1 Nigeria’s Economy After Oil : How should we prepare?
Nigeria’s Economy After Oil : How should we prepare?
INTRODUCTION
C
rude oil is one of the principal sources of
energy to the World. In 2018, its market
share was 34%, other principal sources of
energy were Coal and Natural gas with market
shares of 27% and 24% respectively.
What does crude oil do for the World? It
helps us to transport our vehicles, power our
factories and heat our homes. According to the
US Energy Information Administration (EIA), in
2018, the US consumed 20 million barrels of oil
per day - 69% on transportation, 25% to power
her factories, 3% to heat their homes and the
remaining 3% in other areas.
A further breakdown of the 69% or 14.2mbpd
on transportation shows that motor gasoline
is 45%, Kerosene-type jet fuel is 8% and the
remaining 16% is mainly for diesel powered
vehicles.
2
The US is 25% of the World economy, the rest of
the Organization for Economic Co-operation &
Development (OECD or the rich World) another
25% and China 14%. This means that China and
the rich World represent about two-thirds the
output of the World. We believe that the pattern
of oil consumption in the US is not materially
different from that in these countries and
indeed the rest of the World.
This means that it is safe to assume that the
principal uses of crude oil in the World are
transportation, powering industry and heating
our homes. It is also safe to assume that about
half of the consumption is for transporting
vehicles.
 3 Nigeria’s Economy After Oil : How should we prepare?

What is happening in the automobile industry?

Automobile companies in the World are investing heavily in Electric Vehicles (EV) and Hybrids that
will reduce gasoline and diesel consumption and Co2 emission significantly consequently reducing
the demand for crude oil significantly.

According to OPEC, the demand for crude oil grew from 77mbpd in 2000 to 100mbpd 2019. This
represents a 30% growth during this 20-year period. However, a breakdown shows that all of this
growth came from China and the developing World. In fact, the demand for crude oil from the
OECD countries was 48mbpd in 2019 same as in 2000. The demand for crude oil in the rich World
peaked at 50mbpd around 2005, has dropped to a current level of 48mbpd and is projected to drop
even further as the World embraces EVs and Hybrids.

On the supply side, OPEC controls 80% market share of the crude oil reserves of the World, but has
only 32% market share of supply. Why? This is because OPEC pursues a strategy of price optimization.
This means that the cartel acts as a swing producer of crude oil, bringing just enough crude oil into
the market to balance supply after the non-OPEC production (NOPEC) is accounted for. Over the
years, this has meant loss of market share to NOPEC members.

NOPEC production has increased from 46mbpd in 2000 to 64mbpd in 2019. This represents a
growth of 18mbpd and 13mbpd of this has come from the USA, largely from the fracking of shale.
What has this meant for the USA? In 2000 the USA consumed 20 million barrels of oil per day and
produced only 7mbpd making it a net importer to the tune of 13mbpd. In 2019 she still consumed
20 million barrels of oil per day but produced 18mbpd and net import was only 2mbpd. Sometime
during the next two years, the USA, the largest consumer of crude oil will become a net exporter
of this product.

The balance of power in the World crude oil market is shifting from the Saudi-led OPEC to
the USA largely as a result of the fracking of shale. OPEC has enlisted the support of Russia
in an alliance that is labelled OPEC+ but they are yet to exercise significant control on the
price of crude oil. In fact, it seems as if the era when the average annual price of crude
exceeded US$100 per barrel has gone for some considerable period and OPEC members
must learn to live with an average annual price in the region of US$60 per barrel. What is
the outlook for crude oil price over the next decade?

In my opinion, the long-term outlook for the demand for crude oil is weak because as the
World continues to be more concerned about the environment, embrace EVs and Hybrids,
the World demand for crude oil will begin to fall. This, with rising NOPEC production will
therefore continue to put a downward pressure on the price of crude oil. Even if OPEC
changes strategy and starts pursuing market share, at best the cartel will sell a little more
oil at much lower prices.
Nigeria’s Economy After Oil : How should we prepare? 4

NIGERIA AND THE OIL CURSE

What does this grim outlook mean for Nigeria?

Let’s first understand what crude oil has done and still does for the Nigerian economy.

On the external side, crude oil has provided Nigeria with a sizeable amount of USD revenues
which we have used to trade with the rest of the World. According to the CBN, during the past 20
years, total USD inflows into Nigeria on the trade side was US$1.5 trillion; US$1.1 trillion or 79%
came from selling crude oil and natural gas to the rest of the World and US$0.3 trillion came from
remittances from Nigerians working abroad.

