Nigeria’s N3trn petrol subsidy widens deficit Eurobond can’t fund

Nigeria could be widening its budget deficit as it continues spending on the controversial petrol subsidy projected to hit N3 trillion by the end of 2021, an amount higher than the sum of $4 billion the country raised through Eurobonds a few weeks ago, analysts suggest.

The country’s rising fiscal deficit makes a mockery of the government’s continued petrol subsidy regime that gulps over a trillion naira per annum.

BusinessDay calculations showed Nigeria’s petrol subsidy projected to hit N3 trillion based on current market realities is 46 percent higher than the N1.6 trillion ($4 billion) the government raised through a Eurobond in September.

“The economic case for the removal of Nigeria’s fuel subsidy regime is mounting by the day and the present administration seems undecided on how to proceed,” Joe Nwakwue, former chairman, Society of Petroleum Engineers (SPE), told BusinessDay.

Analysts have long said the subsidy cost is denying the country value that could have accrued from higher oil prices.

During a panel session at this year’s NES27 event, Shubham Chaudhuri, country director of World Bank for Nigeria, condemned the continued spending by Africa’s biggest economy on petrol subsidy, saying Nigeria could channel the money into upgrading primary healthcare, basic education, and rural roads infrastructure.

“I think the urgency of doing something now is because the time is going in terms of retaining the hope of young Nigerians in the future and potential of Nigeria,” Chaudhuri said.

Between January and August, a total of N905.27 billion had been incurred as subsidy cost, according to presentations to Federation Account and Allocation Committee (FAAC) meetings seen by BusinessDay.

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According to the document, Nigeria incurred a subsidy cost of N60.40 billion in February, N111.97 billion in March, N126.30 billion in April, and N114.34 billion in May.

The subsidy cost rose from N143.29 billion in June to N175.32 billion in July, but fell to N149.28 billion in August, according to NNPC’s records.

The UN Children’s Fund (UNICEF) says Nigeria’s 13.2 million out-of-school children are the world’s highest. But the cost of subsidising petrol is 10 times larger than the entire 2021 budget of N94.4 billion meant to pay for free Universal Basic Education.

Data from the Central Bank of Nigeria (CBN) showed that the Federal Government’s fiscal deficit hit N2.4 trillion in the first quarter of 2021, up from N1.6 trillion in the fourth quarter of 2020 and N1.4 trillion in the first quarter of 2020. That is after the government kept up with its expenditure plans but fell way short of its revenue projection.

The government’s total expenditure in the period was N3.38 trillion, which is roughly in line with the N3.39 trillion quarterly budget run-rates. Personnel costs came in 5 percent below the budget but increased 9 percent compared to last year due to the government’s implementation of the national minimum wage.

However, the government’s retained revenue was N904.3 billion, a 9 percent decline compared to the same period last year and 55 percent off the target set in the 2021 budget.

The government’s overambitious revenue targets meant it has failed to achieve its budgeted revenue since 2014. The trend looks set to continue in 2021 with analysts tagging the N7.99 trillion revenue targets in the budget as a bit too ambitious. The amount implies a pro-rata quarterly run-rate of almost N2 trillion but there are holes in that projection.

For instance, the government anticipates it will earn N2.7 trillion from government-owned enterprises (GOEs), despite the source’s weak track record. In 2020, the FGN’s expected revenue taken from GOEs was N990 billion. However, no revenue was generated from the source, according to the budget implementation report published by the CBN.

The government’s dwindling revenue has been a long-standing problem that economists say can only be solved by reforms that encourage more private capital to enable the government to deliver on its gaping infrastructure needs. The concept is something the government is beginning to buy into following the creation of the N15 trillion infrastructure company, which will ride on a Public-Private Partnership (PPP) model to deliver investment in infrastructure.

The company, Infrastructural Corporation of Nigeria Limited (INFRACO), a partnership between the CBN, Africa Finance Corporation (AFC), Nigeria Sovereign Investment Authority (NSIA) and other private organisations, is expected to begin full operations by the third quarter of the year.

Economists have also urged the government to double down on creating an enabling business environment that allows businesses to thrive. This is expected to increase the taxes they pay to the government thereby giving public revenues a lift.

Concessions and privatisation of redundant government assets as well as reviving the N180 trillion dead capitals trapped mostly in real estate, according to estimates by consulting firm PriceWaterhouseCoopers (PwC), have also been put forward as viable ways of improving government revenue.