With less than 3 months: Cautious optimism, fears trail planned fuel subsidy removal

With less than three months to the removal of fuel subsidy, many Nigerians are already bracing up for the effects which they all agreed will lead to an increase in the pump price of fuel, and also a likely steady supply of the commodity in the market.

The removal of the subsidy, according to some experts, will drive up the price of premium motor spirit, resulting in higher transportation fares, increased inflation rate, reduced buying power and a surge in poverty.

 What FG said

Minister of Finance, Budget and National Planning, Hajiya Zainab Ahmed, had during the public presentation of the 2023 Budget, hinted that government would stop the payment of fuel subsidy by the end of June 2023.

She said in the 2023 fiscal period, the government had made a provision of N3.36 trillion for fuel subsidies payment to cover the first six months of 2023.

Nigeria currently runs two forms of subsidy. The first is the payment of the difference between the actual pump price of PMS, which was arrived at after calculating the landing cost and the extant margins.

The other is the cost of transportation (about N30) paid on every litre to ensure the price of PMS is similar across the country.

In Nigeria’s 2022 Budget, capital expenditure stood at N5.4 trillion while subsidy payment was initially N4 trillion but rose to about N7 trillion before the end of the year.

In the 2023 Budget, the subsidy from January to June when the government said it would stop the subsidy stands at N3.6 trillion.

 While there have been calls for a holistic and well-phased approach towards subsidy removal, anxiety continues to prevail as to the possible effects of such a decision, despite being economically expedient if the nation’s fiscal position will not be further jeopardised.

Tinubu’s stance

President-elect Ahmed Bola Tinubu had, November 2022, during his campaign told the business community/Organised Private Sector (OPS) that fuel subsidy would have to go.

“I am determined to give you affordable and reliable power to light the entire economy as we cannot produce without constant electricity. We have what it takes to bring it to you all; we have the gas, sun, wind and water. As for petroleum subsidy, it has to be removed and my administration would see to the implementation of the Petroleum Industry Act (PIA),” he had said.

 Improved revenue

Speaking on the development, the Centre for the Promotion of Private Enterprise believes that one of the gains of the planned subsidy removal is the improvement of Nigeria’s revenues by at least N6 trillion annually.

According to its director, Muda Yusuf, there would be an end to the several years of plundering of the nation’s resources through the subsidy regime.

Yusuf said: “Already, there is a plan to discontinue petroleum subsidy, which is a positive development. This action would unlock a minimum of N6 trillion in revenue into the federation account annually.  Additionally, there would be an end to the several years of plundering of the nation’s resources through the subsidy regime.”

Also renowned energy economist, Professor Wunmi Iledare, on his part, noted that the government has itself to blame for digging a hole and now finding it difficult to climb out of the hole. 

He said subsidy removal would make the economy better than it is, stressing that the development would create less crowding out of private investment in the sector.

“There would be less pressure on external reserves thereby improving Forex rates. The removal would create less borrowing for consumables and more money to do more important things,” he added.

Labour still kicks

But in its typical position, the Organised Labour  argued that with less than three months to the June deadline, Nigerians are yet to feel the safety nets and palliatives government plans to put in place post-subsidy removal, lamenting that it has been months of sufferings brought about by petrol scarcity and the cash crunch that affected many households.

For them, subsidy remains the only gain for the masses after years of crude oil extraction.

They challenged the government to get the refinery working, halt smuggling of the products or increase wages due to possible inflationary impacts of subsidy removal on prices of goods and services.

Similarly, the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) said the federal government must be fixed before subsidy can be removed.

PENGASSAN President Comrade Festus Osifo said the association had always insisted on making the local refineries functional before subsidy removal of subsidy as the price of the product would be lower when refined locally.

“Today, if you look at the cost of importation of PMS and even the cost to produce locally, the crude cost, which is sold at international price, contributes over 80 to 90 per cent of the overall PMS cost. So, it will not necessarily bring down the price.

“The reason we are agitating that the refineries should be working is practically because we want more jobs to be created and we want the value chain to be deepened,” said Osifo who is also the president of the Trade Union Congress (TUC) of Nigeria.

Drain on economy

In a chat with Blueprint, Senior Officer Natural Resources Governance Institute (NRGI) Tengi George-Ikoli, said petroleum subsidy has become a drain on the Nigerian economy.

According to her, subsidy payments proposed for 2022 were almost twice the anticipated revenues from oil for the year.

“Funds spent on petroleum subsidy can be better fed back into the budget to deliver capital projects, bridge Nigeria’s huge infrastructure deficit, accelerate energy access needs that leaves 43% of Nigerians in darkness and achieve Nigeria’s energy transition plans.

“By the subsidy removal, it means that the global prices of petroleum will now be reflected at the pump. If prices go up, prices will go up and if they go down, prices will go down. It is the same with any other commodity. The current government and incoming government have talked about embracing models that will minimise the short term effect on the economy,” she said.

‘Call for subsidy removal unpatriotic’

Also commenting on the issue, a petroleum expert, Bala Zaka, said those calling for subsidy removal at this time are disloyal citizens and do not understand what economic growth is all about, not to talk of economic development.

He said: “We already know that diesel has been deregulated and we can see the consequences on all the sectors, whether in the strategic domestic sector, strategic commercial or strategic industrial sectors.

“The minimum wage in Nigeria today per month is about N30, 000 and that is just about $50. Is that the economy where you want the price of PMS to approach the price of diesel, which is about N850/litre currently? Are they not seeing how Nigeria’s economic landscape is right now?

“If petrol price should hit N850/litre what do you think will be the consequence on the poor masses? They must first think of the repercussions before coming out to utter statements which if implemented, could cause untold hardship to the already suffering masses in Nigeria.”

Shocks to the economy

Also speaking to one of our correspondents, a political economist, Adefolarin Olamilekan, said “the proposed removal of fuel subsidy will come with its shock on the economy. 

“Nevertheless, a review over why the government keeps subsidising PMS has shown that such practice is just not sustainable. Rather, it has reversed all gains attained as government revenues have gone into subsidy.

“Regrettably, whatever the government plans to provide as a safety net or palliative hardly gets the target population as envisaged.”

He wondered if the federal government would have the political will to remove the subsidy as it had earlier said.

 “For us, we believe the government must match its word with action, particularly with a solution and not providing alternatives in the name of palliative and safety net. Such action can only be a cosmetic approach with no deep solution but out to few loyalists and sycophants.

“What we expect the government and incoming administration to do is to take the issue of local refining of the crude seriously because going forward non-refining of crude should be non-negotiable.

“The biggest challenge in the oil and gas sector is corruption and if it is not tackled with a sincerity of purpose, the country will continue to suffer from the sector as an umbrella comatose on the entire economy,” he said.

Need for holistic approach

Meanwhile, a former Statistician-General, Oyeyemi Kale, said he would prefer a holistic approach to the issue.

Kale, who is the Chief Economist of KPMG Nigeria said there is the need to look at the entire system, and then determine what is best for the country.

Kale added that it is a cost-benefit analysis that ultimately determines what is best for the economy, adding that conversations must take place to determine how the government would provide palliatives for affected citizens to minimise the negative effects of the policy.

About Segun Odunewu, Lagos and Benjamin Umuteme, Abuja

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