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Subsidy removal: N21.8tr budget execution, revenues to rally 

Nigeria has for years, enjoyed subsidies on petrol despite having one of the lowest revenue levels as a share of Gross Domestic Product (GDP) worldwide. For instance, in the 2023 executive budget, the aggregate expenditure is N21.8 trillion, statutory transfers (N967 billion); debt service (N6.5 trillion); recurrent non-debt expenditure (N8.3 trillion ) and capital expenditure of (N5.9 trillion). The removal of petrol subsidies by the Federal Government signals opportunity for improved fiscal responsibility, a boost for government revenue and expected improvement in budget implementation

Nigeria is undergoing an economic and fiscal crisis of monumental proportions. Its biggest challenge fueling these crises is poor revenue and fiscal indiscipline. 

At the center of the fiscal crisis is petrol subsidies which have made it very difficult for the economy to breathe. 

Many attempts to scale back harmful petrol subsidies have been reversed under pressure from interest groups and the public, making the government absorb avoidable costs.

That continued until May 29th when President Bola Ahmed Tinubu courageously waved the subsidy payment goodbye and promised palliatives to cushion the effects on the people. 

This has led to  many marketers to shut filling stations while others sold for between N600 and 900 per litre as petrol queues retuned to the cities.

In many countries, subsidies could be a temporary policy tool to correct market imperfections- that is, when competitive, private markets fail to deliver socially desirable outcomes.

But that is not the case with Nigeria, which has for years, enjoyed subsidies on petrol despite having one of the lowest revenue levels as a share of Gross Domestic Product (GDP) worldwide.

A large share of Nigeria revenues is spent on public debt service payments, leaving insufficient fiscal space for critical social and infrastructure spending and to cushion an economic downturn.

With crude oil prices now at $74 per barrel and its implication on the petrol price in the country has once more gave credence to the President’s bold move at  petrol subsidy removal.

Data showed that the Federal Government spent N10.41 trillion on fuel subsidy between 2006 and 2019 on petrol subsidies, which is funds that would have been used or developmental projects and supported effective implementation of national budgets. 

2023 budget fundamentals  

The N21.8 trillion budget for 2023 was the highest ever in Nigeria’s history but has minimal space for infrastructure funding. 

Only N998.93 billion was allocated to infrastructure for works and housing, power, transport, water resources and aviation. 

A large part of the budget will be channelled into consumption, neglecting critical infrastructure needed to facilitate development.

Although N20.5 trillion Budget 2023 was initially presented to the National Assembly, the Senate and the House of Assembly, passed N21.8 trillion as the Appropriation Bill for 2023. The budget is made up of Statutory Transfers (N967 billion); Debt Service (N6.5 trillion); Recurrent Non-Debt Expenditure (N8.3 trillion ) and Capital Expenditure of (N5.9 trillion).

The budget analysis showed that N998.93 billion, about five per cent of the budget, was allocated to infrastructure for works and housing, power, transport, water resources and aviation. Such low funding plan for infrastructure, has widened of infrastructure gap in the country

The Centre for Social Justice (CSJ), a Nigerian knowledge Institution and leading advocate for fiscal transparency and accountability disclosed that in the 2023 executive budget, the reasonable expectation is that every available resource in the 2023 federal budget would be targeted at concrete deliverables. 

“Indeed, frivolous, inappropriate, unclear and wasteful expenditure should be eliminated to the minimum. A larger part of the funding of the budget will be borrowed and it will be foolhardy to borrow and waste the borrowed funds,” the report said.

Lead Director at CSJ, Eze Onyekpere, said the N10.7 trillion deficit in the 2023 budget excludes expenditure on fuel subsidy. The continuation of the subsidy would have increased the deficit and further increased the debt profile of the country. 

“Subsidy removal is a step in the right direct but the fiscal authorities through the budget must make palliative provisions to cushion its effects on the poorest of the poor. Going forward, the removal creates a little fiscal elbow room for government to manage its resources on a more efficient manner,” he said.

A report by PwC titled: ‘Fuel subsidy in Nigeria – issues, challenges and the way forward’, said the practice of fuel subsidy is unsustainable and may lead to a debt crisis in the medium to long term. 

“It is imperative that the government restrategises its approach and focus on targeting the poorest of the poor, and those who have been identified as being in need of it. Targeted subsidy will reduce corruption, increase government savings and investment in infrastructure, and reduce poverty and hardship,” it said.

 

According to the report, households in the bottom 40 per cent of the income distribution account for less than three per cent of all fuel purchases. 

“Furthermore, it is reported that three-quarters of all fuel sold in Nigeria is consumed by private firms, public transportation services, government agencies, and other businesses. Most vehicles used for carrying large numbers of people (such as molue) and goods are diesel powered which is already deregulated,” it said.

The PwC recommend either a full subsidy removal with targeted palliative or a targeted subsidy scheme funded through a subsidy levy which are likely to elicit less opposition from the Labour Union and other key stakeholders that are historically opposed to subsidy removal. 

African Refinery Port Harcourt Limited, The NNPC Joint Venture Partner in the 100,000 barrels per day refinery currently being developed within the Port Harcourt Refinery Complex has lauded the bold action of the government in removing the petroleum subsidy.

African Refinery’s Chief Executive Officer Omotayo Adebajo also called on Nigerians to be patient in the face of the immediate hardship caused by the subsidy removal and to support the President’s strategic announcement which in his opinion has been long overdue.

