Moves by the Federal Government (FG) to increase its revenue in order to fund the record N10.33 trillion 2020 budget appeared to gain momentum in the just concluded week as President Muhammadu Buhari, on Monday, November 4, 2019 assented to the amended Deep Offshore and Inland Basin Production Sharing Contract (PSC) Act (2004) governing the PSC agreements between the FG and the international Oil Companies (OICs).
Essentially, the amendment made provisions for price reflective royalties and periodic review of royalties payable.
Under the previous fiscal regime, offshore projects between 200metres (m) to 400m paid 12 per cent, Projects from 401m to 800m paid 8 per cent, while those from 801m to 1,000m paid four per cent. Deep offshore projects above 1,000m did not pay any royalties.
However, 2019 amendment prescribed a flat rate of 10 per cent across offshore projects from 200m water depth.
Additional royalty payment, to the 10 per cent flat rate, based on price range include: from USD0 to USD20 – zero per cent; above USD21 to USD60 – 2.5 per cent; above USD60 to USD100 – four per cent; above USD100 to USD150 – eight per cent; and above USD150 will attract 10 per cent.
Meanwhile, the crude oil price (bonny light) climbed to USD62.29 on Wednesday, November 6, 2019 from USD59.46 on Thursday, October 31, 2019; hence potentially increasing royalty collections.
Prior to the President’s assent to the amended Act, the Joint House (House of Representatives and Senate) passed a provision of new Section (18), which makes the offender, on conviction, liable to a fine not below N500 million or to imprisonment for a period not more than five years or both.
In the monetary sector, CBN depository corporations survey showed a 0.61% month-on-month (m-o-m) decline in Broad Money Supply (M3 money) to N35.03 trillion in September 2019.
This resulted from a 11.40% decrease in Net Foreign Assets (NFA) to N13.91 trillion which offset partly a 8.06% increase in Net Domestic Assets (NDA) to N21.12 trillion.
On domestic asset creation, the increase in NDA was chiefly driven by a 4.74% m-o-m increase in Net Domestic Credit (NDC) to N35.92 trillion, mellowed by a 0.35% m-o-m rise in Other Liabilities (net) to N14.80 trillion. Further breakdown of the NDC showed a 10.53% m-o-m increase in Credit to the Government to N10.45 trillion and a 2.54% rise in Credit to the Private sector to N25.47 trillion.
On the liabilities side, the 0.61% m-o-m decline in M3 Money was driven by the 3.86% decline in treasury bills held by money holding sector to N7.37 trillion, which was partly offset by a 0.25% m-o-m increase in M2 Money to N27.66 trillion.
The increase in M2 was chiefly driven by a 1.18% rise in Quasi Money (near maturing short term financial instruments) to N16.53 trillion, as Narrow Money (M1) declined by 1.10% to N11.25 trillion (of which Demand Deposits fell by 1.00% to N9.50 trillion as well as currency outside banks moderated by 1.71% to N1.63 trillion).
Reserve Money (Base Money) rose m-o-m by 0.32% to N7.00 trillion, also Bank reserves increased m-o-m by 0.77% to N4.68 trillion, partly offset by a 0.66% decline in currency in circulation to N2.01 trillion.
We feel the amended PSC Bill, given the 10% flat rate on offshore projects from 200m could help stabilise Nigeria’s oil revenues even if crude oil prices moderate.
Meanwhile, we note that the improvement in credit to the private sector was induced by the recent CBN’s policy of 60% loan to deposit ratio which the apex bank mandated deposit money banks to maintain in September 2019.
The loan to deposit ratio, targeted at stimulating real sector growth, was increased to 65% by the apex bank (effective from Dec. 2019) and, coupled with its restriction on OMO transactions to DMBs only, we thus expect credit to private sector to further rise with a resultant growth in production output.
However, we saw credit to government increase by 10.53% as both foreign and local investors opted for safer investment option amid policy uncertainty and rising insecurity challenge.