BusinessDay

Nigeria faces higher budget deficit on revived subsidy

…Seeks to amend PIA

Nigeria’s Federal Government budget deficit in 2022, already tipped to top public estimates, will rise further with the revived petrol subsidy leaving Abuja with no choice but to borrow more.

The drain of the petrol subsidy on the cash-strapped government’s earnings makes the economic case for the removal of the subsidy, but the government is set to maintain the wasteful practice for at least another 18 months when the current administration would have left office.

The financial burden of the subsidy is fuelling confusion among economists and business leaders who are at a loss on why the government is continuing with it.

For a start, the government will need to borrow more this year to pay for the subsidy initially planned to be phased out in July.

“With additional expenditure against the projected revenue, deficit financing will be needed to support the subsidy budget expenditure,” Nigeria’s largest business think tank, the Lagos Chamber of Commerce and Industry (LCCI), said on Tuesday.

“We are likely to see the government borrow more than projected to finance the bloated expenditure in the face of revenue mobilisation challenge,” LCCI’s director-general, Chinyere Almona, said.

Nigeria is already faced with the risk of recording the biggest budget deficit in history this year if actual revenues continue at the run rate of the past five years, BusinessDay’s analysis of budget implementation data shows.

Taiwo Oyedele, fiscal policy partner/Africa tax leader at PricewaterhouseCoopers (PwC), agrees that the plans to extend the subsidy regime beyond budget provision will put more strain on the government budget, which will, in turn, lead to increased borrowings.

Oyedele also notes that as the government seeks amendment of the Petroleum Industry Act (PIA) in order to sustain the subsidy, the activities of the Nigerian National Petroleum Corporation (NNPC), which according to the Act is expected to run commercially, may return to status quo, thereby undermining the benefits of deregulation.

“The government had said the 2022 budget will only provide for subsidy till June and after that, there will be supplementary budget.

“So that in itself means that we will put more strain on the government budget to fund the subsidy and we will have to borrow more, leading to an increased budget deficit and Nigerians are the ones to pay back all the borrowing,” Oyedele says.

If the NNPC must run commercially, it can not take on the costs of subsidy, but with the government seeking an amendment, the law will be placed on hold and the state oil company’s profitability will be constrained.

The 2022 budget targets revenue of N10.13 trillion and a deficit of N6.258 trillion.

However, if actual revenues look anything like what they have consistently done in the past five years, which is 55 percent of the budget on average, then Nigeria could be left with only N5.57 trillion in revenues. That then leaves Abuja with a deficit of N10.82 trillion, the highest ever and equivalent to a full year’s entire budget. The budget for 2020, for instance, was N10.8 trillion.

This means Abuja’s insistence on selling petrol well below half of the actual market price means the budget deficit may hit N13.82 trillion by the end of 2022, according to estimates that factor in rising oil prices, official government’s figures of N3 trillion yearly subsidy spend and the country’s struggling revenue.

The global benchmark, Brent crude, has gained more than 25 percent to $88 in January, the highest since 2014.

Some in the market now think it is now a question of when — not if — oil hits triple digits of $100 per barrel.

Higher oil prices have been a double-edged sword for Nigeria, which higher oil revenue had been swallowed up by the actual cost of importing petroleum products.

A document exclusively obtained by BusinessDay shows that Nigeria spent N270.83 billion to cater for the cost of petroleum shortfall in December 2021.

This was the highest cost for petrol shortfall in the year when oil prices averaged less than $80 per barrel.

In November and October, petrol subsidy payments stood at N131.4 billion and N163 billion, respectively, according to findings by BusinessDay.

In September, it was 149.28 billion. In August, the under-recovery cost of petrol was N173.13 billion. For July and June, it was N103.28 billion and N164.33 billion, respectively. In May, the cost amounted to N126.29 billion.

Also, in April, March, and February, the under-recovery of petrol amounted to N61.96 billion, N60.39 billion, and N25.37 billion, accordingly.

In January, there was no record for under-recovery.

The long-standing recommendations for subsidy removal, which had been echoed by the World Bank and International Monetary Fund (IMF), have fallen on deaf ears despite the government’s initial stance to abolish the practice by mid-2022.

On Tuesday, Timipre Sylva, Nigeria’s minister of state for petroleum resources, said the Federal Government was making plans to extend the subsidy removal implementation period by another 18 months.

Read also: Politics trumps economics as Nigeria sticks with subsidy

The extension will give all stakeholders time to ensure that the implementation is carried out in a manner that ensures all necessary modalities are in place to cushion the effect of the PMS subsidy removal, in line with prevailing economic realities, he said.

“We don’t intend to remove subsidies now. That is why I am making this announcement. We also see the legal implication. There is a six-month provision in the PIA that will expire in February, and that is why we are coming out to say that before the expiration of this time, as I said earlier, we will engage the legislature,” Sylvia said at a press briefing on fuel subsidy organised by the Presidential Communication Team at the Presidential Villa, Abuja.

According to Sylvia, “We are proposing an 18-months extension but what the National Assembly is going to approve is up to them. We would approve an 18-month extension and then it is up to the National Assembly to look at it and pass the amendment as they see it.”

Laoye Jaiyeola, CEO, Nigerian Economy Summit Group, a private-sector think tank, condemns the move to extend the fuel subsidy removal, stating that paying so much money to fund subsidy is not sustainable for the Nigerian economy.

According to Jaiyeola, the extension will only pave way for more borrowings, as the provisions made in the current budget elapse by July.

“It is bad that we have chosen to continue to spend on subsidy, it is not sustainable. The removal of fuel subsidy is long overdue, so the earlier we get the political will to dismantle it, the better for us,” Jaiyeola says.

The fuel subsidy, conceived initially as a short-term support tool, has endured over time, thereby becoming a threat to fiscal sustainability, he notes.

“In the last three decades, Nigeria has spent substantial government revenue on subsidies, which has become increasingly unsustainable,” he states.

Nigeria’s ever-rising fiscal deficit is yet another sign of the government’s ailing finances and makes a mockery of Abuja’s insistence to continue with a petrol subsidy that gulps north of a trillion naira per annum among other overly expensive ventures of a supposedly cash-strapped government.

The government has often resorted to borrowing to plug its fiscal deficit and the trend seems set to continue in 2022, even though the impact of the borrowings that have increased by over N20 trillion since 2015 has been negligible on an economy that has failed to grow in per capita terms since the same 2015.

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