• Friday, September 29, 2023
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Oil price subsidy: A double-edged sword for Nigeria’s 2021 budget

Finance minister, others oppose repeal of Customs Act 2004

Nigerians may have been made to believe that the petrol subsidy has been removed in recent times, but the fact is, the claims by the government is far from reality.

The minister of finance, Zainab Ahmed re-echoed in the recent highlights of the 2021 Federal government budget and appropriation act on Tuesday, stated that “there was no allocation in the budget for subsidy”.

Theoretically, that was intelligently accurate but practically, it was laced with some elements of inaccuracy which was premised on the fact that the N3.9 trillion which has been budgeted as revenue for 2021 is not the true/overall revenue, it is rather the retained revenue after all cost had been accounted for and that is what is reflected in the budget.

The proof that shows Nigeria is still paying petrol subsidy can be obtained from the landing cost of petrol which is now around N180 per litre, higher than the pump price of N162 per litre amid a 45 percent increase in the global crude oil price.

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The implication of a continuous petrol subsidy scheme which means the federal government will not increase pump price is the fact that the federal government would struggle with meeting its revenue expectation in the 2021 budget, a budget that is expected to take the country’s troubled economy out of recession.

Nigeria was at the brink of getting petrol below landing cost in the early parts of 2020 when crude oil prices tanked below $20 and oil prices still stood at N305. At that point, the government had the opportunity of letting go of subsidy and still generate profit subsequently but wrong initiatives were put in place as the government passed it on to the general public in the form of ‘underlying subsidy’ and thus reduced the pump price.

The problem however emanated when the prices had to be subsequently increased in the latter part of the year as a result of the devaluation of the currency which spurred agitation in the hearts of the Nigerian populace.

Hence, with conversion rate at N379, there is absolutely no way $50 oil at N379 would not be a far greater cost than $14 oil at N305. What this means for the budget and the Nigerian economy at large is an inevitable bi-directional hit which is in two-fold.

First, the federal government could decide not to pay the subsidy and increase the pump price of petrol to reflect market reality considering the budget has been forecasted to have a deficit of close to N5 trillion.

Second, would be to ignore increasing pump price and continue undertaking the recovery cost at the peril of getting a revenue lower than N2 trillion because the cost would increase for the government making the net revenue decline.

These outcomes finally boil down to the speculations of what the federal government finally decides to implement and they are both accompanied with individual consequences.

The consequence of the first decision of increasing pump price to reflect market reality would stir up an immediate inflationary economy. Nigeria as we all know is heavily dependent on fuel to run the economy and once this happens the trickle-down effect would be instantly felt in the economy.

The implication of the aforementioned scenario would lead to increase in transport fare; the person who has to enter the bus to deliver foodstuff, would then increase the price of his food, the people in logistics would increase the price of services as well as delivery charge, the office which needs to run their businesses with a generator would definitely increase the charge for their service delivery, the vulcanizer who needs fuel to pump tires would increase the cost of his service, the barber who needs fuel to power his generator would increase the cost of giving a hair-cut and the chain goes on throughout the economy hence the impact of the increase in pump price would be immediate and instantly inflationary on the economy.