Tougher times ahead as rising subsidies weaken FG and state revenues

President Muhammadu Buhari and Finance Minister Mrs. Zainab Ahmed

BY EMEKA EJERE

The ability of federal and state governments to meet their financial obligations in the coming months is becoming increasingly unlikely as the amount spent on subsidizing Premium Motor Spirit (PMS), commonly known as gasoline, continues to rise.

This is all the more true as the Nigerian National Petroleum Company Limited (NNPC) has, according to insiders, informed the Federation Accounts Allocation Committee that it will deduct an estimated value shortfall of US$874.5 billion. Naira under May 2022 procedure to be shared in June 2022. FAAC meeting.

Rather than being a boon to Nigeria as a major oil producer, the high crude oil prices caused by the Russian-Ukrainian war have become a burden on the country as locally consumed fuel is imported, leaving the economy at the mercy of exchange rate volatility. .

Data obtained from NNPC on Wednesday showed a monthly increase in PMS subsidy spending by the oil company which, however, described it as an under-recovery/shortfall in value. The importation of gasoline into Nigeria and the payment of the subsidy for the product was handled solely by NNPC for some time.

The approved subsidized pump price of PMS in Nigeria is between N162 and N165/litre, but oil traders say the actual cost would be a bit higher or about the same price as diesel if PMS was deregulated.

Latest figures from NNPC showed that the amount spent on the fuel subsidy maintained an upward trend from January to April this year. In January, February, March and April, the national oil company committed N210.38 billion, N219.78 billion, N245.77 billion and N271.58 billion respectively, for a total of N947, N51 billion over the four month period.

“It is unsustainable. In just four months, we have incurred so many gasoline subsidies due to our continued reliance on imports of petroleum products,” said National Public Relations Officer, Independent Petroleum Marketers Association of Nigeria (IPMAN) , Chief Ukadike Chinedu.

“And it is because all our refineries are not working despite several government promises that the factories will start producing. The value of the naira depreciates daily, so what do you expect?

“Nigeria will continue to subsidize petroleum products and it’s static at the moment and on that basis our naira will continue to be devalued as so many dollars are just being deployed to seek out products.”

The National Bureau of Statistics (NBS) External Merchandise Trade Statistics report previously revealed that Nigeria spent a total of N675.93 billion on fuel subsidies, an amount representing 44.86% of 1 .51 billion naira spent on PMS imports in the first quarter of 2022. The report further showed that the monthly amount spent on fuel subsidy increased from 60.39 billion naira in March 2021 to 245.77 billion naira in March 2022, indicating an increase of 306.97%.

Growing Concerns

The World Bank and the International Monetary Fund (IMF) have consistently denounced the federal government’s huge spending on gasoline subsidies, urging the government to end the scheme.

The World Bank, in its Africa’s Pulse report, said that increased fuel subsidies put the Nigerian economy at high risk, as subsidy payments could have a significant impact on public finances and raise sustainability issues. debt.

Although the federal government planned to stop paying the controversial fuel subsidy by June 2022, it eventually backtracked on the plan. In January this year, the Federal Government decided to maintain the fuel subsidy for another 18 months following threats of protest from the Nigerian Labor Congress (NLC) and other interest groups.

The IMF, in its report “Nigeria: Selected Issues Paper”, which was prepared by a team of IMF staff as a background document for its periodic consultation with Nigeria, stated that fear of political resistance, widespread corruption and pressure from interested groups are hindering the removal of the fuel subsidy in Nigeria.

The multilateral lender also said that Nigeria is likely to rely on overdrafts from the Central Bank of Nigeria (CBN) to fund its gasoline subsidy bill, which will further negatively affect the country’s fiscal situation.

Nigeria’s Resident Representative to the IMF, Ari Aisen, recently said that Nigeria’s subsidy bill is likely to reach N6tn by the end of this year at the current monthly subsidy bill of N500 billion naira.
There are fears that given the continuous rise in the subsidy bill, the country will find it difficult to meet its budgetary needs and that the payment of subsidies will skimp the country on other development needs that the citizens could have benefited from. .

The IMF further revealed that a macro-fiscal stress test it carried out on the country showed that interest payments on debts in the country could be equivalent to Nigeria using 100% of its income. for debt service by 2026 if not closely monitored.

“Rising oil prices have put us in a very precarious position…because we are importing refined products…and that means our cost of subsidy is really going up,” the finance minister of the United States recently reported to Reuters. Budget and National Planning, Ms. Zainab Ahmed, as saying.

The Debt Management Office (DMO) said on Tuesday that Nigeria’s total public debt stock rose to 41.60 billion naira in the first quarter of 2022 from 39.56 billion naira in December 2021, which represents an increase of 2.04 billion naira over a three-month period.

“The total stock of public debt as of March 31, 2022 was N41.60 billion or $100.07 billion. The amount represents the outstanding domestic and external debt of the Federal Government of Nigeria, the thirty-six state governments and the Federal Capital Territory. The comparative figure as of December 31, 2021 was N39.56 billion or $95.78 billion,” reads in part a statement on the DMO website.

The country’s outstanding debt is expected to reach N45.95 trillion following plans by the Federal Government to borrow an additional N6.39 trillion to finance the 2022 budget deficit.

An economist and director general of the Center for Promoting Private Enterprise, Dr Muda Yusuf, lamented that instead of the country benefiting from the increase in the price of oil like other oil-producing countries, the government loses money on imported fuel and fuel. subsidy, warning that the subsidy would harm the economy.

“As the price of oil increases, the price of the subsidy will have to increase beyond what NNPC requested. While other oil-producing companies are happy, as their reserves grow and currencies strengthen, we lament that we are not fully benefiting from the oil windfall,” Yusuf said.

According to him, the approvals will lead to an increase in debt service, an increase in the budget deficit, an increase in inflationary pressure and even a depreciation of the naira.

He said: “With this development, our near-term macroeconomic outlook should be cause for concern. The results of these approvals include increased borrowing, increased debt service, increased budget deficit, increased inflationary pressure, and risk of further depreciation of the Naira exchange rate.

Arguing that there would be an increase in recurrent expenditure as debt servicing and fuel subsidies will eat up a large chunk of government revenue, Yusuf urged Nigerians to prepare for tougher times as the reforms needed to economic recovery and growth may not happen any time soon.

Below quota

Thanks to an increase in production quotas granted to the country by the Organization of the Petroleum Exporting Countries (OPEC), Nigeria could earn up to 23 billion naira from the export of crude oil in June if the price of oil is hovering around $113 a barrel.

At its 28th OPEC and Non-OPEC Ministerial Meeting, OPEC recently increased Nigeria’s crude oil quota from 1.753 million barrels per day in May 2022 to 1.772 million barrels per day in June. Brent International closed at $113.22 a barrel on Friday, up 2.16 or 1.94%.

Based on the Central Bank of Nigeria exchange rate of 416 naira and production of 1.772 million (55 million barrels per month), total revenue stands at 23 billion naira for the month under review.

This means the country would likely ramp up exploration to meet its June OPEC quota. Africa’s largest economy derives 90% of its revenue from crude oil exports. Experts have predicted that the price could reach $150 a barrel without end in view of the ongoing Russian-Ukrainian war.

However, over the past two years, Nigeria has been unable to meet its OPEC production quota due to increased cases of pipeline vandalism, oil theft and other technical issues. Its output has stalled at around 1.45 million barrels per day, with little to no chance of improving anytime soon.

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