With the current rebound in the crude oil price and the burden of fuel subsidy costs on Nigeria’s government, the country’s debt profile is likely to widen this year.
Fuel subsidy is already projected to gulp N4 trillion this year, even as the country’s debt profile swelled over N41 trillion as of the first quarter.
Experts say fuel subsidy removal remains one of the many difficult decisions the government have to take and one of the key events expected to shape the Nigerian economy this year.
Last week, the country returned into a fuel crisis, which got messier this week as many of the major cities are currently experiencing fuel scarcity as petrol depots have run out of stock, leaving many of the filling stations to close shops.
Conceived as a short-term support tool initially, the fuel subsidy has remained a threat to Nigeria’s fiscal sustainability as the government has spent substantial revenue on subsidies, which has become increasingly unsustainable.
According to a report by the Nigerian Economic Summit Group (NESG), between 2015 and 2021, the government spent a cumulative sum of N3.64 trillion on fuel subsidies, rising from N307 billion in 2015 to N1.77 trillion in 2021. This represents a whopping increase of 477 per cent.
Following the fall in the crude oil price to as low as $9 per barrel in April 2020 (average price in 2020 at $42 per barrel) as a result of the COVID-19 pandemic, fuel subsidies accounted for over five per cent of the federal government’s retained revenue from around 11 per cent in 2019 when crude oil price averaged $66 per barrel, the NESG stated in its 2022 macroeconomic outlook, titled ‘The last mile: Reforms towards significant improvement in national economic outcomes’.
Full deregulation of the downstream oil sector, experts say, remains the best bet. This is even as the private sector had argued that without a fair pricing system that comes with deregulation, expected inflows of investments would be hard to achieve.
The Nigerian oil refineries are not working, if at all not to full capacity, as such the country has continued to rely on imported gasoline which it swaps for crude oil. This has not only resulted in a higher price of petrol at the current pump price of N165 but also hurt the overall economy.
There has been a significant hit on the budget revenue, heightened by lower crude output arising from insecurity and massive theft as criminals reportedly tap into oil pipelines.
While the Petroleum Industry Act (PIA) stipulates the removal of fuel subsidy by the middle of this year, the earlier planned removal was jettisoned by the Federal Government on the excuse to forestall supply disruptions and guide market readiness preparatory to migration to the deregulated pricing regime.
“We discovered that practically, there is still heightened inflation and that the removal of subsidy would further worsen the situation and impose more difficulties on the citizenry,” the Finance Minister, Zainab Ahmed had said at a meeting at the National Assembly.
However, inflationary pressure rose to 17.71 in May, hitting an 11-month high, while the rising global oil prices, augmented by the war in Ukraine, have intensified debates around fuel subsidies.
In its Nigeria Development Update (NDU), released recently, the World Bank Group, while noting that Nigeria’s exports and government revenues depend on crude oil, said petrol subsidy was already very costly.
As in many other countries, the potential benefits of removing the petrol subsidy as described in previous editions of the NDU report, are clear that richer Nigerians benefit significantly more than poorer Nigerians from the subsidy, making it regressive.
“So, redirecting spending towards health, education, and targeted social protection instead stands to benefit the poor and vulnerable,” it stated.
According to the Bretton Woods Institution, political and economic constraints make reforming the petrol subsidy especially difficult in Nigeria, adding that understanding of the petrol subsidy by both the government and its citizens is limited.
“Nigerians do not support removing the petrol subsidy, and Nigerians do not trust the government to use any fiscal savings for pro-poor causes. Sequencing spending on a well-targeted social transfers program first, alongside a clear, two-way communication campaign, could help overcome these political economy constraints and generate the trust needed to build a consensus around petrol subsidy reform.
“In 2021, Nigeria’s petrol subsidy cost around $4.5 billion, or roughly two per cent of GDP, far exceeding federal government spending on health, education, and social protection. Therefore, diverting spending away from the petrol subsidy towards more pro-poor causes could help spread the gains of growth, which is essential for reducing poverty.”
The international fund added that in the absence of countervailing measures, many poor and vulnerable Nigerians would still lose out in the short run if the subsidy were removed, and petrol prices were allowed to rise.
BADEJO ADEMUYIWA has 23 years experience as a Finance Writer, specialising in Insurance and Investigative Reporting.