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FAAC Revenue Sharing Declines as Downstream Oil Regulator Unveils New Regulations

Mar 23, 2023   •   by TheAnalyst, Proshare Research   •   Source: Proshare   •   eye-icon 229 views

Being an Analyst Note issued by Proshare Research on March 23rd, 2023

 

FAAC Slides to N722bn Due to Weaker PPT

The Federation Account Allocation Committee (FAAC) has approved the disbursement of N722.677bn to the three tiers of government, as federation allocation for the month of February 2023. The amount disbursed in February represents a 3.7% decline compared to the N750bn disbursed for January. Analysts attribute the decline to the fall in Gross Statutory Revenue (GSR) which declined sharply from N487bn to N366bn. Earnings from Value Added Tax (VAT) also declined from N250bn to N240bn. Analysts say the recent extension of the N50 Electronic Money Transfer (EMT) Levy to domiciliary accounts is expected to buoy the EMT component of the FAAC disbursement in March. Analysts also attribute the continuous decline in FAAC disbursement to the lower-than-expected earnings from Petroleum Profit Tax (PPT) and royalties, a development which itself is due to a decline in crude oil prices. Analysts say such vagaries would persist until the revenue base of the government is sufficiently diversified away from oil (see chart 1 below).

 

Chart 1:

 

New Regulations to Spur Fresh Investment in the Mid and Downstream Oil Industry

Subject to consultation with stakeholders, section 33 of the Petroleum Industry Act (PIA, 2021) provided for the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) to make regulations on critical industry operations, including licensing, processing, refining, transmission, distribution, supply, sale, and storage of petroleum products. In pursuance of this, the NMDPRA has unveiled six gazetted regulations to spur investment, a competitive market, and economic growth in the midstream and downstream sectors of the petroleum industry. The gazetted regulations are the Midstream and Downstream Petroleum Operations Regulations; Assignment or Transfer of License and Permit Regulations; Petroleum Measurement Regulations; Gas Pricing and Domestic Demand Regulations; Petroleum (Transportation and Shipment) Regulations; and Natural Gas Pipeline Tariff Regulations. While there may be points of overlap in the many regulations the Authority is expected to draft, analysts say the new regulations address specific industry issues that should provide regulatory, legal, and fiscal clarities to the mid and downstream oil operations in the country (see illustration 1 below). 

 

Illustration 1:

 

 

Possible Global Slowdown in Rate Hikes to Favour Fixed Income Market 

The fate of the fixed-income market is currently hinged on the severity of the financial institution fallout and rate hikes. With Central banks torn between taming inflation or watching out for banks, we might eventually see a green light for fixed-income instruments. In 2022, the aggressive monetary tightening took yields to record highs as the negative real return made bondholders sell off to mitigate losses. Although some analysts project a halt to rate hikes to prevent a financial contagion, some still believe the battle against inflation will persist but at a lesser pace. This signals that the rate hike cycle might be ending soon and with global inflation moderating, analysts expect the market to start witnessing some buying interests that will reverse yields from the bearish path. 

 

FG Exempts Telecoms Service From 5% Excise Duty, Contain Hike in Digital Costs 

After six months of intense deliberations with the telecommunications industry stakeholder, the FG has finally been convinced that including the sector in the excise duty will impede the activities of the sector which was already engaged with over 41 taxes and levies and the sector has set an unprecedented record in terms of contribution to GDP. In Q1 2021, the ICT sector alone contributed 14% to GDP, in Q2 2021 the sector contributed 17.9%, in Q2 2022 sector contributed 18.44%. Analysts believe that the outcome of the presidential review on Excise duty is one major step in sustaining growth in the nation’s telecom sector as the implementation of the 5% excise duty in telecoms would have led to a 5% increase in the cost of all telecom services including calls and data as the service providers were to pass the tax to their customers. 

 

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