Businesses in Nigeria have used these USDs to equip their factories, buy raw materials and some
have imported finished goods for resale. Households have used these USDs to buy cars, houses in
the UK and the USA, educate their children abroad, buy healthcare from UK and the USA and fly
foreign airlines to and from key capital cities in the World. In short, crude oil has helped Nigerians
finance a lifestyle that is significantly above our productive capacity.

Even with crude oil, our 200 million people produce goods and services worth only US$0.4 trillion
annually, the 320 million people in the US produce US$20.5 trillion annually.

On the fiscal side, crude oil has provided the government with a large amount of oil revenue in
the form of oil taxes (PPT, Royalties and rents paid by oil companies on their share of the crude oil
produced) and proceeds of the sale of the Government’s equity crude. During the past 20 years, the
federation account received NGN 87 trillion in oil revenues and NGN 29 trillion in non-oil taxes
making a total revenue of NGN 116 trillion. This money was shared NGN 53 trillion to the FGN, NGN
40 trillion to State Governments and NGN 23 trillion to Local Government Areas.

The NGN 53 trillion of the FGN was spent paying interest on loans (NGN 15 trillion), payroll and
pension (NGN 26 trillion) and capital expenditure (NGN 15 trillion).

With respect to money and banking, average annual rate of inflation in Nigeria for the past twenty
years is 12%. This means that knowledgeable investors who want to lend money to the FGN for any
considerable period will seek a return higher than 12%. If the FGN, who can print money to repay
its loans, borrows ten-year money at around 14%, most households will have to borrow for the
same tenor at about 20%. How many households can service a ten-year mortgage at this interest
rate? Mortgages do not work in high inflation environments!

The long-term rate of inflation in Nigeria NGN is 12% compared with 2% for the USD resulting
in a difference of 10%. In spite of this difference, successive Governments have been promising
Nigerians stable NGN/USD exchange rates. In reality, exchange rates have moved from NGN110/
 5 Nigeria’s Economy After Oil : How should we prepare?

US$1 in the year 2000 to a current rate of NGN360/US$1.

In periods of high crude oil prices, Nigeria uses her USD earnings to support the exchange rate but
in periods of weak prices she allows sharp currency depreciations. Therefore, exchange rates move
in steps instead of a gradual depreciation of close to 10% per annum.

Severe devaluation of the NGN is usually accompanied by a banking crisis. This is because weak
crude oil price drives the economy into recession, devaluation increases the financing needs of
businesses and those who owe hard currencies suffer large exchange losses. All these weaken
the ability of businesses in the real sector to repay their loans resulting in large credit losses that
erode banking industry capital.

Government should then use these three sectors – external trade and investment, tax revenues and
the financial sector to help businesses and households to thrive. What happens in Nigeria is that
we experience economic booms in periods of high oil prices and recession when prices fall.
Nigeria’s Economy After Oil : How should we prepare? 6

HOW SHOULD WE PREPARE FOR LIFE AFTER OIL?

Our goals are threefold

1. Improve income 2. Better manage

distribution population

3. Grow output

These three things are the key determinants of peace and prosperity in a Nation. The output is
what is shared amongst the residents of a country, if it is large and growing, there is a lot to go
around. If the population is not growing as fast as the output, there is even more to go around on
a per person basis. Therefore, both the numerator and the denominator determine the prosperity
of nations. If the output is fairly spread, this adds peace to prosperity as people would not need
embrace violence in order to access basic services.

Therefore, with respect to output, our objective for the next decade should be to increase output
at least two and a half times from USD 400 billion to at least USD1.04 trillion within a decade.
This translates to a compounded growth rate of around 10% per annum. During the same period,
population growth should not exceed 1.5% per annum. This means that by the end of the decade,
Nigeria’s population will be around 232 million and average income per person will be US$4,500
compared with US$2,000 today. With respect to income distribution, the objective should be to use
the tax system to ensure that no adult earns less than half the average income per capita.

These objectives might appear ambitious, but I believe with honest and competent management
of our economy, we can achieve them. Currently, more than 40% of our working population is either
unemployed or underemployed. Getting these people to work alone will boost output significantly.
 7 Nigeria’s Economy After Oil : How should we prepare?

With respect to population, we need to educate women about the benefits of child spacing,vaccination
and other things that will help a child survive into adulthood. Most importantly, Government, at
grassroot level, must help young ladies acquire skills that are valuable and marketable and, if
necessary, provide them with seed capital so that they can earn.

