The economic case for the removal of Nigeria’s fuel subsidy regime is mounting by the day even though the present administration seems undecided on how to proceed.
The billions of naira Africa’s largest oil-producing country commits to subsidising petrol is no longer news, but what is more infuriating is the opportunity cost forgone in a slow-growing economy that could use more private sector investments for job creation and growth.
According to statements from Nigerian National Petroleum Corporation (NNPC) and World Bank, the huge burden Nigeria incur in the cause of taking care of controversial petrol subsidy may hamper the ability of the three tiers of government to pay salaries in 2022.
“The NNPC may have to start invoicing the federation to be able to maintain subsidy,” the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari said during a panel session at the launch of World Bank’s Nigeria Development Update (NDU) bi-annual report.
He added, “When you take out N243 billion from your total income every month, you are not able to fund your operations and so you can’t meet your other fiscal obligations. Clearly, there is a challenge in the ability to pay. So, there is a reform going on, particularly in the energy sector and no one can stop”.
Kyari pointed out that while all over the world, subsidies are introduced to bring cost control and less pains to citizens, in Nigeria, fuel subsidy has become a major fiscal burden that must be eliminated.
Nigeria is sinking under the weight of petrol subsidy which is set to cost the country some N3 trillion this year, more than the country has spent on capital projects each year since 2016. The government passed the Petroleum Industry Act (PIA) last August after many years of dilly-dallying.
Though the law abolishes the petrol subsidy practice, the government has carried on with it despite the drain it has increasingly become on the country’s finances.
The government claims the need to protect the poor from more economic hardship is the reason it has continued to make petrol prices artificially low despite rising oil prices even though economists have often argued that petrol subsidies benefit the rich much more than the poor.
Speaking further, Lead Economist, Nigeria Country office of the World Bank, Marco Antonio Hernandez, painted a gloomy picture of Nigeria if the country decides to continue with the controversial fuel subsidy.
Hernandez who provided insights into the NDU report, titled “Time for Business Unusual,” stated that should the current revenue challenge continue till 2022, only Lagos State would be able to meet its financial obligations.
The report pointed to mounting fiscal pressures due to lower-than-expected revenues in 2021 and the rising cost of PMS subsidy.
It stated: “Because most states rely heavily on intergovernmental transfers, diminished revenue inflows to the Federation Account are jeopardising fiscal sustainability at the state level.
“For example, in the oil-producing State of Bayelsa federal transfers account for 91 per cent of revenues, and declining transfers caused a 22-percent drop in Bayelsa’s revenues per capita during the year.
“Even in the state of Lagos, which relies the least on Federal transfers, transfers accounted for 29 per cent of revenues in 2020? Most State expenditures cover salaries and administrative expenses, and given their rigid (i.e., nondiscretionary) nature, State-level expenditures are difficult to cut.
“Consequently, lower revenues are likely to intensify pressure on states’ debt stocks and undermine their fiscal sustainability.”
According to the report, in contrast to past periods of high oil prices, the Nigerian government has this time not been able to fully benefit from the oil boom because oil production has fallen below Nigeria’s estimated capacity and the Organisation of Petroleum Countries (OPEC) quota due in part to rising insecurity and the higher cost of the PMS subsidy.
BusinessDay calculations showed Nigeria’s petrol subsidy spree projected to hit N3 trillion based on current market realities is 46percent higher than the N1.6 trillion ($4 billion) the government raised through a Eurobond in September.
“Nigeria’s fiscal position is deteriorating, resulting in higher debt and less space for investments in human capital and infrastructure,” the World Bank said.
Data from the Central Bank of Nigeria (CBN) showed that the Federal Government’s fiscal deficit hit N2.4 trillion in the first quarter of 2021, up from N1.6 trillion in the fourth quarter of 2020 and N1.4 trillion in the first quarter of 2020. That is after the government kept up with its expenditure plans but fell way short of its revenue projection.
Also, World Bank’s data showed cost of Premium Motor Spirit (PMS) subsidy is at a six-year high from N107 billion in 2020 to N864 billion between January and September 2021, significantly reducing fiscal space for social spending,
In 2022, the Federal government plans to spend N3, 000 per person per year on health. In 2022, the PMS subsidy could cost N13, 000 per person per year, the World Bank said in its latest report.
The UN Children’s Fund (UNICEF) says Nigeria’s 13.2 million out-of-school children are the world’s highest. But the cost of subsidising petrol is 10 times larger than the entire 2021 budget of N94.4 billion meant to pay for free Universal Basic Education.
The global Bank raised concerns that the subsidy mostly benefits the rich and those who smuggle PMS to neighboring countries.
Consequently, it recommended that the N3 trillion recovered revenue should be redirected immediately to deliver N600 billion in cash support to the people over six months.
The World Bank also recommended that part of the money should be set aside for development priorities at all levels of government, including Local Government Area (LGA) development funds, State development funds, and National priority programs.
The bank also advised the Nigerian government to allocate N850 billion to National priority programs for security, interstate connectivity and power sector recovery.
According to the bank, N800 billion needs to be set aside for State development funds, which should be spent on basic education, rural roads, and industrial zones, while N774 billion should be kept for local government development funds for primary healthcare, water and sanitation , and community development.
The World Bank Country Director for Nigeria, Shubham Chaudhuri said 20 million Nigerians comprising 10 million each from the national and local can benefit from N5,000 per month cash for the people in six months.
Nigeria is the only country in the world that subsidizes only PMS, the cost of which is massive and unsustainable; as a result, Nigeria is sacrificing critical investments in physical and human capital.
The report said 40 percent of the poorest consume less than 3 percent of the total PMS consumption in Nigeria, adding that by creating a large price differential between Nigeria and its neighbors, the PMS subsidy is incentivizing smuggling.