Subsidy removal will raise inflation by 69% -Experts

Nigerians faced one of their most difficult questions of the future last week when the issue of subsidy removal dominated discussions. Minister of Finance, Mrs. Zainab Ahmed had said in Washington DC, U.S.A that the country was disposed to removing subsidy on fuel following concerns by the IMF/World Bank against its continuation because of the huge resources going into it.

With that statement fuel queues emerged across the country, prompting her to reverse herself by clarifying that Nigeria was not prepared to remove subsidy at the present as there is need to provide some cushions and palliatives for the people to reduce its effects. Experts agree that removing the subsidy would create hyperinflation in the economy which may lead to another recession.

Nigeria spent N783 billion on subsidy in 2018 and a total of N5.3 trillion in the past four years. Meanwhile government debt increased from N11 trillion in 2015 to N24.48 trillion by 2018, an increase of N13 trillion. IMF believes that with this level of subsidy and borrowing the economy is not likely to grow to address issues of poverty and unemployment. Last year, Nigeria emerged as the poverty capital of the world with 81 million people in extreme poverty.

Under-recovery is the name coined by the NNPC to represent the amount of subsidy the corporation incurs on behalf of the federal government for the importation and supply of petroleum products at a landing cost above the official retail pump price of N145 per litre of Premium Motor Spirit, popularly called petrol. The volume purchased is meant to be refined abroad, while refined petroleum products are brought into the country for consumption.

A review of the document submitted to the FAAC showed that showed that about N51.3 billion was incurred as under-recovery cost in January, while February, March, and April recorded N58.7 billion, N36.1 billion, and N82.4 billion respectively.

In May, the document showed the cost under-recovery on PMS by NNPC dropped to about N36.9billion, before increasing to about N53.4 billion in June, N52.4 billion in July and N63.2 billion in August.

Again, the amount incurred as under-recovery by the corporation rose to N71.8 billion in September before dropping to N51.2 billion and N65.9 billion in October and November respectively.

Further details from the document revealed that the cost of under-recovery incurred by the NNPC was deducted from its revenue every month before transferring the balance to the federation account for distribution among the three tiers of government.

Details showed, about N45.8 billion was deducted in January; N59.5 billion in February; March, N34.03 billion; April, N77.9 billion; May, N88.9 billion; June, N68.6 billion; July, N52.5 billion; August, N60.6 billion; September, N71.6 billion; October N51.2 billion and November N65.86 billion.

The issue of fuel subsidy and cost under-recovery by NNPC has remained contentious since the present administration announced at inception in 2015, the removal of subsidy from the pricing template of petrol. This government had criticized its predecessor over the policy and vowed to stop it. So it did not budget for it in past four years. Yet Nigeria is spending more on subsidy now than at any other time.

But speaking while briefing journalists on the outcome of Nigeria’s delegation meetings with investors and institutions at the IMF/Word Bank meetings in Washington DC, the Minister said, “IMF said that fuel subsidy is better removed so that we can use the resources for other important sectors.

“In principle, it’s a good suggestion, but in Nigeria we don’t have any plans to remove fuel subsidy at this time because we have not yet designed buffers that will enable us remove the subsidy and provide cushions for our people.

“So there is no plan to remove fuel subsidy. We will be working with various groups to find an alternative if we have to remove it. We are not yet at the point of removing fuel subsidy yet.”

She had said that the general advice for Nigeria is to prioritise cost-effective policies that would increase resilience to shocks, boost productivity and raise incomes of the bottom 40 per cent of the population.

Several controversies have also trailed the subsidy regime The Senate had accused the NNPC of operating a $3.5 billion fund allegedly kept and utilised by for fuel subsidy in October 2018. In 2012 fuel subsidy payment was a major issue, leading to probes by the National Assembly and EFCC.

Also there was $1.05 billion Nigerian Liquefied Natural Gas dividend which the NNPC diverted to pay subsidy. According to the Kanti Baru, GMD NNPC,, the action was in line with section 7 (4)(b) of the NNPC Act, which mandated it to defray its operational costs from its revenue.

He said, “This $1.05 billion is being administered under a steering committee that was set up, and a working committee that handles daily operations of this fund. “These committees comprise representatives of the Minister of Finance, Minister of State for Petroleum Resources, Accountant General of the Federation, CBN, Petroleum Pricing Regulatory Agency, Petroleum Equalisation Fund Management Board, Directorate of Petroleum Resources and the NNPC.

“The fund is being transparently administered according to laid down processes and governance.

“Currently, no other oil company imports petrol due to the high landing cost above the N145 per litre price ceiling on sale of the product, and also due to the lack of provision for subsidy in the Appropriation Acts since 2016.”

However, Minister of state for Petroleum, Dr. Ibe Kachikwu said last week that the landing cost has risen from N177 per litre to N180 as oil price in the international market continues to rise. To fully remove subsidy the pump price of fuel will rise to N210, as current subsidy stand at N65 per litre. There is a N30 addition to the landing cost to cover distribution logistics. This will amount to a 70 percent rise in the price of fuel.

However, experts say that this will be a bitter pill to swallow as its social and economic consequence and effects could be far-reaching. For instance, when fuel price was raised from N98 to N126 in 2012 a difference of 35 percent, inflation rose by 26 percent. Also when it went up from N126 to N145, a change of 26 percent, prices rose by 20 percent.

So a price change of 70 percent is likely to spike inflation by over 50 percent. This, according experts is unwholesome and is capable of pushing the country into recession as demand will drop. But they insist that this is an evil that the country must confront whether now or in the future but better now to save the future.

“There is no good or better time to do it; much time and resources have already been wasted; this is an inevitable choice we must make. This government has no money and is borrowing heavily; in fact it is spending on deficit”, say Mr. Teslim Shitta Bey of Proshare.

He believes the plan for palliatives is a waste of time because government will never have enough money to do much in that regard. He attributes the problem to the structure of the economy and there will be no respite until that structure is properly reset.

SOURCE: hallmarknews