2023 budget hangs on meeting oil target, ending subsidy

The prospect for a successful implementation of the 2023 budget relies heavily on the government’s ability to remove petrol subsidies and ramp up oil earnings, a review of the budget document shows.

President Muhammadu Buhari signed the N21.83 trillion 2023 Federal Government budget on Tuesday after lawmakers tucked in N1.32 trillion worth of expenditure, even as the government spending continues to outpace revenue.

This indicates that it has to earn more money. Oil is a major source of income. In the budget, the government has planned with the anticipation that oil will sell above $75 per barrel and Nigeria would produce at least 1.69 million barrels per day (bpd).

Many analysts including JP Morgan Chase project oil prices will average $90 in 2023; even the Organization of Petroleum Exporting Countries (OPEC) and the International Energy Association project average oil price above $80 this year. This could be positive for the Federal Government and may even allow for some savings if only production could meet the projected benchmark.

Nigeria’s oil production rose to an eight-month high of 1.35 million bpd, helping to raise OPEC production by 150,000 bpd to 29.14 million bpd, according to a Bloomberg survey.

While this development suggests that the Nigerian government’s crackdown on oil thieves may be yielding some positive results, the country is not close to the budget benchmark of 1.69 million bpd.

According to the document, the overall budget deficit is N11.34 trillion for 2023. This represents 5.03 percent of GDP, and the government is betting on debts and proceeds of privatisation to finance the deficit.

Considering that it was unable to earn any proceeds from privatisation in 2022 and lenders are becoming wary as debt servicing formed the biggest expenditure last year, the government would be desperate to cut subsidies to prevent the deficit from ballooning by N3 trillion at the end of the fiscal year 2023.

“The projected fiscal outcome in the 2023 budget is based on the PMS subsidy reform scenario. In the 2023 budget framework, it is assumed that: petrol subsidy will remain up to mid-2023 based on the 18-month extension announced early 2022. In this regard, only N3.36 trillion has been provided for the PMS subsidy,” the government said in its public presentation document.

This means that the government has made no provision to pay subsidies beyond June 2023, a situation that could create a nightmare scenario for a new administration coming to power only the previous month.

The total revenue to fund the 2023 budget is estimated at N10.49 trillion.

This includes the gross revenues of 63 government-owned enterprises totalling N3.87 trillion. Of this, the federal government’s oil revenue share is projected at N2.29 trillion, non-oil taxes are estimated at N2.43 trillion, and the federal government’s independent revenues are projected to be N2.62 trillion and other revenues total N762 billion.

In total, on aggregate 22 percent of projected revenues is expected from oil-related sources, while 79 percent is to be earned from non-oil sources.

This makes it imperative not to fritter away what has been earned. Yet, Zainab Ahmed, minister of finance, budget and national planning, recently told lawmakers that the federal government spends N18.397 billion on petrol subsidy daily.

Subsidy bills could surpass N6 trillion by December, competing with debt service as the biggest cost drivers in a federal government that analysts say its pattern of spending has been reckless and delivered little value.

These subsidies hobble the Nigerian National Petroleum Company Limited (NNPC), which last July unveiled a plan to become a commercial entity and deliver dividends to the federation. What should have been delivered as dividends goes to paying for subsidies.

Read also: 2023 budget performance hangs on growing oil revenue, ending petrol subsidies

Half of the imported petrol, of which the government paid subsidies for, is smuggled out of Nigeria and sold in Accra, Cotonou, Yaounde and Khartoum.

They also drain the country’s foreign reserves. “It’s simple, a large chunk of Nigeria’s FX goes into payment of petrol subsidies,” Ayodele Oni, an energy lawyer and partner at Bloomfield Law Practice said.

The NNPC puts Nigeria’s petrol consumption at over 60 million litres daily, up from less than 30 million litres in 2015, while petrol stations in Cameroon and Benin Republic are shutting down because their citizens reportedly prefer cheaper black market petrol smuggled from Nigeria.

Under the Buhari government, Nigeria has spent N7.3 trillion on petrol subsidies. This amount is more than the amount it spent building new schools, health centres and equipping new science labs during the period.