Business

Subsidy removal and drive for economic growth

By Chinwendu Obienyi

“Unfortunately, the budget on fuel subsidy that existed before I assumed office and what I have heard is that no provisionwas there for fuel subsidy, so fuel subsidy is gone.

‘We commend the decision of the outgoing administration in phasing out the petrol subsidy regime which has increasingly favoured the rich more than the poor. Subsidy can no longer justify its ever-increasing costs in the wake of drying resources. We shall instead re-channel the funds into better investment in public infrastructure, education, health care and jobs that will materially improve the lives of millions”.

These were the words of Nigeria’s President, Bola Tinubu, on May 29. He also stated that his administration will be targeting 6 per cent GDP growth, create jobs, work towards a unified exchange rate and ensure that investors and foreign businesses repatriate their hard earned dividends and profits home.

Expectedly , these  words sent shockwaves across the country and caused an impact on the nation’s economy. For example, Nigerian stocks posted an impressive performance by out-shining its peers in Sub-Saharan Africa, registering a month-to-date gain of 6.4 per cent at the end of May 2023. The nation’s sovereign dollar denominated bonds have also rallied.

However, a day after the speech and 30 days before the set date for the removal of the subsidy, the Nigerian National Petroleum Company Limited (NNPCL), swiftly announced a new price template, raising the pump price of Premium Motor Spirit (PMS) from N195 per litre to N557 per litre to signal the deregulation of the downstream industry.

For decades, Nigeria, despite being a leading oil-producing country relies mainly on the import of petroleum products; the development had remained a major drain pipe on the country’s revenue and foreign exchange crisis as investment remained dismal in the sector.

To suggest that the giant of Africa has been dancing around this abyss for long is not fallacious or a rare case of fiction but an appearance of authenticity. Of course, the push-and-pull narrative about subsidy removal had been elevated to a popular discourse in the past two decades or so. But never has the waste and corruption associated with it pushed the economy to its current bend-or-break position.

Also, the red figures as well as headshaking facts are now in the open. Volumes of books could be written about the missed opportunities but nothing calls for deep-thinking and audacious action than the current sorrowful state of public finances, poor infrastructure spending and mounting liabilities.

Statistics from the Nigeria Extractive Industries Transparency Initiative (NEITI) stated that from 2005 to 2021, the country spent $74.39 billion, translating to N13.697 trillion on importing PMS alone.

   According to the NEITI report, a breakdown of these figures showed that in 2005, the government paid $2.6 billion (N351 billion) as subsidy. In 2006 and 2007, it paid $1.99 billion and $2.176 billion (N257 billion and N272 billion) respectively.

   The report further pointed out that subsidy payments more than doubled in 2008 and 2010 and witnessed the highest increase in 2011 to $13.52 billion (N2.11 trillion). A sharp decline was witnessed in 2012, 2013, 2014 and 2015 when it dropped to $3.34 billion (N654 billion) in 2012.

  The decline in subsidy expenditure continued in 2016 and 2017 to as low as $473 million (N154 billion) in 2017. The reduction was short-lived as the payments skyrocketed to over $3.88 billion (N1.19 trillion) in 2018 and in 2021 to $3.58 billion (N1.43 trillion). By these figures, Nigeria has spent an average of N805.7 billion annually in recent years, N67.1 billion monthly or N2.2 billion daily.

This also means that the amount paid out on subsidies from 2005 to 2021 is equivalent to the entire budget for health, education, agriculture, and defense in the last five years.

It is imperative to note that the subsidy has failed to help Nigerians buy refined products at much lower than the prevailing market price. Like the President, African Development Bank, Dr Akinwumi Adesina said recently at a forum, fuel subsidy is killing the economy as it only benefits the rich.

According to the World Bank, subsidy payments could significantly impact public finance and pose debt sustainability concerns in Nigeria. Nigeria’s economy depends on petroleum, accounting for 90 percent of its exports and one-third of its GDP. However, the petroleum industry recently recorded zero revenue.

