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Nigeria's leading finance and market intelligence news report.

Petrol subsidy payment to shrink FAAC, widen budget deficit – NESG

The continuous payment of subsidy on petrol will reduce the Nigerian government allocates to states and local governments as well as increase public debt, according to the Nigeria Economic Summit Group (NESG).

The private sector-led think-tank and policy advocacy group says if the Federal Government continues to pay the subsidy on petrol, it could push Nigeria into a debt extension by the end of 2021.

“Continuous payment of subsidy on refined petroleum products would narrow FAAC allocations and widen the country’s budget deficit. If this continues, the action could push Nigeria into a Debt Overhang” by the end of 2021,” the non-profit organisation said.

While Nigeria continues to channel huge resources to funding petrol subsidy, the country largely depends on borrowing to finance its capital and recurrent expenditure annually.

Nigeria’s widening budget deficit has pushed the country’s debt profile to jump 81 percent in four years to N35.465 trillion as of June 2021 from N19.636 trillion in 2017.

As of June 30, 2021, the Debt Management Office (DMO) said Nigeria’s total public debt amounted to N35.47 trillion (about 86.5 million dollars).

While crude oil prices have risen nearly 45 percent from January’s price of $54.77 per barrel to the current $84.02 as of last week, Nigeria’s petrol subsidy costs have risen 10 times faster at 488 percent, wiping out the gains of higher oil prices.

Read also: Nigeria consumed 1.74bn litres of petrol in August – PPPRA

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

“The Federal Government reluctance to regulate the downstream sector or even try to reduce the price of petrol has reflected market reality that has continued to be on the deficit on government revenue because the amount they need to subsidise petrol has continued to rise,” said Ayorinde Akinloye, associate investment researcher at United Capital plc.

Due to subsidy payment, the Nigerian National Petroleum Corporation (NNPC) has been deducting from its remittance to the Federation Account and Allocation Committee (FAAC), a threat to the ability of the Federal Government and other tiers of government to meet their various obligations.

NNPC said in August 2021 that it was going to deduct a total sum of N215.32 billion from its remittance to the federation account in September 2021.

This means various state governments already impacted by low internal revenue may find it difficult to pay government workers or meet electorate promises without enough remittance from the NNPC which forms a large chunk of revenues shared at the FAAC meetings in Abuja.

Checks by BusinessDay showed that the Federation Accounts Allocation Committee distributed a total of N697.97 trillion to the three tiers of government in September, an 8.4 percent drop from the N760.7 billion distributed in August 2021.

“The issue of subsidy payment was not in the budget when it was presented by the minister of finance, which means NNPC will continue to deduct the subsidy, and it will affect what it will be remitting to FAAC, which in turn will limit what will be remitted to the government,” said Abdulazeez Kuranga, economist, Cordros Securities.

While Nigeria has, for years, depended on borrowing to fund its revenue shortage, the World Bank says implementation of tax reforms, rationalisation of generous concessions, expenditure can help the cash-strapped country raise as much as N10 trillion.

“In the next three years, such measures can raise the tax-to-GDP ratio to about 7 percent and bring in as much as N10 trillion,” the Washington-based lender said.

 

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