Weekly Economic And Financial Commentary – July 27, 2020
Given the broad expectation for a rebound in economic activities in 2021, with the IMF projecting a growth of 2.6% in 2021 from a forecast contraction of 5.4% in 2020 (we estimate a contraction of 2.9% YoY), the FGN is also adopting more prudent measures to increase its revenue. Largely, the effort as outlined in the 2021-2023 fiscal strategy paper focus on reducing the costs lines across revenue segments in a bid to increase actual retained revenue. With the pressure occasioned by the decline in oil prices on actual retained oil revenue, the FGN is now adopting measures to reduce the cost of crude oil production. From current average oil production cost of $23/barrel, the FGN cost optimization measures which includes lowering of logistics, security, and transportation costs, is expected to lower the cost of production to $10/barrel in 2021. Also, with adoption of a market reflective PMS price, the cost of subsidy/under-recovery borne by NNPC is expected to unlock additional revenue for the federation account. Other measures targeted at increasing oil revenue include accelerating licensing of Marginal Oil Fields and renewals of existing licenses as well as ramping up production from previously shut-down oil wells. Intuitively, the gradual convergence of the official rate towards the NAFEX rate could also increase the naira translation of oil proceeds, even in 2020.
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