BY CHARLES ABUEDE
A new report examining Nigeria’s beleaguered petrol supply years of intricacies by some expert analysts projects that the country is headed for a fiscal cliff in mid-2023, just when a new president should be assuming office.
The experts’ calculation is premised on what is a planned date for the removal of petroleum subsidy which was postponed by the current government from an earlier 2022 implementation.
The report notes that subsidy on the premium motor spirit (PMS) will remain, at least until mid-2023 when it will be the burden of the next administration, which will see subsidies absorbing a significant portion of the revenue from oil, which is expected to rise in the near-term.
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Prepared by ratings and research house, Agusto & Co, on Nigeria’s petrol subsidy debacle, it stated that Nigeria is unable to maximise the fiscal benefits from what should ordinarily be an oil windfall as vandalism, ageing infrastructure and inadequate investments in oil fields continue to ensure that output remains significantly below the country’s OPEC quota (1.8mbpd). However, recent events have put the debate on subsidies on the front burner in Nigeria ahead of the forthcoming general elections.
In the first quarter of 2022, global crude oil prices averaged $102.97 per barrel on the back of heightened geopolitical tensions which culminated in Russia’s invasion of Ukraine.
But in Nigeria, the dire fiscal reality currently experienced means the subsidy regime has simply become unsustainable as the country will effectively be borrowing N8 trillion in 2022 for consumption.
According to the NNPC, Nigeria spent N1.4 trillion on petrol subsidies in 2021 while N4 trillion is expected to be expended in the 2022 fiscal year. Agusto said the threefold increase in subsidy will further widen the fiscal deficit and increase the debt burden.
As at December 2021, Nigeria’s total debt stock stood at N39.5 trillion ($95.76 billion), according to the Debt Management Office, and the federal government is expected to borrow another N8 trillion in 2022 to augment its spending while economic experts also project that the debt service to revenue ratio will rise further to 94 percent.
The other arguments put up by Agusto & Co against subsidies rest largely on the efficiency gains that an inevitable move towards a free market presents. The Ratings and research company asserts that subsidy removal will free up funds that could be deployed more productively to capital investment, or at least to narrow the fiscal deficit.
Meanwhile, at N4 trillion, petrol subsidies will amount to 80 percent of Agusto & Co’s aggressive revenue projection of N5 trillion in 2022. Increased spending on infrastructure should, in theory, have a stimulating effect on economic growth in the medium-to-long term. This should more than compensate for the negative impact on disposable incomes.
For the Agusto & Co’s report, the “Market pricing is crucial to the deregulation of Nigeria’s downstream oil industry and is essential to the viability of the new profit-oriented state oil company “NNPC Limited” as currently configured in the Petroleum Industry Act.
“Price liberalisation is crucial to attracting investments in local petroleum refining, which, considering the fuel shortages Nigerians have experienced recently, is consistent with Nigeria’s energy security objectives. Domestic refining will eliminate fuel imports which accounted for approximately 20 percent of forex demand in 2021, according to the CBN. This significant reduction in forex demand pressure is positive for the fortunes of other forex-dependent sectors such as manufacturing and trade.
“Given the average price of N412 ($0.99) per litre in neighbouring countries ($1.06 in Cameroun, $0.87 in Chad, $0.85 in Togo Republic, $1.01 in the Benin Republic, $1.19 in Ghana) compared toN165 ($0.4) per litre domestically, the subsidy regime presents a massive incentive for smuggling across the border. This incentive has also triggered increasingly greater demand for fuel imports into Nigeria due to the huge arbitrage that exists for smugglers, further inflating the subsidy bill,” the report obtained by Business A.M. stated.
Making a case for the said PMS subsidy removal by the federal government, an argument that has been peddled consistently is that the existence of petrol subsidies is necessary to keep transportation costs low, which in turn, keeps the prices of consumables affordable. This is also largely viewed by a huge section of the populace as the only benefit that the clichéd common man enjoys from Nigeria’s status as an oil-producing country.
Evidence for this argument has been founded on the conjecture as figures from the National Bureau of Statistics show that food prices have more than doubled in the past two years while the price of petrol increased by only 32 percent from N125 per litre in March 2020.
However, a sound argument in support of subsidy removal notwithstanding, many have asked why the government is only seeking to carry out reforms when oil revenues have plummeted, knowing that the burden will fall squarely on the poorest Nigerians, but failed to do so in the years of plenty.
Taking a cue from the existing PMS prices from neighbouring countries, Agusto noted that now is the next best time to remove subsidies, while 10 years ago was the best time to remove petrol subsidies.
“Separating the politics from the economics in Nigeria just 11 months before a general election would be impractical. A proposed stipend of N5,000 per month for 40 million of the poorest Nigerians, while being pro-poor, is unlikely to compensate for the inflationary effect of cost-reflective petrol pricing. It also raises questions bordering on transparency as to who will be part of the ‘40 million Nigerians’.
“With Nigeria’s debt service to revenue ratio projected to reach 94 percent in 2022 and subsidy spending expected to eclipse our projections for CAPEX in 2022 (N3 trillion), it is unequivocally a question of when and not if subsidies should be removed. The real cost of subsidies is the opportunity cost of consuming what we should be investing. The best time to have removed petrol subsidies in Nigeria was 10 years ago. The next best time is now. Waiting until mid-2023 could plunge Nigeria over the fiscal cliff. We simply can no longer afford it,” Agusto & Co. noted in the report.