Tuesday, February 27, 2024

The Evil Called Petrol Subsidy

At the end of 2021, the minister of finance, budget, and national planning, Mrs. Zainab Ahmed, at the launch of the World Bank Nigeria Development Update announced that the petrol subsidy was going to end.


According to the minister, to help deal with the hardship the initial removal will have on Nigerians, a monthly transportation grant of N5,000 would be paid to the poorest 30 million to 40 million Nigerians. What the minister failed to do was to tell us how the government arrived at this policy.


A close dive into the policy to start with shows that serious thinking was given to it before the announcement. N5,000 monthly to 40 million people is N2.4 trillion per year. Meanwhile, the subsidy expenditure that we want to wipe out is about N1.4 trillion per year.


According to the document obtained by Avalon Daily from the Nigerian National Petroleum Corporation (NNPC) presentation to the Federation Account Allocation Committee (FAAC) meeting between January 19 and 20, 2022, in 2021 alone, Petrol subsidy payments gulped N1.43 trillion in 2021, shrinking revenue accrued to the federation account to N542 billion — a shortfall from the projected N2.51 trillion.


In January, the federal government postponed the planned petrol subsidy removal till further notice due to “high inflation and economic hardship”. While it is a fact that the 2023 general election is the main reason behind the postponement, according to the minister, it has become clear that the timing for the removal of the petrol subsidy will be problematic as the country still experiences heightened inflation.


I know this might sound awkward but I will say it directly without missing words “Nigeria is broke.” That’s the bitter truth the government is not confident to admit and accept.
The country has continued to borrow money to fund its budgets, including the 2022 budget, and the country does not plan to stop borrowing soon, as details on its Medium Term Expenditure Framework show that between 2022 and 2024, the country will borrow N14.8 trillion.


Debt servicing, a consequence of the heavy borrowing, continues to gulp huge amounts and between 2022 and 2024, debt servicing will take a total of N14.6 Trillion.
I will sincerely understand if you ever doubt the “broke-ness of Nigeria. But how can you tell Nigerians their government is broke when they can see that their resources are still being burnt on chartered fights for political meetings, at home and abroad? The legislature is still ballooning the budget. There is nothing in the behavior of our leaders to show that we are broke.


Last week, President Muhammadu Buhari requested the approval of N4 trillion as payments for petrol subsidy payments in 2022. The president in his letter addressed to the House of Representatives, titled “Submission of the Revised 2022 Fiscal Framework,” said the incremental provision by N442.72 billion from N3.557 trillion to N4 trillion was necessary for the face of current economic developments, including the increased market price of crude oil aggravated by the Russian-Ukraine war.

The cost of the fuel subsidy has continued to grow exponentially. This is partly due to the rising cost of fuel—which meant that the government had to spend even more to keep domestic prices low— and also due to Nigeria’s increasing population— which resulted in increased fuel consumption; together these pressures made the cost of the fuel subsidy unsustainable.

Yesterday, after days of consideration, the national assembly approved the request of the federal government. What this means is that the government will be spending more on fuel subsidies in 2022.

The committees also revised the 2022 medium-term expenditure framework (MTEF) and fiscal strategy paper (FSP) to accommodate the president’s request. The national assembly also approved an oil benchmark of $73 per barrel and an oil production output of 1.6 million barrels per day.
What Nigeria plans to spend on petrol subsidy in 2022 is higher than the total VAT and Company Income Tax (CIT) collected by the FIRS in 2021.

Also, it is more than what it budgeted to spend on education and health – expenses that would have raised the living standards of its people and translated to economic growth.
The whole petrol subsidy story has become a political matter and was moved from the realm of economics and investment, adding that the outcome was predictable, especially with impending general elections next year.

But the economic cost of the capitulation is equally weighty. The truth is that you cannot eat your cake and have it. Nigerians should expect the cost of funding the subsidy to be much higher this year because of the surge in crude oil prices. With the hike in the oil price, the high cost of subsidies is not surprising. This will surely affect funding for critical infrastructures such as roads, railways, healthcare, education, and even security.


The petroleum products smugglers, beneficiaries of the fiscal leakages in the fuel subsidy ecosystem, and their collaborators will continue to smile at the banks for the next one and half years. Some states may struggle to pay salaries, especially states that are heavily dependent on federal allocation while some may have to lay off some of their workforces. Many will struggle to meet their financial obligations as sub-nationals.

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