• Friday, June 21, 2024
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Nigeria is not ready for subsidy removal

Nigeria is not ready for subsidy removal

Nigerians are curious about the fuel subsidy removal plan announced by President Bola Ahmed Tinubu. Some experts have argued that fuel subsidy benefits the middle and wealthy class.

Others opine that kerosene should be subsidized if the objective of subsidy is for people with low incomes, as most low-income Nigerians use kerosene more than fuel. Others argue that neighbouring countries like Niger, Cameroon, and Chad benefit from subsidy payments due to the activities of smugglers.

Why continue subsidy when fuel is sold for over ₦300 in many Nigerian cities? The Nigerian National Petroleum Corporation (NNPC) Limited claims ₦241 is spent on every litre of fuel for subsidy. 19.5 billion litres of fuel are consumed yearly, bringing the subsidy payment to ₦4.6 trillion (over 20 percent of the entire fiscal budget) in 2023. Payment of subsidy beyond June 2023 would negate the provisions of the Petroleum Industry Act (PIA). But how prepared is Nigeria for subsidy removal?

Nigeria’s four (4) refineries are still in abysmal conditions, with low efficiency despite multiple efforts to boost refining output. Dangote refinery presents the only gleam of hope. Over 40 percent of Nigeria’s population battle for survival on less than US$1.9 (less than ₦1,000) daily, while 133 million Nigerians are multi-dimensionally poor.

₦300 billion have been secured from the World Bank for ₦5,000 monthly Cash Transfer (CT) to 10 million Nigerians for six months out of 46 million Nigerians on the National Social Register to cushion the effect of subsidy removal, according to former Nigeria’s Minister of Finance, Zainab Ahmed.

Inflation as of April 2023 stood at 22.22 percent. The yet-to-be-updated unemployment rate in the fourth quarter of 2020 remains at 33.3 percent. The economy is yet to recover from external shocks like the COVID-19 pandemic and the Russia-Ukraine war. The federal government has spent 50.6 percent of its budget and 88.5 percent of its revenue on recurrent expenditure in the last decade, according to a report by the Debt Management Office.

Subsidy removal is an essential economic decision, but Nigeria is clearly not ready. Subsidy removal will face stiff resistance from Nigerians even as citizens seem unprepared for bold reforms. Hardship is much and would even be more with subsidy removal.

The current administration got less than 40 percent of the total vote to emerge winner, the least since democracy in 1999, hence may not enjoy majority support from the masses. Subsidy removal would amount to agitation for a minimum wage increase for civil servants despite many states yet to fully implement the last minimum wage of 2019.

An increase in minimum wage will fuel inflation even further. As proposed by the Federal Ministry of Finance, the payment of conditional cash transfers to 10 million Nigerians is ambitious but will not yield any significant effect in cushioning the impact of subsidy removal. If 10 million benefits from the small and unsustainable cash transfer, what will happen to the other 37 million Nigerians on the National Social Register?

Nigeria’s refineries, or at least the Dangote refinery, must be in full operation before the complete deregulation of the petroleum industry. Public service reforms are essential to implement government policies and achieve results. The executive and legislative arms of government must cut down on the cost of governance and fiscal rascality if the funds from the subsidy removal will yield the proposed benefits.

The rule of law must be entrenched, accountability of public finance and stronger state institutions must grow to check political officer holders as proposed by Francis Fukuyama in his Book “Political Order and Political Decay” before the removal of subsidy.

If not, subsidy removal funds will be looted and embezzled by a few Nigerians. The government must engage with Nigerians and commit to accountability. Stakeholders, the private sector, and Nigerians must know the government’s plan for the sectors like health, education, railway, power, public transport system, and other priority areas for re-investment. An effective public transport system is crucial if subsidies must be removed. The new administration must learn lessons from the failure of the Subsidy Re-investment Program (SURE-P) of 2012.

The Tinubu administration must identify other revenue-generating areas for the middle and wealthy classes. The Voluntary Asset and Income Declaration Scheme (VAIDS) program of 2017 should be revisited to enhance efficiency and tax compliance by the rich and wealthy class.

VAT needs to be increased to 10 percent. Create an “Elite Tax’ for the wealthy class and introduce a toll fee on major highways to generate revenue and a central billing system to improve accountability and transparency as alternatives to subsidy removal to increase Nigeria’s revenue mobilization.

Read also: Explainer: Who collected over N11 trillion Buhari spent on petrol subsidy?

The 2020 Finance Bill signed into law must be fully implemented. Domestic borrowing from the apex bank must comply with the CBN Act of 2004. Foreign borrowing should be renegotiated to match Nigeria’s current economic realities.

Political will and actions are required to address Nigeria’s fiscal challenges. Nigeria has more of a revenue problem than a debt problem; hence, it must identify ways to improve Nigeria’s revenue base. Economic diversification towards agriculture, manufacturing, and servicing sectors with more employment potential should be the core of the administration’s economic transformation agenda.

Change must come with a prize, and the new administration must display a commitment to governance beyond the election. Leadership must be inclusive and exemplary at the national and sub-national levels.

Alikor Victor is a development economist, policy analyst, and the University of Oxford Foundry Fellow