According to the Nigerian National Petroleum Company released report for October 2022, the agency recorded zero revenue from oil export due to the subsidy payment. Petrol subsidy alone for October 2022 gulped N199 billion.

This clearly shows that subsidy payment and a weak downstream sector are a falling knife on an economy with many negativities which include heavy debt, high inflation, acute infrastructural shortage and high unemployment.

It has been argued that the removal of subsidy will free allocations which can be channeled to the provision of infrastructure like roads, education, health service, power, security, creation of jobs, development of the downstream sector, improve Nigeria’s GDP growth, clamp down on product theft, pipeline vandalism, environmental pollution, foreign exchange shortages and provision of basic benefits for the “poor in the society”.

For instance, in the petroleum industry, the downstream sector deals with petroleum product refining, storing, marketing and distribution. The sector is an enabler of other critical industries such as petrochemical, construction, agricultural, and industrial sectors among others. Though it is a vibrant segment and a major revenue earner for most oil-producing countries across the world, the sector has remained in shambles in Nigeria.

Borrowing, Borrowing and Borrowing

Worse still, the country’s debt stock is nothing to write home about. According to data gleaned from the Debt Management Office (DMO)’s website, Nigeria’s total public debt stock stood at N41.60 trillion (about $100 billion), which means that it would need more money to subsidize fuel. Hence, if subsidy is still existing, then Nigeria would need to borrow money. This rightly corroborates Adesina’s statement.

The AfDB President said that Nigeria keeps borrowing for what should not be borrowed for and advised that such money should instead be channeled to national development.

“The place to start therefore is to remove the inefficient fuel subsidy. Nigeria’s fuel subsidies benefit the rich, not the poor, fueling theirs and the government’s endless fleet of cars at the expense of the poor. Estimates show that the poorest 40 per cent of the population consume just three per cent of petrol. Fuel subsidies are killing the Nigerian economy, costing it $10 billion in 2022. That means that Nigeria is borrowing what it does not have to borrow.”, he explained.

Rather than spending billions on crude oil, the AfDB boss called on the new administration to support private-sector refineries as well as modular refineries for efficiency and competitiveness.

However, it is important to note that to enable a conducive environment for attracting investments in the petroleum sector, its deregulation remains critical.

This approach will allow investors to take over the role of supplying petroleum products rather than the government.

The new administration’s decision will undoubtedly cause pain for the majority of Nigerians especially for the small and medium scale businesses because petrol touches everything in Nigeria and considering that the minimum wage is about N30,000 (something the Tinubu-led administration has recently promised to review) will lead to high demand for salary increase.

According to economic experts, this is where the FG needs to bring in palliatives that must be segmented into immediate, short and medium term deliverables.

Experts’ views

Speaking to Daily Sun via a telephone chat, the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said the decision of the new administration will eliminate distortions and stimulate investments in the oil and gas sector.

Yusuf said, “There surely has to be immediate and short-term options which must include wage review in public service, the introduction of subsidised public transportation schemes across the country and reduction in import duties on intermediate products for food-related production to moderate food inflation.

“In the medium to long-term, there should be accelerated efforts to upscale domestic refining capacity, driven by private investments; accelerated investments in rail transportation by the government to ease logistics of fuel distribution across the country as well as domestic freight costs”.

Also speaking, the Vice President, HighCap Securities, David Adonri, while commending the new administration’s decision, said Nigeria should look at a possibility of reducing the percentage of excise taxes citizens pay to enable them to afford the new price.

“I believe that the President’s comment on removal of subsidies and exchange unification will move the economy to a quick recovery but palliatives have to be put in place for its citizens. You cannot embark on policies without looking at the advantages and consequences or what the impact might likely turn out to be”, he said.

Conclusion

No pain, no gain is a very common popular saying especially in Nigeria and there is no doubt that many of the citizens are rightly concerned that they will be unable to meet the cost of education, food and healthcare. However, fuel subsidy removal in Nigeria is an economic necessity, as the subsidy funds could lead to major development gains. With the proper structure, such as building good infrastructure and a conducive environment for investors, removing subsidies can be the blessing and the much needed boost its economy needs at the moment.

now.

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