For the umpteenth time, the World Bank has warned that the high cost of subsidies, due to the spike in oil prices may deteriorate Nigeria’s fiscal balance, saying that shielding the Nigerian consumers from the high cost of fuel will pile up more debts for the country, reports Festus Akanbi

For a nation with a lot of economic baggage on the eve of a general election, it is understandable why the Nigerian economy is open for scrutiny by members of the international economic community. Besides this, the nation’s economy has been tottering as a result of a chain of economic developments which include the instability in the international crude oil market, the backlash of the Covid-19 pandemic, and the attendant reduction in the flow of foreign investment into Nigeria and of course, the ongoing hostilities between Russia and Ukraine, which have continued to put pressure on the commodities market globally.

Amidst these unfavourable economic realities, the current administration is expected to start winding down for a transfer of power after the next year’s general election. In the light of these, economic affairs commentators said there are quite a several unfinished businesses that if not properly handled may turn out to be landmines to the incoming administration.

Two of such issues are the controversial policy of fuel subsidy payment and debt sustainability. In its latest report on Nigeria’s economy, the global financial institution, the World Bank cautioned against the continued retention of the controversial policy, warning that fuel subsidy payments by Nigeria could significantly impact public finance and pose debt sustainability concerns.

Nigeria’s bank credit to the government surged to N14.9 trillion as of February 2022, an uptick from the N14.2 recorded in January 2022.

The concern of the global lender was contained in its new biannual report known as Africa’s Pulse, where the World Bank said the increasing fuel subsidy puts the Nigerian economy at high risk.

It said Nigeria is projected to have a 3.8 per cent growth in 2022, adding that as an oil-dependent country, weak oil production hampers economic recovery.

Apart from the red signal from the World Bank, another multilateral institution that raised the alarm was the International Monetary Fund (IMF), which stated that there is a reason to worry about this nexus between banks and governments.

“Large holdings of sovereign debt expose banks to losses if government finances come under pressure and the market value of government debt declines,” it stated.

The bank stated that a crisis with the credit to the government could force banks, especially those with less capital “to curtail lending to companies and households, weighing on economic activity.”

Debt Sustainability

Meanwhile, the World Bank 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 World Bank and economic analysts have continued to raise concerns over the surging external debts, the Debt Management Organisation (DMO) insisted that Nigeria’s public debt remains within a sustainable profile, but is susceptible to revenue shocks.

In the just-released report of the 2020 Debt Sustainability Analysis (DSA) posted on its website, the DMO noted that the Risk Rating from the 2020 (DSA) revealed that Nigeria’s external debt remains at a Moderate Risk of Debt distress, but is sensitive to export shocks.

World Bank: Fuel Subsidy Poses High Risk

Meanwhile, the World Bank’s latest observation contained in a new biannual report known as ‘Africa’s Pulse’, said Nigeria is projected to have a 3.8 per cent growth in 2022, adding that as an oil-dependent country, weak oil production hampers economic recovery.

It added that the increasing fuel subsidy poses a high risk to the country’s economic growth, despite the increase in oil prices.

The bank said: “Growth in Nigeria is forecast to increase to 3.8 per cent in 2022 and stabilise at four per cent in 2023-24. Real GDP growth was revised by 1.2 percentage points for both periods compared with the previous forecast. Nigeria’s economy is still dependent on the oil sector. Oil-related revenue contributes 40 to 60 per cent of fiscal revenue, while oil and gas account for 80 to 90 per cent of total exports.”

Unfortunately, Nigeria is still battling with the twin problem of oil theft and low productivity at a period when other oil producers are making a kill of the spike in the price of crude oil.

The World Bank nevertheless warned that “Risk remains high on increasing fuel subsidies, which could weigh heavily on public finance and pose debt sustainability concerns.”

It noted that the high level of oil prices will affect countries that are shielding the impact on their consumers through fuel subsidies, such as Nigeria and Ethiopia, warning that the high cost of fuel subsidies, due to the increase in oil prices, may deteriorate Nigeria’s fiscal balance.

In 2021, the NNPC Limited put the cost of fuel subsidy at N1.43 trillion. However, the National Assembly has approved N4 trillion as of the fuel subsidy bill for 2022, which is an increase of 179.72 per cent over the previous year’s subsidy bill. Experts have warned the federal government that the N4 trillion fuel subsidy bill would adversely affect the country’s economy.

Analysts: There is a Cause for Alarm

Despite the assurances from the government quarters that all is well, Group Executive Director, Cordros Capital Limited, Mr. Femi Ademola, believed the fear raised by the World Bank is a very real one. According to his explanation, “When proposed in October 2021, the budget of N16.39 trillion had a deficit of N6.26 trillion which will be financed through debt.

In January 2022, the deficit was further increased by about N1.1 trillion when the National Assembly approved a budget of N2.55 trillion for fuel subsidy. The increase to N4 trillion now would result in an additional burden of at least N600 billion to the federal budget for 2022 and a reduction of the state’s share of federal allocation by the balance of N900 billion.”

He pointed out that most of the revenue gap would be financed by debt; thus, increasing the country’s debt burden in the face of reducing revenue accruable to the federation. This, according to him, will threaten Nigeria’s fiscal sustainability and put further pressure on prices and exchange rate stability.

He believed it is politically impossible to consider the removal of the fuel subsidy at this period, saying however that if the economy has a consideration, it would be a better decision to place the effect on the economy above political calculations.

“I agree that the argument that the country should focus on improving revenue generation to cover the deficit gap is a valid one. However, since this is taking a longer time than required, we should streamline expenditure in the short term to meet the country’s fiscal realities,” he said.

Speaking on options available to the government, Ademola explained that “Sustaining the subsidies to the end of the year or even forever is not the problem in itself. Very many oil-producing economies do that for their citizens and it is considered a way to share part of the country’s commonwealth with all the citizens.

“The problem in the case of Nigeria is that of affordability. Nigeria’s fiscal situation appears to imply that the country cannot afford to continue to subsidise fuel consumption for its citizens. There is a need to create a more cost-effective social welfare scheme or program to redistribute national wealth to the citizens.

Ademola thinks that one of the options available to the government is to increase revenue drive through increased taxes and complete stoppage of the theft of the country’s natural resources, especially oil, aggressive taxing of the citizens may be counterproductive while ending the oil theft would take some time to be sufficiently contained. The choices for the federal government are very limited.

Reacting to the debate on the dangers of retaining subsidy payment on petrol, a leadership strategist and Chief Executive Officer, Leading Strategies Consult Limited, Dr. John Ekundayo said: “Now that Nigeria is on the eve of the election year, it would be politically foolhardy to reverse the earlier.”

He added: “In my perspective, the government at the centre would want to keep financing the subsidy for peace to reign even when it is obvious that the globally existing price of PMS does not make sense.”

According to him, one implication of this decision is indirectly oiling the wheels of smuggling of PMS across the borders; possibly part of the reason oil theft runs rampantly and riotously to the chagrin of state actors.

As difficult as the withdrawal of the fuel subsidy regime is, the current administration will not be forgotten if it fails to face the reality by ending the policy which has proven to be a serious drain pipe to the nation’s economy.