These steps will cost money and we shall discuss how it will be funded later. However, if done with
honesty and competence, population growth will slow as women
• on average marry a bit later in order to first acquire skills,
• have at least two years between each child,
• have fewer children because the odds are that these children will survive, and
• prosper from their earnings

The next step will be to fix infrastructure principally – electric power, railways and roads.

The FGN should not reverse the privatization of the generating companies (GenCos) and distribution
companies (DisCos). She should complete the Power Sector reform focusing on the following three
key areas

• Gas
• Tariff
• The National Grid

With respect to gas, the FGN should stop regulating the domestic price of natural gas. We understand
that the principal reason for this regulation is that government wants the poor to be able to access
electric power. However, setting gas prices at uneconomic levels discourages investments in gas
infrastructure. The owners would rather treat and export the gas at market price and for USD.
Again, we have always been told that Nigeria is a gas province that has some crude oil. This means
that if we encourage the owners of gas to invest in gas infrastructure, it wouldn’t take them long
before they realize that infrastructure cost is sunk cost and start discounting the price of domestic
gas surplus to their requirements.
Government should work with the industry operators and evolve a tariff with two principal
objectives in mind

• An efficient player must be able to cover his cost of capital

• Poor households should be heavily subsidized
Nigeria’s Economy After Oil : How should we prepare? 8

A poor household could be defined as one who lives in one or two rooms, has a few light bulbs,
one electric fan, an electric iron and a refrigerator. It is easy to estimate the monthly consumption
of such a household and possible to subsidize consumption up to that threshold heavily. Once the
household buys an air conditioner, it begins to pay market price! In substance, we let businesses
and affluent households pay for poor households. In my opinion, this will still be cheaper than
burning diesel to generate electricity!

The final piece in the electricity reform is the national grid. We need a grid that is more efficient
and with greater capacity to carry electricity. Should the government own it fully and manage it?
Again, No! The reason often adduced for government ownership of the national grid is – Security.

In the UK, their NEPA was called the Central Electricity Generating Board and had responsibility
for generation and transmission in England and Wales. In the 1990s, the generation activities were
transferred to three companies and its transmission activities to the National Grid Company plc.

National Grid Company plc was first listed on the stock exchange in 1995 and today, it is privately
owned and one of the FTSE100 companies in the UK. It also operates 14,000 km of electricity
transmission delivering electricity and gas to Massachusetts, New York and Rhode Island in the
USA and Mr. Trump has not raised any security concerns! Of course, the national grid can be owned
by the private sector as long as they are not enemy aliens.

Even if the FGN wants to own the grid, does she have the money required to improve the efficiency
and capacity of the grid? Will the NASS approve these sums for investment in the grid instead
of their constituency projects? Will government have the presence of mind to allocate enough
resources annually for the maintenance of the grid? In decision making, will political exigencies
not have priority over economic considerations?

Once we have a tariff that allows efficient players to cover their cost of capital, gas to use to
generate electricity and a national grid that can evacuate electricity generated, supply of power
will improve significantly.

With respect to railways, the FGN should, unbundle the industry into
• railway infrastructure (tracks, signal and stations)
• rolling stock (the trains that ply the routes)

The railway infrastructure should link Abuja to all state capitals and all the ports. The FGN, State
governments and private sector businesses should own the railway infrastructure and again, the
private sector businesses should own majority stake. Rolling stock should be owned 100% by the
private sector. In substance, tracks and signals are like inter-city highways while the rolling stock
is like having buses that ply the highways. If government is not competing with Ekene Dili Chukwu
on the intercity highways, why would they want to own and manage trains?
 9 Nigeria’s Economy After Oil : How should we prepare?

Government should act as an independent regulator, divide the country into zones and have these
private sector businesses bid for these routes. In agreeing passenger tariffs with them, the regulator
will negotiate discounts for the young, the elderly and the physically challenged. Subsidies obtained
in this manner do not blow big holes in government budgets.
With respect to education, there are two principal groups that we would need to focus on
• Those that have already “completed” their education
• Those currently in school and new entrants

There is urgent need to re-train those who have “completed” their education embracing the
following steps
• Identify the things we need to produce (e.g. food, clothing, houses, cars)
• Identify the skills we require to produce these things
• Train teachers
• Identify how we shall use technology to scale and customize teaching
• Retrain and certify

For the second group, that is those currently in school and new entrants, we need to review our
curriculum, better align it to the needs of the Nation and re-train teachers to ensure they can
deliver, again using technology to scale.

The government should then act as a strong independent regulator of schools ensuring compliance
with standards agreed.

