A major challenge awaiting Bola Tinubu, Nigeria’s president-elect, is petrol subsidy, which is on track to gulp N6 trillion in 2023.
President Muhammadu Buhari has presided over the biggest jump in the nation’s petrol subsidy expenditure.
The 2022 Macroeconomic Outlook report by the Nigerian Economic Summit Group showed Buhari’s payment for petrol subsidy grew from N307 billion in 2015 to N1.77 trillion in 2021. This represented a 477 percent increase within seven years.
Africa’s biggest economy is facing a deepening fiscal crisis, acute shortages of domestic and foreign currency, and widespread insecurity.
Bloomberg reported on Wednesday that the government’s ability to deal with those issues is being undermined by a petrol subsidy that will drain N6 trillion ($13 billion) from state finances this year — about two-thirds of the revenue expected to be generated by oil and gas output.
For overseas investors, Nigeria’s multiple exchange rates and moves by the central bank to ration dollars are also a big deterrent.
“The next president will be tasked with a course correction anchored on sound economic policies, fiscal and structural reforms, as well as monetary policy orthodoxy,” Gbolahan Taiwo, an analyst at JPMorgan Securities Plc, was quoted as saying in a note.
“The top policy priorities are clear with fuel subsidy reforms” and the liberalisation of the foreign-exchange market at the top of the agenda, he said.
It’s going to be politically difficult to scrap the popular price cap that’s used by residents and small businesses in Africa’s most populous nation to run cars and power generators in the energy-deficient country. Outgoing President Buhari resisted pressure from the World Bank and International Monetary Fund (IMF) to end the payments that dwarf spending on education and health combined.
In his election manifesto, the 70-year-old Tinubu pledged to end the subsidies and use the money to fund health and education programs, as well as infrastructure and social-welfare projects. Previous efforts to end the payments triggered social unrest.
The president-elect also promised to “carefully review and better optimise” the nation’s system of multiple exchange rates — a central bank policy he’s described as “somewhat arbitrary.”
He has not said whether he will retain Godwin Emefiele, governor of the Central Bank of Nigeria, whose unorthodox policies have been criticised for being interventionist.
The IMF has cited central bank interventions in Nigeria’s foreign-exchange market as a hindrance to capital inflows.
Foreign direct investment in the West African nation plunged 52 percent to $698 million in the six years through 2021. By comparison, inflows into Indonesia increased 6 percent to $31 billion in the same period.
Tinubu’s other campaign commitments include ensuring that his administration limits the nation’s exposure to foreign-currency debt. He plans to contract non-naira loans only for projects that “generate cash flows from which the debt can be repaid.”
Nigerian public debt has grown more than six-fold since Buhari became president in 2015, with servicing costs consuming about 80 percent of government income last year.
The IMF projects the country may spend more on servicing its loans than it raises in revenue this year unless it significantly improves tax collection.
Tinubu will be sworn in on May 29 as the country’s fifth democratically elected president since the end of military rule a quarter century ago.
The former leader of Nigeria’s commercial hub of Lagos also plans to reverse a decline in oil output – setting an ambitious target to boost production of about 1.5 million barrels a day by more than 70 percent by 2027.
Africa’s biggest crude producer has been unable to meet its OPEC quota since the beginning of last year because of pipeline theft and dwindling investment in an industry that accounts for more than 80 percent of export earnings.
“His positioning on the oil sector, including subsidy and leadership at the central bank, will be key points to watch,” said Ayodeji Dawodu, head of Africa sovereign and corporate credit research at BancTrust & Co. “This will have significant implications on Nigeria’s economic performance and direction.”
