According to statements from Nigerian National Petroleum Corporation (NNPC) and World Bank, the huge burden Nigeria incur in the cause of taking care of controversial petrol subsidy may hamper the ability of the three tiers of government to pay salaries in 2022. The economic case for the removal of Nigeria’s fuel subsidy regime is mounting by the day even though the present administration seems undecided on how to proceed. The billions of naira Africa’s largest oil-producing country commits to subsidising petrol is no longer news, but what is more infuriating is the opportunity cost forgone in a slow-growing economy that could use more private sector investments for job creation and growth.
According to statements from Nigerian National Petroleum Corporation (NNPC) and World Bank, the huge burden Nigeria incur in the cause of taking care of controversial petrol subsidy may hamper the ability of the three tiers of government to pay salaries in 2022. “The NNPC may have to start invoicing the federation to be able to maintain subsidy,” the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari said during a panel session at the launch of World Bank’s Nigeria Development Update (NDU) bi-annual report.
He added, “When you take out N243 billion from your total income every month, you are not able to fund your operations and so you can’t meet your other fiscal obligations. Clearly, there is a challenge in the ability to pay. So, there is a reform going on, particularly in the energy sector and no one can stop”. Kyari pointed out that while all over the world, subsidies are introduced to bring cost control and less pains to citizens, in Nigeria, fuel subsidy has become a major fiscal burden that must be eliminated.
Nigeria is sinking under the weight of petrol subsidy which is set to cost the country some N3 trillion this year, more than the country has spent on capital projects each year since 2016. The government passed the Petroleum Industry Act (PIA) last August after many years of dilly-dallying. Though the law abolishes the petrol subsidy practice, the government has carried on with it despite the drain it has increasingly become on the country’s finances.
The government claims the need to protect the poor from more economic hardship is the reason it has continued to make petrol prices artificially low despite rising oil prices even though economists have often argued that petrol subsidies benefit the rich much more than the poor. Speaking further, Lead Economist, Nigeria Country office of the World Bank, Marco Antonio Hernandez, painted a gloomy picture of Nigeria if the country decides to continue with the controversial fuel subsidy. Hernandez who provided insights into the NDU report, titled “Time for Business Unusual,” stated that should the current revenue challenge continue till 2022, only Lagos State would be able to meet its financial obligations.
The report pointed to mounting fiscal pressures due to lower-than-expected revenues in 2021 and the rising cost of PMS subsidy. It stated: “Because most states rely heavily on intergovernmental transfers, diminished revenue inflows to the Federation Account are jeopardising fiscal sustainability at the state level. The World Bank Country Director for Nigeria, Shubham Chaudhuri said 20 million Nigerians comprising 10 million each from the national and local can benefit from N5,000 per month cash for the people in six months. Nigeria is the only country in the world that subsidizes only PMS, the cost of which is massive and unsustainable; as a result, Nigeria is sacrificing critical investments in physical and human capital.
The report said 40 percent of the poorest consume less than 3 percent of the total PMS consumption in Nigeria, adding that by creating a large price differential between Nigeria and its neighbors, the PMS subsidy is incentivizing smuggling.