BY EMEKA EJERE
There is a gloomy outlook for Nigeria’s economic recovery drive, with inflating petrol subsidy payments posing serious threat to more growth-enhancing activities of both the federal and sub-national governments.
This is even as the situation is accounting heavily to more government borrowing, which is raising concerns of possible debt distress among economic experts.
A plan by the government to deregulate the sector, following enactment of the Petroleum Industry Act (2021) that prescribes a free market for the downstream sector of the petroleum industry has been abandoned, with the government seeking and obtaining legislative approval to spend N4 trillion on petrol subsidies in 2022.
According to the latest data from the Nigerian National Petroleum Corporation (NNPC), the total cost of subsidy in January and February, 2022 alone was N396.72 billion, the cost of subsidizing the product in 2020 was N450 billion.
Petrol subsidy payments grew by 349.42 per cent from N350 billion in 2019 to N1.573 trillion in 2021, propelled by the rising price of crude oil in the international market and the falling value of the Naira.
The Minister of Information, Alhaji Lai Mohammed, had previously disclosed that federal government spent N10.413 trillion on fuel subsidies between 2006 and 2019.
The Executive Secretary of Major Oil Marketers Association of Nigeria (MOMAN), Mr Clement Isong, in a monitored interview on Tuesday, listed spike in the international price of crude oil, foreign exchange rate and high rate of petrol smuggling across Nigeria’s borders as three factors responsible for the astronomical rise in petrol subsidy.
He said: “The first is the international cost of crude oil and the derivative products like Premium Motor Spirit (petrol) has gone up significantly as a result of the Russian war in Ukraine. So the price of crude itself, and the price of petrol, diesel and all products that come from petroleum have gone higher than they normally would be because of the war and the sanctions imposed on Russia, which is a major exporter of crude.
“Secondly, the rate of foreign exchange is exceedingly high right now. That is to say, the exchange rate for the Naira is at its highest level. Im not talking of the black market which is even higher, Im talking about the Central Bank of Nigeria rate which is N411-N414 to the dollar. It is higher than it has ever been historically.
“Finally, and this is the most important reason because you have capped the price, at one third or one quarter, of the price that it is across the borders, the propensity for the product to move across the borders is at the highest.
“What I mean by that is that so many people, ordinary Nigerians, ordinary human beings on both sides of the border engage in moving the product from the Nigerian side to the other side. Whether we are talking about Cameroun, Chad, Republic of Benin, Niger or Equatorial Guinea, this product goes to the whole Central and West African regions.”
Isong believes that ordinarily, the volume being imported into the country ought to be lower, but has been shot up by the activities of smugglers.
Director, Centre for Petroleum, Energy Economics and Law, University of Ibadan, Professor Adeola Adenikinju, noted that the governments decision to continue subsidy payment was more political than economic, given the revenue challenges facing governments at all levels.
He argued that by retaining the petrol subsidy, the government would find it difficult to meet other commitments.
“It is a political decision, not an economic one. Economically, we know that subsidies have been very costly to the country and this is going to have serious implications on government revenue, particularly the state governments.
The states are going to feel it more because they depend heavily on revenue from the Federation Account and secondly, they do not have the leverage to borrow like the federal government.
“If it goes ahead, the states are going to be hard-hit financially and it is going to be extremely difficult for them to meet all their commitments in terms of payment of salaries and keeping their obligations to pensioners.”
Triggering more borrowing
Reuters reported the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, as saying at the Arab-African Conference in Cairo, Egypt that fuel subsidy was widening governments deficit gap so much that it was considering tapping the 2 billion Euros it raised in the Eurobond sale last year to support its fiscal position.
The minister said that the administration would target more local borrowing this year to help fund the budget deficit which has been exacerbated by rising oil prices, due to Russias war in Ukraine.
“Rising oil prices have put us in a very precarious position … because we import refined products … and it means that our subsidy cost is really increasing,” Ahmed had noted.
Meanwhile economic experts are kicking against the federal governments proclivity for debt, which they have described as unsustainable, calling for increased productivity with a view to boosting revenue.
Data from the Debt Management Office (DMO) showed a rise in Nigeria’s total public debt from N32.92 trillion in 2020 to N39.56 trillion at the close of last year.
Only recently, the DMO revealed that the federal government has incurred N950bn new domestic borrowing between January 2022 and March 11, 2022.
Disclosing the fresh borrowing in the presentation of the Public Debt Data as of December 31, 2021, the Director-General of the DMO, Patience Oniha, revealed that the federal government was considering all options to raise funds externally.
According to the document, the federal government still plans to borrow an additional N1.6tn, while the 2022 debt target for domestic borrowing is N2.57tn. There is also a plan to borrow N2.57tn from foreign creditors, while N1.16tn is expected from multilateral/bilateral drawdowns.
In total, the federal government plans to add N6.3tn new debts to the current debt stock, which would push the countrys total debt stock to N45.86tn by December 2022.
Although Nigeria’s current debt to Gross Domestic Product (GDP) 22.47 per cent is relatively low, giving it room to borrow, its inability to generate adequate revenue has worsened its debt problem.
The debt to GDP ratio stood at 22.47 per cent compared to 21.61 per cent in 2020. At this level, the ratio is within Nigerias self-imposed limit of 40 per cent, the World Bank/IMFs recommended limit of 55 per cent for countries within Nigerias peer group, and 70 per cent for ECOWAS countries.
Nigerias revenue to GDP ratio has remained low at nine per cent compared to countries, such as Ghana at 12.5 per cent; Kenya at 16.6 per cent; Angola at 20.9 per cent; and South Africa at 25.2 per cent.
Reacting to the situation, an economist Dr Muda Yusuf, said the country is on the brink of debt distress.
He said, Nigeria is on the brink of debt distress because our debt profile now is not sustainable.
“We had a debt service to revenue ratio getting to 76 per cent as of November last year. The situation is likely to get worse because our deficit in the 2022 budget is N6.4tn, and we need to borrow to finance the deficit,” he said.
“Also, the federal government has submitted a supplementary budget proposal for subsidy for N2.55tn after the budget was passed. Adding that to the deficit, we will get about N9tn.
“How much is the revenue? It is just about N10.7tn, and we are not likely to get the full revenue, maybe 70 per cent. So, we are getting to a point whereby the time we service our debts, which should be around N4tn, and spend another N4tn on subsidy this year, we have consumed almost all our revenue for the year. Does that now mean that we are going to be using debt for personnel costs? For overhead?; for capital budget? That is where we are heading to.”
Yusuf, who is the Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), regretted that instead of the country gaining from the increase in oil price like other oil-producing countries, the government is losing money on fuel importation and fuel subsidy
“With the increase in oil price, the subsidy price will have to increase beyond what the NNPC requested. While other oil-producing companies are happy, as their reserves are increasing and currencies are getting stronger, we are lamenting because we are not getting the full benefit of the oil windfall,” Yusuf said.