While acknowledging that the subsidy removal has resulted in higher pump prices, he strongly believes that in the long run the President’s action will boost investment in local refinery capacity in addition to the short-term benefit that subsidy removal will free up money that can be immediately channelled by the new government into high impact projects that would benefit a vast majority of Nigerians.

Also speaking, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, said payment of subsidy on petrol would have sent the country into bankruptcy.

He spoke the day after releasing the new petrol pricing template, which raised the price from N185 per litre to between N488 – N577.

Kyari, who spoke during a visit to the National Secretariat of the All Progressives Congress (APC), said the Federal Government spends N400 billion on subsidy monthly, an amount that is too heavy for the economy to cope with.

He added that no kobo has been made available by the government for subsidy payments since February.

He advised Nigerians to accept the reality that subsidy removal had come to stay.

The NNPCL boss warned that reversal of the decision could cause a cash crunch for the company and consequently affect borrowings by the federal and state governments.

Last year, the Federal Government said payment of subsidy would stop by June 2023. It budgeted N3.36 trillion for the payments.

On his part, an economist and Chief Executive Officer of Financial Derivatives Company Limited, Bismarck Rewane, said petrol subsidy removal presents a good opportunity for fresh investments in the downstream oil sector.

Many other stakeholders have give various responses on the likely impact of petrol subsidy removal on households, businesses and economy.

Former Registrar, Chartered institute of Bankers of Nigeria (CIBN), Uju Ogubunka, said payment of petrol subsidy has been a major drain in the resources of Nigeria adding that there is low revenue to susutain subsidy payment. 

Ogubunka, who is also President, Bank Customers Association of Nigeria (BCAN) said government should however be more prudent, and invest borrowed funds in projects that supports the economy.

On its part, the International Monetary Fund (IMF) said Nigeria’s removal of petrol subsidy remains a domestic decision.

Speaking at the Sub-Saharan Africa Regional Economic Outlook press conference in Washington, the Director, IMF’s African Department, Abebe Selassie, said Nigeria spends so much on petrol subsidy, when much investment is needed to shore up health and educational sectors.

Selassie said knowing when to subsidise and to what extent, is a very deeply domestic and political question. “If government wants to do that, that’s fine, but we think it’s suboptimal, as I said,  the benefits of subsidies tend to accrue to to richer households. But if that’s what the government is deciding, that’s fine. Removing them also, I think, is of course part of the split, you know, political and domestic debate that needs to be heard,” he said.

“Continuing, Selassie said: “We know of course in Nigeria, fuel subsidies eat up tremendous amount of resources at the same time that the government doesn’t have resources to address huge investment needs.”

Selassie said there is so much investment need from health, education to infrastructure, but this is a choice for the Federal Government and civil society to make on where to put the funds.

Countries with working subsidies reforms

 

The International Monetary Fund (IMF) says that reforming subsidies is not always easy, but many (mostly energy-producing) countries have nevertheless managed to raise domestic prices in recent years, including Angola, Egypt, India, Mexico, and Saudi Arabia.

“Reforms need to go a lot further, however, particularly in reflecting environmental costs in fuel prices, which should be a key component of countries’ strategies to implement the pledges made in 2015 under the Paris Climate Change agreement to reduce carbon emissions,” it said.

The Fund said Nigeria needs a comprehensive and detailed reform strategy that specifies clear long-term objectives for future price paths and the use of revenues.

“A far-reaching communications strategy is also needed to show how subsidies crowd out more efficient and equitable public spending. A gradual approach to reform, allowing consumers and firms time to adjust, can help. Measures such as cash transfers to protect vulnerable households and retraining for displaced workers are often essential to overcome opposition,” the IMF said.

 

Revenue options open to govt

 

The IMF said that what Nigeria needs at the moment is mobilizing revenues through efficiency-enhancing and progressive measures, including petrol subsidies removal.

According to the Fund, revisiting tax exemptions and customs duty waivers, increasing and broadening the base for excise taxes, developing a high-integrity taxpayer register, enhancing digital infrastructure, and improving on-time filing and payment are important measures.

It added that Nigeria’s export structure has not fundamentally changed over the decades, with hydrocarbon products still accounting for 90 per cent of the country’s exports today as they did in the 1970s.

“Successful economic diversification requires trade openness and competitive discipline. The experience of Malaysia, Indonesia, and to some extent India has shown that a shift toward export-oriented industrialisation can boost GDP. 

The limited gains from inward-oriented policies in terms of creating jobs and improving living standards suggest that Nigeria needs to change course,” it stated.

To accommodate a growing number of young people entering the labour market, Nigeria will need to create at least five million new jobs each year over the next decade. Based on the experience of other countries, embracing more open trade and competition policies would help diversify the economy and reinvigorate growth, particularly as the African Continental Free Trade Area takes effect.

Reiterating the benefits of effective budget implementation,   Onyekpere advocated early release consolidated budget implementation reports.

He said Section 30 (1) of the Fiscal Responsibility Act, requires the Minister of Finance, through the Budget Office of the Federation, to monitor and evaluate the implementation of the annual budget. 

This includes the crucial task of assessing the attainment of fiscal targets and providing comprehensive quarterly reports to both the Fiscal Responsibility Commission and the Joint Finance Committee of the National Assembly.

 

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