Tougher times ahead as rising subsidy weakens FG, states’ revenue

BY EMEKA EJERE

Ability of the federal and state governments to meet their financial obligations in the coming months is getting increasingly unlikely, with the continued rise in the amount spent in subsidising Premium Motor Spirit (PMS), popularly called petrol.

This is more so as the Nigerian National Petroleum Company Limited (NNPC) has, according to insiders, informed the Federation Account Allocation Committee that it would deduct an estimated value shortfall of N874.5bn in the May 2022 proceed due for sharing at the June 2022 FAAC meeting.

Rather than being an advantage to Nigeria as a major oil producer, the high crude oil prices provoked by the Russia-Ukraine war have become a burden for the country as the fuel consumed locally is imported, leaving the economy at the mercy of volatile exchange rate.

Data obtained from the NNPC on Wednesday showed a monthly rise in PMS subsidy spending by the oil firm which, however, described it as under-recovery/value shortfall. Importation of petrol into Nigeria and payment of subsidy for the product have solely been handled by the NNPC for a while.

The approved subsidised pump price of PMS in Nigeria is between N162 and N165/litre, but oil marketers say the actual cost should be a little higher or about the same price as diesel were PMS deregulated.

Latest figures from NNPC showed that the amount spent on fuel subsidy maintained an upward trend from January to April this year. In January, February, March and April, the national oil firm incurred N210.38bn, N219.78bn, N245.77bn and N271.58bn respectively, amounting to a total of N947.51bn during the four-month period.

“This is unsustainable. In just four months we’ve incurred this much as subsidy on petrol because of our continued dependence on petroleum products imports,” the National Public Relations Officer, Independent Petroleum Marketers Association of Nigeria (IPMAN), Chief Ukadike Chinedu, stated.

“And this is because all our refineries are not working despite several promises by government that the plants will start production. The value of the naira is depreciating daily, so what do you expect?

“Nigeria will continue to subsidise petroleum products and that is static at the moment and based on this, our naira will continue to be devalued, because so much dollars are just being deployed in pursuing products.”

The Foreign Trade in Goods Statistics report of the National Bureau of Statistics (NBS) had earlier revealed that Nigeria spent a total of N675.93bn on fuel subsidy, an amount representing 44.86 per cent of the N1.51tn spent on the imports of PMS in the first quarter of 2022. The report further showed that the amount spent on fuel subsidy monthly rose from N60.39bn in March 2021 to N245.77bn in March 2022, indicating an increase of 306.97 per cent.

Growing concerns

The World Bank and the International Monetary Fund (IMF) have consistently decried the federal government’s huge spending on petrol subsidy, urging the government to end the regime.

The World Bank, in its Africa’s Pulse report, said increasing fuel subsidy puts the Nigerian economy at a high risk as subsidy payments could significantly impact public finance and pose debt sustainability concerns.

Although the federal government had 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 retain the fuel subsidy for another 18 months following threats of protests by the Nigerian Labour Congress (NLC) and other interest groups.

The IMF in its ‘Nigeria: Selected Issues Paper’ report, which was prepared by a staff team of the Fund as background documentation for its periodic consultation with Nigeria, said the fear of political resistance, widespread corruption and pressure from interested groups is hampering the removal of the fuel subsidy in Nigeria.

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

The Resident Representative for Nigeria at IMF, Ari Aisen, recently said that Nigeria’s subsidy bill would likely hit N6tn by the end of this year at the current monthly subsidy bill of N500bn.
There are fears that given the continued increase in subsidy bill, the country may find it hard to meet its fiscal needs and subsidy payment may shortchange the country on other developmental needs that could have been enjoyed by the citizenry.

The IMF further revealed that a macro-fiscal stress test it conducted on the country showed that interest payments on debts in the country could amount to Nigeria using 100 per cent of its revenue to service debts by 2026 if not closely monitored.

“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,” Reuters recently reported the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, as saying.

The Debt Management Office (DMO) said on Tuesday that Nigeria’s total public debt stock increased to N41.60tn in the first quarter of 2022 from N39.56tn as of December 2021, representing an increase of N2.04tn within a period of three months.

“The total public debt stock as at March 31, 2022, was N41.60tn or $100.07bn. The amount represents the domestic and external debt stocks of the federal government of Nigeria, the thirty-six state governments and the Federal Capital Territory. The comparative figures for December 31, 2021, were N39.56tn or $95.78bn,” a statement on the DMO’s website read in part.

The nation’s debt stock is likely to reach N45.95tn following plans by the federal government to borrow an additional N6.39tn to finance the 2022 budget deficit.

An economist and Chief Executive Officer of Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf,  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, warning that the subsidy would adversely affect the economy.

“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

According to him, the approvals will lead to higher debt service, increase in fiscal deficit, increasing inflationary pressure and even naira depreciation.

He said, “With this development, our macroeconomic outlook in the near term should be a cause for worry. The outcomes of these approvals include increased borrowing, higher debt service, surge in fiscal deficit, heightening inflationary pressure and a risk of further depreciation in the naira exchange rate.”

Arguing that there would be an increase in recurrent expenditure as debt service and fuel subsidy will gulp a significant part of the government’s revenue, Yusuf urged Nigerians to be prepared for more challenging times, as necessary reforms for economic recovery and growth may not happen soon.

Below quota

Going by a production quota raise granted to the country by the Organisation of Petroleum Exporting Countries (OPEC), Nigeria could earn as much as N23 billion from crude oil export in June if the oil price hovers around $113 per barrel.

OPEC had at its 28th OPEC and non-OPEC Ministerial Meeting held recently increased Nigeria’s crude 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 per barrel on Friday, increasing by 2.16 or 1.94 percent.

Based on the Central Bank of Nigeria’s exchange rate of N416, and an output of 1.772 million (55 million barrels a month), total revenue comes to N23 billion for the month under review.

This means the country would likely ramp up exploration to meet its OPEC June quota. The Africa’s largest economy earns 90 percent of its revenue from crude oil exports. Experts predicted price could reach $150 per barrel with no end in sight to the ongoing Russia-Ukraine war.

However, Nigeria had, for the past two years, been unable to meet up with its OPEC production quota due to increased incidences of pipeline vandalism, oil theft, and other technical issues. Its’ output has stagnated at around 1.45 million barrels per day, with little or no likelihood of improving anytime soon.