The delay by Nigeria’s central government to end the controversial petrol subsidy regime, as well as other long-awaited fiscal and monetary reforms means nearly N200billion is locked out of the FAAC allocations every month, according to BusinessDay analysis.
Nigeria runs a federal system of government in which the central government is responsible for monetary and fiscal policy and the federal government also calls the shot when it comes to rules governing the operations of the national oil corporation and the price of petrol. In this case, the other tiers of government – states and local councils – are made to pay the price of the failure of the central government.
In the Nigerian context, states are so poor they cannot pay workers’ salaries or make the needed investment in the future of their citizens by way of meaningful capital expenditure. In fact, the finances of the states and local councils are getting weaker while the federal government regularly provides them with a bailout.
According to data by the National Bureau of Statistics, the internally generated revenue of Nigeria’s 36 states and Federal Capital Territory, Abuja, amounted to N1.31trn in 2020 compared to N1.33trn recorded in 2019 indicating a negative growth of -1.93 percent year on year.
By official estimates, it costs Nigeria between N80bn and N100bn monthly by way of the so-called “under-recovery”, a new term to describe the unappropriated funds with which Nigeria’s national oil corporation covers the cost of petrol subsidy each month.
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What is more, because this cost or spending is not appropriated by the national assembly, it is treated as cost of doing business by the oil corporation and all of this almost N100bn can drop into FAAC’s monthly pot at current crude oil price.
Another reform which can significantly raise the purse available for distribution by the tiers of government is the rate at which proceeds from crude oil export, royalty, petroleum profit tax and dividend from NLNG is converted to the local currency.
Conversion of oil proceeds to the local currency is done today at between N389-N400 a dollar. By simply moving this to a mean of N450/$1, the allocation account of the federation could swell by anything from N80bn to a high of N100bn each month given rising crude oil prices.
According to one senior federal government official, “we have also seen these numbers. We know that the difference between the current rate of converting FAAC allocation and the so-called mean rate of around N450 to the dollar could theoretically amount to increasing FAAC allocation by as much as one seventh of N600bn. But don’t forget there are also those in Nigeria with a counter argument to adjusting the currency and removing subsidies.”
There are Nigerians who say deregulating petrol price will lead to more poverty in the country where 40 per cent of the people are already living below the poverty line of N385 a day. However, strong as their case may be, pricing petrol at such ridiculously low levels fuels the astonishingly high rate of smuggling across the borders and ensures that governments across the country do no more than just pay salaries of civil servants monthly.
The case can be made that the federal government should not be the one making the decision of what the other tiers of government can and should do with their portion of the subsidy budget. Some states may choose to invest their share in providing health insurance for their people or build badly needed infrastructure instead of buying petrol for them as the latter benefits only the well to do who can afford cars.
Furthermore, mass transit vehicles, public transportation, trailers and lorries for haulage of goods already run on diesel which is already deregulated and currently retail at N265 /litre .
In any case, this is unsustainable. “It is only a matter of time and imminent implementation that the provisions of the African Continental Free Trade Area Agreement on prohibited and restricted subsidies would catch up Nigeria’s international obligation,” says Wolemi Esan, energy lawyer and partner at Olaniwun Ajayi.
Esan said that whether fuel subsidies are removed now or not, Nigerian’s international obligations would necessitate its removal in the nearest future.
“Rather than wait for that nearest future, it is proactively best that the fuel subsidies are moved to the FAAC to address the infrastructural deficit in Nigeria, albeit with close monitoring and reporting obligations on the eventual use of the removed fuel subsidies,” he said.
On the adjustment of the Naira, some argue that moving the local currency towards a market determined rate of N480 to the dollar will lead to a further spike in inflation and that prices will go through the roof.
However, a look at the blended rate which leading firms use for pricing their inventory replacement shows that while they used the rate of N360 to the dollar in January 2020, manufacturers were applying the rate of N470-N476 to the dollar as of January this year.
The blending rate is the average rate at which manufacturers access foreign exchange used for importing their raw materials. This is typically the average rate derivable from merging the FX manufacturers secure from official CBN channel with the FX from the parallel market and arriving at an effective rate.
The movement in the effective rate clearly shows that manufacturers in Nigeria get a significantly higher portion of their FX requirement from the parallel market as confirmed in a survey undertaken late last year by BusinessDay. But perhaps more importantly, the manufacturers already assume an exchange rate of more than N450 for pricing their goods. The reality is that the price of consumer and capital goods in the market are determined by the actual cost incurred by importers and manufacturers, and not determined by government rates.
There is another argument made by those who do not want so much more money stranded in the hands of the government because it cannot be trusted to do the right thing with money. This set of Nigerians ask the question, “what will the government do with the cash when it has not shown it can be trusted to positively impact the lives of the people.”
Nigeria is projecting a fiscal deficit in 2021 in excess of N4.5trn but this can go down by up to half if the federal government were to apply a more sensible rate for the conversion of Nigeria’s oil proceeds and if subsidy on petroleum products were to be removed or reduced significantly as part of its economic reforms.
This also means Nigerians can be saved the controversy and counter accusations around the so-called printing of money which is a slang globally associated with the ways and means borrowing by governments from their central banks because the government will have more funds available without having to borrow.
In September last year, Timipre Sylvia, minister of state for petroleum said Nigeria could save as much as N1trn annually after abolishing fuel subsidies. Petrol price should be above N200 a litre today and it is difficult to see how Nigeria can survive carrying this heavy subsidy burden, which cost the country N10.7trn in the last 10 years.
Fuel subsidies in Nigeria are enormous according to the UK based International Centre for Tax and Development (ICTD) which has done a comprehensive study of the matter. At last estimate, the state subsidises petrol to the tune of US$3.9 billion a year – more than double the entire health budget.
Such subsidies come at great cost: the opportunity costs of such spending on other development objectives are large; the distribution of resources to the state governments is reduced; the vast majority of the subsidy goes to better-off Nigerians; and cheaper petrol encourages greater pollution, congestion and climate change.
Despite this, surveys show most Nigerians oppose the reduction or removal of subsidies.
A new nationally representative household survey by the centre that asked 16,000 Nigerian men and women about their knowledge and attitudes towards subsidies found that 70% were opposed to the reduction or removal of subsides on petrol.
The ICTD study, which was led by Nel McCulloch, Tom Morenhout and Joonseok Yang found that trust or the lack of it in their government, was a major driver of the opinion of Nigerians many of whom have formed their views regardless of their understanding of the matter.
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