Early last month, the World Bank Group President David Malpass in a meeting with Vice President Yemi Osinbajo affirmed the Group’s readiness to support Nigeria in phasing out regressive fuel subsidies while increasing social assistance for the poor and vulnerable. He also encouraged a decisive move toward exchange rate unification and stabilization by Nigeria, highlighting the economic benefits for the Nigerian people.
Earlier, the World Bank had in its June 2022 Nigeria Development Update (NDU) report titled “The Continuing Urgency of Business Unusual, said,
“Nigeria’s inflation, already one of the highest in the world before the war in Ukraine would likely increase further as a result of the rise in global fuel and food prices caused by the war and thus, likely to push an additional one million Nigerians into poverty by the end of 2022, on top of the 6 million Nigerians that were already predicted to fall into poverty this year because of the rise in prices, particularly food prices.”
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The ‘NDU’ also highlighted that the inflationary pressures will be compounded by the fiscal pressures Nigeria will face this year because of the ballooning cost of gasoline subsidies at a time when oil production continues to decline and thus recommended:
- The phasing out of the petrol subsidy (estimated to cost up to 5 trillion Naira in 2022 and redirecting the fiscal resources to investments in infrastructure, education, and health services; increasing ‘pro-health taxes’ and improving tax compliance so as to overcome the mounting fiscal pressures at the federal and sub-national levels by phasing out the petrol subsidy (estimated to cost up to 5 trillion Naira in 2022).
- The reduction of inflation through a sequenced and coordinated mix of the exchange rate, trade, monetary, and fiscal policies including the adoption of a single, market-responsive exchange rate.
- Catalysing private investment to boost job creation by improving the transparency of key government-to-business services and eliminating trade restrictions.
The Nigeria Development Update (NDU) is a World Bank report series produced twice a year around Spring and Fall. It assesses recent economic and social developments and prospects in Nigeria and places these in a longer-term and global context.
It is against the backdrop of the consequent macroeconomic pressures and fiscal deficit that the WBG dedicated two series on fuel subsidies. The November 2021 NDU report estimated that Nigeria could stand to lose more than 3 trillion Naira in revenues in 2022 because the proceeds from crude oil sales, instead of going to the Federation account, would be used to cover the rising cost of gasoline subsidies that most benefit the rich.
FG’s response
Despite the World Bank’s recommendations on the removal of fuel subsidies, the FG has not been able to gather enough political will to remove the subsidy. Because fuel subsidy, which is supposed to be an economic issue, has been politicised, making it a very difficult issue to handle.
Because of politics, private vested interest, and insincerity of purpose, the past and present FG always dances around the issue.
President Buhari, in response to the World Bank and IMF’s criticism of the retention of subsidy payments, defended that even in the West; subsidies are being paid by the government in various forms.
Conversely, earlier this year, the government planned to remove the subsidy but had to backtrack on the plan, citing the negative impact it would have on the poor and vulnerable in the country.
On Friday, October 7, 2022, during the presentation of the 2023 budget to the National Assembly, President Muhammadu Buhari said that the current fiscal impact of fuel subsidy has shown that it is not sustainable. “As a country, we must now confront this issue taking cognisance of the need to provide safety nets to cushion the attendant effects on some segments of society,” he said. “Discontinuing the policy is necessary for the country to manage limited resources.”
Why FG is foot-dragging
Data sourced by Nairametrics revealed that the removal was stopped because of likely consequent social unrest/protests that would have followed based on intelligence reports. From an economic perspective, it has been argued that the removal would have added to the inflationary pressure as petrol would have been sold between N700 to N800 per litre based on the projected Petroleum Products Pricing Regulatory Agency (PPPRA) price template.
This is why for decades successive governments have met a brick wall in an attempt to remove the subsidy. And for the present government, this is sort of karma, because the same people that protested against the removal of subsidies 10 years ago are the same people that have to carry the huge financial burden now. Now they are spending close to $10 billion on fuel subsidies, they cannot do anything about it and they have no sympathy.
Nigeria paid over N2.802 trillion as a petrol subsidy in 17 months, between February 2021 and June 2022. The money paid for fuel subsidies in the whole of 2021 was N1.43 trillion, while between January and June 2022, the country paid N1.372 trillion. This means that fuel subsidy in the first six months of this year has equalled the amount paid for the entire 12 months of 2021, according to figures from the Nigerian National Petroleum Company (NNPCL).
In July this year, the federal government projected that the petrol subsidy will gulp N6.7 trillion in 2023 if bold steps are not taken to do away with it, even as the debt service outpaced its revenue in the first four months of this year.
In August, Zainab Ahmed, minister of finance, budget and national planning said the federal government of Nigeria spends N18.397 billion on petrol subsidies daily.
The impact of fuel subsidy has been so intense and has compounded the country’s fiscal deficit, which has become a macroeconomic risk. Last year, the country spent about N11 trillion and generated N4 trillion, indicating a deficit close to N8 trillion. This means for every N100 spent, N60 was borrowed. And over a sustained period, it is huge, aside from the accumulated amount spent on petrol subsidy.
Towards the end of the Goodluck Jonathan administration in 2014, inflation stood at eight per cent annually. The Naira exchanged at $1 to N164.8. The debt stock was about $67.7 billion (N11.24 trillion) of which the domestic component was $10 billion and the foreign $9.7 billion. The total national debt was 20% of the GDP.
Currently, the country’s annual inflation rate has climbed for the seventh straight month to a 17-year high of 20.5%. In 2021, it rose to 16.95%, a 3.71% increase from 2020 and rose by 1.85% to 13.25% in 2020 from 11.40% in 2019.
As of June 2022, the country’s debt stock was N42.846 trillion ($103.312 billion); $63.248 billion domestic and $40.064 billion foreign, according to DMO data.
There is another debt with the CBN; the ‘Ways and Means financing’ which has crossed over N20 trillion. Ways and Means Advances is a loan facility used by the central bank to finance the government in periods of temporary budget shortfalls subject to limits imposed by law. But the question is, has CBN not violated the Act? 2007 (Section 38.2) caps advances to the FGN at 5% of last year’s revenues. With Ways and Means financing, the debt stock is about $150 billion, which is close to half of the country’s GDP.
Way forward
None of the Presidential candidates in the forthcoming elections has made a definite statement about phasing out fuel subsidies. The present government is saying we cannot because of dire consequences. Yes, advocacy that you do not take out subsidies overnight may be right but if the country had gradually been taking out a certain percentage of the subsidy a year, over a period of time, we would have been done with the subsidy by now.
Now the country has a critical problem in terms of fiscal deficit. Nigeria today is insolvent as a country in terms of its high debt profile. The country has accumulated a deficit of close to N30 trillion over the years, which has equally compounded inflation and exchange rate pressures. The country’s revenue cannot fund the operation of the government. This requires decisive action to tackle the challenges; of multiple exchange rate leakages through large-scale crude oil theft, the difficult operating environment for businesses, lack of innovation in tax collection/administration, etc.
As the country goes into elections next year, the cardinal thing is for the Presidential candidates to understand that the country is under a serious fiscal challenge and so must show understanding and knowledge.
- Possible structural reform plans to be put in place to bring stability.
- How to put the country’s economy on the part of growth
Economists and Analysts believe that the country has a GDP potential of $1 trillion compared to the $420 billion currently. So how to grow the GDP at the rate of 7% to 8% per annum should be underlined. Anything outside this is “Business as Usual”
