You need to active Javascript on your
BusinessDay
Nigeria's leading finance and market intelligence news report.

Call for subsidy removal heightens

… as World Bank report project 13% decline in FG’s revenue for 2022

Nigeria’s economy may be plunged into a deeper revenue crisis as petrol subsidy is projected to gulp over N3 trillion in the next 12 months.

The Federal Government spent an estimated N149.28 billion subsidising petrol in August, an increase of 488 percent compared with the N25.37 billion spent in January.

This has continued to reduce oil sector revenues as petrol subsidy costs have wiped out the gains of higher oil prices.

According to the World Bank report launched on Tuesday, the cost of fuel subsidy is currently at a six-year high, significantly reducing the fiscal space for social spending.

Presenting the report in Abuja, the senior economist of World Bank, Marco Hernandez, said continued payment of subsidy, which is not sustainable, will significantly lead to lower revenue for the government in 2022.

He explained that while Federal Government revenue could see a 13 percent decline in 2022, 35 out of 36 states are likely to see transfers from federation accounts fall to about 11 percent.

Read Also: World Bank in strident call on Nigeria to end wasteful fuel subsidy, speed reforms

“In the case of many states, this will mean that transfer from the federation will not be enough to cover even salaries and certainly not recurrent costs which are growing in nominal terms.

“By creating a large price differential between Nigeria and its neighbor, the PMS subsidy is incentivizing smuggling while the poorest 40 percent consume less than 3 percent of the total PMS consumption in Nigeria.”

Speaking further, Hernandez stressed on the need for the domestic price of PMS to be cost-reflective thereby eliminating the payment of subsidy.

Continuing business as usual, according to him, may push 6 million additional Nigerians into poverty from 2022 to 2024.

“The N3 trillion recovered revenues from eliminating PMS subsidies are directed to immediately deliver N600 billion in cash support to the people over the next six months and to fund development priorities at all levels of government,” he said.

Governor of Kaduna State, Nasir el-Rufai, commenting on the report, noted that the collection of value added tax had become the lowest hanging fruit for state governments, as subsidies continue to deplete revenue receivable from the federation accounts.

“If VAT is taken out of the equation today, most of the states will collapse, if state governments are investing in infrastructure as expected, then the 11 percent FAAC revenue will be nothing. We need to ask ourselves, why do we spend so much subsidizing fuel and spend little on infrastructure and human capital development”

According to El-Rufai, social crises may arise from parts of the country as more states lack the resources to run the activities of government, even payment of salaries.

“The conversation that Nigeria will continue to be viable with subsidy is misleading; subsidy will bring Nigeria economy to its knees,” he said.

Zainab Ahmed, minister of finance, budget and national planning, said the report was a wakeup call for relevant parties to take decisive action to drive needed development.

According to Ahmed, the recent development in the oil sector that led to the passage of the Petroleum Industry Act will significantly boost production in the sector.

She said, “We are working in a committee to create a process that will remove subsidies, and provide an alternative in LPG and CNG.

“We remain committed to the broad objective of stimulation broad based growth, through diversification a d the active participation of the private sector to ensure that our growth is inclusive, we also continue to prioritize investment in infrastructure that is needed to needed unlock production as well as ease the supply chain constraints that we currently have, and also create employment and preserve jobs and to ensure macroeconomic stability.

“The government during the pandemic had the opportunity to end subsidies such as the PMS subsidy while utilizing cash transfer to safeguard the welfare of the people. Towards this end we intend to accelerate structural reforms particularly in the power sector, in governance and business environment to unlock the huge potential that exists in our economy.

“We need to continue to look for how to scale the social safety nets, and also deepen financial inclusion, to reduce poverty.”

According to her, while there are concerns that immediate removal of subsidy may lead to more sufferings for Nigerians, Zainab said that benefits of subsidy removal outweighs the immediate suffering that it may impose on the people. “The cost of commodities may rise as a result of subsidy removal but we need to urgently address subsidies now,” she said.

Mele Kyari, the GMD of the Nigerian National Petroleum Corporation (NNPC) Limited said, “We do not have the resources to pay subsidy, we now pay over N230 billion for subsidy monthly. As we work to stop the payment of subsidy, we also ensure that gas utilisation, cash transfer programmes bring calmness to the ordinary Nigerians who may be affected,” he said.

Get real time updates directly on you device, subscribe now.