that in Cameroun you get a litre for $1.26; Chad ($0.87); Togo Republic ($1.28), Benin Republic ($1.19), and Ghana ($2.17), thus establishing an average price from the different prices of petrol at N412 ($0.99) per litre, as the Nigerian Bonny light crude sells for an average of $118 per barrel.

Putting that information into context, especially going by the average market price, the gap between the realistic price and the subsidy comes into relief. The Cowry analysts refer to the state-owned oil giant, NNPC, as admitting that Nigeria spent N1.4 trillion on petrol subsidies in 2021 and that N4 trillion will be expended in the 2022 fiscal year. Based on this scenario, they warned that they see any three-fold hike causing a spike, adding, “We see this threefold spike in subsidy to further widen Nigeria’s fiscal deficit and in turn, increase the debt burden.”

Notwithstanding this scenario, the analysts flag a planned deduction of N126 billion by the NNPC from the June FAAC allocations to states that is likely to put more screws to the economy nationwide and cause more hardship.

The Cowry Assets Research analysts acknowledged that for years Nigeria has been unable to maximise the financial benefits from what should naturally be an oil windfall due to vandalism, ageing infrastructure and inadequate investments in oil fields, as output remains significantly below the country’s OPEC quota of around 1.8mbpd.

The debate on what to do about oil subsidy is one that has been on for a long time; and as it is now, given that the Buhari government is leaving next year, Cowry Assets analysts think it logical a burden to be left for the next government to tackle. They add that this will see subsidies absorbing a significant portion of the nation’s revenue from oil, with the anticipation that this asset will rise in the near term.

“Basically, the planned subsidy removal on PMS by FG may leave Nigeria on a fiscal cliff edge,” they warned.

Now, with that much background given, identifying the winter that has come so very early to hit Nigerians, businesses and the government, Cowry analysts pin a take off point in the resurgent fuel queues that have spread across the country, which they say is an indication of fuel scarcity. This they say could birth dire consequences that could leave the average Nigerian in a perilous situation, “worsened by the spike in the insalubrious rate of inflation, rising energy and commodity prices, as well as induced pressure on profit margins of most manufacturing companies and other businesses, who will record an unprecedented increase in their operating costs,” they opined.

The direct consequences of the subsidy and fuel queues impasse are the soaring cost of living for Nigerians, businesses who are left to grapple with rising operating costs as the price of diesel seems to never stop its upward climb, and you can add that to the lingering forex scarcity, among other structural severities the economy faces to understand how early your winter has come.

With petrol in short supply, the analysts say, it has opened the way for the black marketers across Lagos, Abuja and other major cities to thrive, allowing perpetrators to profit from this development as they resort to hoarding the supplies and then selling at around N300 per litre; compounding an already nerve-wracking situation, bringing woes to consumers in the face of shrinking incomes. “On this, the subsidy regime may present a massive incentive for smuggling across the border,” they offered.

The analysts consequently offered the following opinion: “Taking a cue from the foregoing, we comment that this mound reality is likely to place Nigerians in an even more perilous situation where price increases will negatively affect consumption levels and aggregate demand of consumers who are already embattled with sustained income squeeze. Thus, a hike in transportation costs is inevitable.

“Also, the turnover (and to an extent, the profits) of businesses, most probably the manufacturing firms will witness impairments from increased expenses as a result of the increased cost of operations which may lead to the layoff of staff in a bid to cut costs.

“However, the planned deduction by the NNPC from states’ FAAC allocation for June will likely compound the financial woes of governments which may be forced into more borrowings to fund capital expenditure, and non-capital expenditure (salaries and pension payments).

“The above, however, may steer the thinking of the governments to cut salaries and pensions.

“On the bright side, the earnings for oil and gas firms in Nigeria are expected to soar significantly; taking due advantage of the continued rally in the crude oil price to above $100 per barrel in 2022.”