Adjusting the conversion of dollar rate for oil proceeds to the naira and putting an end to fuel subsidies could add about N200 billion to monthly funds shared by the various tiers of government in Nigeria, analysis shows.
The fall in oil income and economic impact of COVID-19 have reduced funds available to be distributed under the Federal Accounts Allocation Committee (FAAC), forcing the government to raid its savings such as excess crude account, stabilisation account, and even Nigeria LNG dividend to push up FAAC to at least N600 billion required each month.
Zainab Ahmed, Nigeria’s finance minister, on Monday said the country recorded a shortfall of almost N50 billion in the March FAAC, and there was not much money in other accounts other than N8.5 billion found in the exchange rate differential account, which it added to FAAC, pushing it to N605 billion.
But this shortfall could worsen, leading analysts to recommend ending fuel subsidy as a way out and adjusting how dollar oil proceeds exchanged in naira.
Subsidies, by government estimates, cost Nigeria between N80 billion and N100 billion monthly captured as ‘under recovery’ in the accounts of the Nigerian National Petroleum Corporation (NNPC), depending on oil prices.
For example, according to the NNPC March FAAC report, the February 2021 value shortfall of N73 billion would be deducted from March 2021 proceeds. This shortfall is due to subsidy deduction.
Since this spending is not appropriated by the National Assembly, it is treated as a cost of doing business by the oil corporation, leading to at least a drop of N100 billion into FAAC’s monthly pot at the current crude oil price.
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A recent PwC report noted that the President Muhammadu Buhari-led administration spent N1.12 trillion on petrol subsidy within a period of three years.
Wolemi Esan, energy partner at Olaniwon Ajayi, said rather than investing this much on fuel subsidy, priorities might be redefined such that such costs, in a phased manner, be re-directed towards revitalising infrastructural deficit in the country.
“This would go a long way in reshaping the cost and standard of living in Nigeria as well as attracting the influx of investment-related and commercial activities in the country,” Esan said.
However, there are concerns shared by government officials that removing subsidies will fuel hardship for Nigerians, as the finance minister said the government was also concerned that it could further worsen inflation.
According to Esan, efforts to improve refining to boost local content and local production will increase drastically, and there may not be a need for subsidy in the first place.
“More so, to further hedge any risk of hardship being meted out on Nigerians, a phased removal of petroleum subsidies is being proposed,” Esan said.
Fuel subsidy is encouraging the smuggling of refined petrol across the borders, which is eroding value for Nigeria. Furthermore, states too do not have a say in how their portion of the subsidy budget is spent.
Some states may choose to invest their share in providing health insurance for their people or build badly needed infrastructure instead of buying petrol for them, as the latter benefits only the well to do who can afford cars mostly in big cities like Lagos, Abuja and Port Harcourt.
Another argument against subsidy is that mass transit vehicles, public transportation, trailers and lorries for haulage of goods already run on diesel, which is already deregulated and currently retail at N265/litre.
Some analysts have also called for a reform of the rate at which proceeds from crude oil export, royalty, petroleum profit tax, and dividend from NLNG are converted to the local currency.
That conversion of oil proceeds to the local currency is done today at between N389 and N400 a dollar. By simply moving this to a mean of N450/$1, the allocation account of the federation could swell by anything from N80 billion to a high of N100 billion each month given rising crude oil prices.
“We have also seen these numbers. We know that the difference between the current rate of converting FAAC allocation and the so-called mean rate of around N450 to the dollar could theoretically amount to increasing FAAC allocation by as much as one-seventh of N600 billion,” a senior Federal Government official told BusinessDay.
The fear that such an adjustment could trigger a further spike in inflation is mitigated by the fact that the blended rate, which leading firms use for pricing their inventory replacement, is already at the market rate for the dollar. While they used the rate of N360 to the dollar in January 2020, manufacturers were applying the rate of N470-N476 to the dollar as of January this year.
The blending rate is the average rate at which manufacturers access foreign exchange used for importing their raw materials. This is typically the average rate derivable from merging the FX manufacturers secure from the official CBN channel with the FX from the parallel market, and arriving at an effective rate.
The Federal Government has been working itself into lather over the revelation by Godwin Obaseki, Edo State governor, that the CBN printed between N50 and N60 billion monthly to augment March 2021 FAAC due to dwindling revenue.
“The issue that was raised by the Edo State governor for me is very, very sad. Because it is not a fact,” the finance minister told journalists in Abuja.
“What we distribute at FAAC is revenue that is generated, and in fact, distribution revenue is public information. We publish revenue generated by FIRS, the customs, and the NNPC and we distribute at FAAC. So, it is not true to say we printed money to distribute at FAAC, it is not true,” she said.
This argument misses the larger issue raised by the governor that the country’s expenditure profile is rising faster than the revenue, and states in Nigeria are increasingly unproductive.
According to data by the National Bureau of Statistics (NBS), the internally generated revenue of Nigeria’s 36 states and Federal Capital, Abuja, amounted to N1.31 trillion in 2020 compared to N1.33 trillion recorded in 2019, indicating a negative growth of -1.93 percent year-on-year.
