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World Bank: Encouraging subsidy removal for Nigeria’s economic growth

The World Bank recently issued a dire warning on the state of Nigeria’s economy, predicting that both the federal and state governments would be unable to pay salaries from next year, if the subsidy on premium motor spirit (PMS) is not scrapped by February. TONY CHUKWUNYEM writes on the Bretton Woods institution’s stance that removing fuel subsidy would help make governments to be fiscally responsible

Although the Bretton Woods sisters – the World Bank and the International Monetary Fund (IMF) – have, in recent years, consistently advised the Federal Government to end its fuel subsidy regime, which they describe as a major waste and drain on the economy, the World Bank went a step further a fortnight ago in Abuja, when it warned that unless subsidy on petrol was removed by February, federal and state governments would not be able to pay salaries in 2022. The Lead Economist, Nigeria Country office of the World Bank, Marco Antonio Hernandez, issued the warning while unveiling the Nigeria Development Update (NDU), a bi-annual report of the multilateral institution. In the NDU report titled: “Time for Business Unusual,” Hernandez also warned that the present fiscal condition of the sub-national governments would significantly deteriorate in 2022 as 35 of Nigeria’s 36 states would not be able to meet their financial obligations. According to the World Bank official, a situation where N250 billion goes into subsidising fuel monthly is unsustainable, given the huge revenue challenge that the country is currently grappling with. He predicted that if the current revenue challenge continues into 2022, only Lagos State would be able to meet its financial obligations. Specifically, the report cited mounting fiscal pressures due to lower-than-expected revenue in 2021 and the rising cost of PMS subsidy.

Inadequate revenue

It stated: “Because most states rely heavily on inter-governmental transfers, diminished revenue inflows to the Federation Account are jeopardising fiscal sustainability at the state level. “For example, in the oil-producing state of Bayelsa, federal transfers account for 91 per cent of revenues, and declining transfers caused a 22-per cent drop in Bayelsa’s revenues per capita during the year. “Even in the state of Lagos, which relies the least on Federal transfers, transfers accounted for 29 per cent of revenues in 2020. Most state expenditures cover salaries and administrative expenses and given their rigid (i.e., non-discretionary) nature, statelevel expenditures are difficult to cut. “Consequently, lower revenues are likely to intensify pressure on states’ debt stocks and undermine their fiscal sustainability.” The report noted that unlike during past periods of high oil prices, the current Nigerian government has not been able to fully benefit from the oil boom because oil production has fallen below the country’s estimated capacity and the Organisation of Petroleum Countries (OPEC) quota due in part to rising insecurity and the higher cost of PMS subsidy. It stated: “In 2022, the Federal Government plans to spend about N3,000 ($7) per person for health, while the cost of PMS subsidy for next year could reach N13,000 ($32) per person. Not only is PMS subsidy costly, but it mainly benefits richer households. “Nigeria has the opportunity to establish a ‘compact’ with citizens that eliminates the subsidy and uses the savings to provide targeted cash transfers to lower-incomehouseholds, invest in job-creating programmes and improve its fiscal position.” It further stated that the inadequate supply of foreign exchange (FX), issues related to the unpredictability of exchange rate management, the unsustainable subsidy on PMS, burdensome trade restrictions and the sizeable fiscal deficit financing by the Central Bank of Nigeria (CBN) are undermining the business environment, compounding underlying constraints on domestic revenue mobilisation, foreign investment, human capital development and the delivery of public services. The report noted that despite a strong initial recovery and resurgent global oil prices, Nigeria’s pre-crisis challenges were threatening its post-crisis recovery, highlighting the need to depart from business-as-usual policies. Prescribing policy options for Nigeria, the report said: “Urgent priorities for the next three to six months include reducing inflation, improving exchange-rate management, mobilising additional oil and non-oil revenues, eliminating the PMS subsidy and redirecting expenditures towards targeted cash transfers and other priority investments, fostering competitive markets and improving infrastructure.” “While Nigeria’s macro-economic projections have been updated since the previous edition of NDU, government’s fundamental policy challenges remain unchanged,” it added. On his part, World Bank Country Director for Nigeria, Shubham Chaudhuri, said:“Even though Nigeria’s economy exited a pandemicinduced recession, several challenges persist, including double-digit inflation, declining incomes and rising insecurity. “While government took bold policy measures to mitigate the impacts of the COVID-19 crisis, the reform momentum has slowed, which hinders Nigeria’s ability to reach its growth potential.”

Arbitrage

In his contribution during a panel session at the event, Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, lamented the huge burden the retention of the subsidy on PMS had been on the Corporation’s finances, warning that going forward, “NNPC may have to start invoicing the federation to be able to maintain subsidy.” Kyari pointed out that while all over the world, subsidies are introduced to bring cost control and less pain to citizens, in Nigeria, fuel subsidy has become a major fiscal burden that must be eliminated. The NNPC boss said: “Today, we are evacuating about 60 million litres of gasoline from all the depots in the country. It is not national consumption and it is very understandable because of issues such as cross-border smuggling. “As long as you have arbitrage, traders don’t see it as a crime, they just take advantage of that and exploit it. What we are dealing with is about N243 billion worth of fuel subsidy monthly. So, there is no magic around that. “This is the reality that we are facing. Going forward in 2022, we simply cannot afford this; we just don’t have the resources. As a matter of fact, the NNPC may have to start invoicing the federation to be able to maintain subsidy. “When you take out N243 billion from your total income every month, you are not able to fund your operations and so you can’t meet your other fiscal obligations. Clearly, there is a challenge in the ability to pay. So, there is a reform going on, particular in the energy sector and no one can stop.” Earlier, in her opening remarks, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, expressed optimism that recent developments in the oil sector such as the PIA 2021, the full reactivation of the four public refineries in the country, and the completion and coming on stream of the three private refineries under construction in 2022, would significantly boost contribution from the sector to economic growth. She reiterated that government was working on introducing measures that would cushion the impact of fuel subsidy removal on vulnerable Nigerians. According to her, subsidies’ regime in the sector remained unsustainable and economically disingenuous. She disclosed that ahead of the target date of mid-2022 for the complete elimination of fuel subsidies, government was working with its partners on measures to cushion potential negative impact of the removal of subsidies on the most vulnerable at the bottom, which she estimated to be 40 per cent of the population.

Last line

Last week, about 82 Civil Society Organisations (CSOs) under the aegis of Civil Society Coalition for Economic Development (CED) hailed President Muhammadu Buhari over the plan to end subsidy regime in the country. However, analysts point out that apart from commending the President, the CSOs should put pressure on the National Assembly and State Governors to support the Federal Government and NNPC in the battle to remove the subsidy on fuel.

 

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