Nigeria’s petroleum Industry Act (PIA) is likely to provide modest uptick to economic growth in the coming years, albeit not without constraints as that will tamper the positive growth, doing little to rescue the beleaguered economy, Fitch Solutions predicts.

According to the research firm, insecurity that is driven by Islamist insurgencies, banditry and increasing inter-communal violence over natural resources presents an acute and growing threat. This is not only in the economically marginal north east, but across Nigeria’s northern and central states, Fitch Solutions asserts.

“We at Fitch Solutions expect the adoption of the Petroleum Industry Act (PIA) to provide mild tailwinds to Nigerian economic growth in the coming years, and have upwardly revised our average real GDP forecast for 2021-25 from 2.6% to 2.8%.

“… despite the PIA being hailed as a transformative step for the oil industry and the wider economy, we expect significant constraints on economic growth to persist in the coming years.”
Fitch Solutions

Prospects of Petroleum Industry Act

The PIA (then known as the Petroleum bill) was signed into law on August 16, 2021 by President Muhammadu Buhari after a protracted political process spanning nearly 20 years.

That notwithstanding, Fitch Solutions expects that the new legislation which intends to revolutionize oversight, regulation and taxation of the hydrocarbons sector will provide greater certainty for the industry. Thus, this will support a modest rise in investment and oil production, in the coming years, Fitch Solutions suggests.

Given the sector’s numerous linkages across the economy with oil accounting for 88.7% of merchandise exports in 2020, Fitch Solutions expect the PIA’s adoption to have wider positive implications for Nigeria’s medium-term economic outlook. This will improve foreign reserves and government revenues.

As a result, private investment will rise as a result of financial incentives for oil companies, and improvements in policies governing the sector.

Fitch Solutions has therefore revised its forecasts upwards. As such, fixed investment is now expected to grow by an average of 5.0 per cent during 2021-2025 (compared to our previous forecast of 4.2% growth). This will also feed into a rise in investment as a share of GDP from 14.7 per cent in 2021 to 16.0 per cent in 2025.

In particular, the Petroleum Industry Act streamlines the regulatory environment by doing away with a bundle of earlier legislation. Thus, it replaces the numerous existing oversight bodies with two new, reformed regulatory agencies– the Nigerian Upstream Regulatory Commission and the Nigerian Midstream and Downstream Petroleum Regulatory Authority.

Also, it simplifies the tax regime, and introduces a lower royalty rate (7.5%, as against the earlier 10.0%) for oil companies operating in the deep-water sector, and stipulates the creation of a new Frontier Exploration Fund that will support new exploration activity.

Headwinds to slow down growth

However, based on the aforementioned destabilizing conditions, they will continue to deter foreign and domestic business investment in non-oil sectors in the coming years. Further, these will lead to ongoing disruptions to local economic activities such as farming, and limit prospects for job creation.

Social unrest will also remain a big challenge in the south. While the PIA stipulates the creation of special funds to support communities living in close proximity to oil projects, the success of similar schemes in the past has been mixed.

Moreover, it is likely that target groups will demand a larger share of the oil wealth than is envisaged in the legislation, leading to protests and limited militant activity, Fitch Solutions notes.

Based on these factors, the research firm has retained a relatively low Long Term Political Risk Score of 46.3 for Nigeria (scores out of 100; higher score indicates lower risk).