Nigeria’s contracting economy shows time running out on subsidy regimes

That Nigeria’s ailing economy would contract in the three-month ending June was expected, but it cuts deeper than forecasts and experts have recommended aggressive reforms to include exiting all subsidy regimes.

Africa’s biggest economy contracted 6 percent, the deepest in 10 years, second-quarter gross domestic products (GDP) data from the National Bureau of Statistics (NBS) show. In this vein, the International Monetary Fund (IMF) has revised downwards its projection for Nigeria to -5.4 percent from a -3.4 percent projection in April 2020. This reinforces the necessity for Nigeria to block leakages in its public finance.

Three consumption subsidies burden Nigeria’s economy with an inefficient allocation of resources. The subsidy on foreign exchange, petrol and power are some of the conduits through which Nigeria loses resources that could have been put to productive uses in developing social and physical infrastructure. Nigeria spends close to $3 billion yearly subsidising each of these three items.

President Muhammadu Buhari’s administration alone has paid up to N1.7 trillion in the last three years and about N380 billion so far this year to subsidise electricity consumption. The service reflective tariff that failed to take effect from July 1 was designed to remove the subsidy the Federal Government pays on electricity consumption.

“We require cost-reflective tariffs on electricity consumption. This will drive new investment inflows to the sector and promote economic activities at both small and big scales. Without power, we are going nowhere,” Bismark Rewane, CEO, Financial Derivatives Company, said on Channels TV’s Business Morning.

In the last five years, Nigeria has spent about $10 billion subsidising premium motor spirit (PMS) – petrol. Critics have said petrol consumption subsidy like power subsidy favours middle class and rich Nigerians who are more likely to enjoy more hours of electricity and own at least two cars.

The Central Bank of Nigeria (CBN) has also become obsessed with defending the Nigerian currency and intervening in the foreign exchange market through its Open Market Operations (OMO). The official naira to dollar rate is N379.50 per dollar. But the parallel market rate is $/N477. This means the CBN subsidises the dollar by N97.50. To do this, the apex bank dips into the foreign reserves, which has been depleting.

The foreign reserves have hovered around $35 billion in August down from $36 billion in previous months.
“Accretions to Nigeria’s foreign reserves come from two main sources, borrowing and crude oil sales. Half of the palliatives promised by the government against economic fallouts from COVID-19 have not been delivered because there is no revenue to do so,” said Henry Adigun, team lead at Facility for Oil Sector Transformation, “Yet the government goes on subsidising petrol, power and foreign exchange.”

With 86.90 million Nigerians living in extreme poverty, according to a World Poverty Clock report, experts say Nigeria requires investments in education, health and physical infrastructure to lift its citizens out of poverty rather than subsidise the consumption of petrol, foreign exchange and electricity for a small percentage of its population. But the government has not used oil and gas earnings to diversify the economy.

Some economists and investment analysts say third-quarter GDP figures would come in negative after the contraction of by 6 percent in the second quarter. This means the odds of Nigeria entering another recession in four years are high. A recession for Nigeria amid accelerating inflation means more job losses. Companies would downsize and the naira would further weaken.

Operators in Nigeria’s downstream oil and gas sector have constantly recommended the removal of subsidy on petrol. This, they say, will attract investments into crude oil refining, which will lead to the export of finished petroleum products to African countries and earn Nigeria sustainable foreign exchange as it creates jobs.

“Investors avoid uncertainties but Nigeria’s downstream oil and gas sector is still murky. No investor will put money down to build refineries until it is clear that the government has stopped interfering with retail pricing of petroleum products,” Clement Isong, executive secretary/CEO, Major Oil Marketers Association of Nigeria, told BusinessDay.