The challenge on the healthcare side is huge and resources are limited. However, the population
is young and lifestyle changes can help reduce the amount of money the country would need to
fund healthcare significantly.

The FGN should not own secondary schools. She should hand these secondary schools to eminent
old boys who will act as Trustees in perpetual succession and manage these schools. Government
(federal, state and local) can of course provide scholarships to indigent students who qualify to
attend these institutions.

Universities in Nigeria need to overhaul their funding models. They need to be able to attract
funding from users of their services, governments and philanthropists from Nigeria and above. This
means that they must overhaul the way they govern their institution and ensure greater fairness,
transparency and accountability.
Nigeria’s Economy After Oil : How should we prepare? 10

The key areas of focus with respect to healthcare are

2. Facilities 4. Other clinical staff

1. Life style changes 3. Doctors 4. Funding

Through advocacy, Nigeria can significantly reduce what is required to fund healthcare focusing of
diet, exercise, safety and environment. For example, reducing salt and oil intake and taking regular
exercise can improve health and productivity of the Nation. Another low hanging fruit is that
improving how we drive can save numerous lives.
We need to encourage government, private sector (profit making and charities) to build and equip
facilities and employ clinical and other staff who will manage these facilities.

These groups, particularly profit making institutions, will only invest if they can cover their costs of
capital. A good doctor is valuable, marketable and tradable internationally. This means that he/she
is valued in USD or any other international currency and not in NGN or any other weak currency.
This means that what we pay him locally must be competitive internationally otherwise he/she
moves!

Government revenue (federal and states) per person per annum is about =N=50,000 or USD140.
This cannot be enough to provide high quality healthcare and education to all for free.

The UK’s National Health Service (NHS) has a budget of about GBP140 billion (USD196 billion) per
annum. About 80% of NHS funding comes from general tax revenue and the balance comes from
NHS contributions by individual taxpayers and their employers. This means that, in addition to
personal income tax, most people pay about 10% of their salaries plus benefits as NHS contributions;
their employers also pay a similar sum. Therefore, the UK spends about GBP2,100 (USD2,750) per
person per annum on healthcare. Although free at the point of delivery, residents of the UK pay a
significant amount of their earnings for healthcare.

In the US, healthcare spending is about USD10,000 per person per annum and this is funded
largely through employer assisted health insurance.
11 Nigeria’s Economy After Oil : How should we prepare?

Even if Nigeria, spends a paltry USD500 per person per annum on healthcare, this translates to
USD100 billion per annum or NGN36 trillion per year! How do we pay for this when aggregate
government revenue (all tiers of government) is about NGN10 trillion?

To fund healthcare, everyone needs to contribute. In my opinion, the most viable way to fund
healthcare is through insurance. Individuals buy health insurance and government buys insurance
for the poor and weak in society. In my opinion, good healthcare is a crucial need in our society and
once there is capacity and willingness to pay (through a strong insurance system) service outlets
will grow and quality of services will improve.

Before we discuss, how we fund Government, let us agree her purpose. What is the purpose of
government?
1. Secure life and property
• internal and external security
• strong, independent judiciary that resolves disputes fairly and in a timely manner.
2. Provide social services by helping the poor and weak in the society to access basic services
(education, healthcare, mass transportation, food)
3. Protect the value of the local currency by ensuring that the long-term rate of inflation does not
exceed 3% per annum
4. Help businesses thrive by ensuring
• there is adequate infrastructure,
• it is easy to do business,
• efficient players can grow in a fairly regulated environment, and cover their costs of capital
5. Help households thrive through
• employment/self-employment
• protection of real incomes, savings and pension assets
• home ownership
6. Regulate businesses to ensure compliance with standards, promote competition and ensure fair
trading

How does the Government fund all these things if there is no free lunch anywhere? It is through
taxation.

During the past five years, non-oil taxes collected by all tiers of government in Nigeria averaged
4% of national income. In Angola it was 8%, Ghana 16%, Kenya 18%, South Africa 24% and in the
OECD countries 32%. The World bank says a nation cannot grow meaningfully if tax revenue is less
than 15% of national income!
Nigeria’s Economy After Oil : How should we prepare? 12

Why is Nigeria, generating significantly lower tax revenues than other key economies in sub-
Saharan Africa? Is it the tax rates, is tax compliance or both? The principal taxes in these countries
are corporation tax, personal income tax and Value Added Tax (VAT). Corporation tax rate in Kenya
and Ghana is 30% and 25% respectively, in Nigeria it is 32%. the rate of VAT in Kenya and Ghana is
16% and 15% respectively, in Nigeria it is 7.5%. The top rate of personal income tax in Kenya and
Ghana is 30% and 25% respectively, in Nigeria it is 24%. In Kenya, you get to the top rate when
taxable income exceeds KSH564,709 (USD 5,600), in Ghana it is GHC240,000 (USD 45,300) and in
Nigeria it is NGN 3.2 million (USD 8,900).

This means that with the exception of VAT, tax rates are generally same in these three countries.
Why then does government collect only 4% in Nigeria compared to 16% and 18% in Ghana and
Kenya respectively? In my opinion, it is largely due to poor tax compliance in Nigeria.

What if Nigeria were able to increase non-oil tax revenue to 15% of National income? This means
that Nigeria will generate an additional NGN14.4 trillion (US$40 billion) in revenues every year.
It also means that total Government revenue will be 20% of national income or NGN28.8 trillion
(US$80 billion) per annum compared to the current figure of NGN10.4 trillion (US$28 billion).

We estimate that the obligatory spending (interest, payroll, unfunded pensions and statutory
transfers) of all the three tiers of government is about NGN12 trillion. This means that, if revenue
were NGN28.8 trillion, there will be free cash flow of about NGN14.8 trillion to use to fulfil the
purpose of government. That is to secure life and property, help the poor and weak in society to
access basic services, support young ladies to acquire skills that are valuable and marketable,
partner with the private sector to build railways, repair our roads and improve electricity supply
significantly.

How do we raise the level of non-oil tax revenue? First, reform the tax laws. Focus on Personal
Income Tax (PIT), VAT and Companies’ Income Tax (CIT) and make tax laws simpler. Increase the top
rate of PIT to at least 30%, increase the rate of VAT to 10% and reduce the rate of CIT to 20% but
levy an additional tax of 20% on “Super Profits”. Super profits shall be profit in excess of a target
return on equity for shareholders. In today’s terms that would be return on equity in excess of 30%.
Government should also abrogate all the numerous other levies that, in any case, do not generate
significant revenues.

The second and more important leg of our tax reform is for the Government to show willingness to
enforce tax laws. How should Government show this willingness? I believe the Government should
focus on PIT, forgive all past sins and thus look forward and not backwards. The next step is for
Mr. President to make his PIT returns public annually, then make it obligatory for all those want to
work for him to do the same. He should then look at all of us in the face and say “Woe betides you
if you don’t comply going forward!”
13 Nigeria’s Economy After Oil : How should we prepare?

They should enforce by auditing a sample of individuals, if they have underpaid, ask them to pay
such amounts plus a stiff penalty, if they fail impound their assets, sell and pay government. Don’t
waste taxpayers money throwing anyone into jail and start feeding him.

The biggest culprits with respect to tax evasion are the wealthy 0.1% of the population (or 200,00
individuals) who ought self-assess themselves to tax but fail to do so. The focus should be on them,
not businesses and those in employment who are already largely compliant.

Government (FGN and States) should create infrastructure funds into which they will pay a significant
proportion of the additional revenues raised. They can then use these monies to partner with
the private sector to invest in infrastructure. They will also subject these Funds to independent
audits and make the annual report and accounts of these Funds public. Essentially, subject the
management of these Funds to corporate governance rules that public companies observe.

Nigerians argue that they would start paying taxes when public services improve. I disagree! My
counter argument is that “If you don’t buy shares in Nestle Nigeria, they’re never going to send
a dividend warrant to you!” You must pay your taxes first then seek fairness, transparency and
accountability in the management of your taxes. If the Government forces us to comply, we shall be
more interested in what goes on in there.

Lastly, in partnering with the private sector, Government should use the Nigeria Liquefied Natural
Gas limited (NLNG) model. This means that Government will be a large minority shareholder,
private sector institutions that are knowledgeable in the industry will own majority and manage
the operations using a company incorporated under CAMA as the vehicle for doing business.

The Government should therefore implement the NLNG model in the Oil & Gas (Upstream)
industry, Railway Infrastructure and the National Grid. This will help improve transparency and
accountability in these sectors.

Nigeria can do well in the midst of much lower oil revenues, but we need to make tough choices,
enforce tax compliance, invest in securing life and property, subsidize only the poor and weak
not everyone in town, subsidize in ways that do not blow big holes in the budget of Government,
partner with the private sector in the key areas that will grow output, re-train and certify our work
force, manage our population, account for taxes collected in a transparent manner. Finally, like
good Nigerians, pray that the good Lord should bless our efforts.

Thank you.

Bode Agusto
25 February 2020