Nigeria: How Fuel Subsidy Removal Will Reduce Borrowing - Expert

Attendants at a petrol station in Ilorin (file photo).

"We are faced with a very tricky situation; if we continue with the subsidy, it has the potential to pull down the economy completely the way it is going," Mr Yusuf said.

The Director of the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, has said that removing the petroleum subsidy would help reduce the nation's budget deficit and borrowing appetite.

Mr Yusuf disclosed this while speaking at the weekly episode of PREMIUM TIMES' TwitterSpaces. The latest episode of the programme was titled "Fuel Subsidy Removal Walking the Tightrope."

Mr Yusuf attended the event; the president of the Independent Petroleum Marketing Association of Nigeria (IPMAN), Chinedu Okoronkwo; the Managing Director Mutasit Oil and Gas, Titilope Anifowoshe; and many other Nigerians.

Fuel queues returned to Nigerian cities Monday as many motorists scrambled to get petroleum products hours after President Bola Tinubu announced that the government would end the fuel subsidy regime.

Mr Tinubu, on Monday, in his inaugural address at Eagle Square, Abuja, declared that there would no longer be a petroleum subsidy regime as it was not sustainable.

On Wednesday, Mr Yusuf said the subsidy removal plan was not just a pronouncement because it is already effective.

"Just the way it is, if the government does not backtrack, we are likely to see some savings of about N6 to N7 trillion annually; we are likely to see a reduction in the pressure on our foreign reserves because we are spending close to $15 billion on importation of petroleum products," he said.

"If we have a market that is liquid, a bulk of these things will have to be coming from the private sector as well. In the medium to long term, we have refineries. We don't have private investors in the space because of the subsidy.

"The change that will happen around this policy step has a lot of macro-economic importance as it will reduce deficit, borrowing, ways and means, and once all these are reduced, it will impact on macro-economic stability, which is necessary for growth and employment generation."

Policy Implications

Asked what implications the current subsidy removal policy in the country could have on the already fragile economy, Mr Yusuf said there were both positive and negative implications.

He said short-term negative implications are effects of what is being witnessed now, which include an increase in the cost of transportation with a ripple effect on the welfare of the people.

"Food and transportation are a major part of a family's budget, and so when you have any policy that touches on those two things, it can be very painful, and the impact can be very severe," he said.

"We are faced with a very tricky situation; if we continue with the subsidy, it has the potential to pull down the economy completely the way it is going," Mr Yusuf said.

He explained that there are two components of the subsidy, and that's why it is a challenge.

"There is the direct or real subsidy which is the real difference between the cost of getting the petroleum products and the market price," he said.

"Secondly, there is the corruption component of the subsidy, which is almost 50 per cent of this subsidy that is being talked about."

According to him, it is said that Nigerians consume about 60 million litres of petrol a day, but this cannot be correct, and the only way to address it is to scrap the entire subsidy, which is why it is a very difficult decision.

Mr Yusuf said, "I am of the view that there is an issue about sequencing; but the way the President pronounced it was a bit abrupt, going against the June arrangement that had been laid down by the previous administration."

According to him, some stations were already hoarding the fuel even before the pronouncement was made, but the escalation came when the pronouncement was made. He said following the already prepared schedule would have allowed for some engagement and preparation that could help minimise the shock.

The CPPE boss added that the main challenge now is to deal with the palliatives to ensure that the shock and pain are not too severe.

"There are a whole lot of options to address this challenge, and it is very important to use policy as a major form of palliative," he said.

"By this our tariff and tax policies need to be looked into, thereby removing all the tariffs and taxes that are on all those critical things that can bring down the cost of conversion, for instance."

He noted that the important thing is how to engage people to deal with the issue of palliatives and how to quickly scale up the supply of petroleum products either through local refining or importation.

"If supply increases, prices also drop, depending on the cost of the product because right now there is no competition in that space, and that is needed. This should address the supply side," he said.

"When there is regular electricity, the generator component for the demand for fuel will reduce drastically; we can also deal with the issue of converting petrol cars to gas cars; we can as well improve our public transportation so that lesser people will put cars on the road."

Exchange Rate

Speaking about the unification of the exchange rates, Mr Yusuf said this is one of the biggest distortions that exist in the economy today.

"We need to deal with the foreign exchange to generate liquidity in the FX market.

"The current foreign exchange market structure is a transactional structure (depends on your connections and who you know). Very few people are getting the forex at the official rate without connection. This is not sustainable, and most importantly, it is blocking the inflow of capital into the economy.

"The short-term implication is inflation, which will have a welfare effect, as we can already see. This may likely reflect in the Gross Domestic Product (GDP) of this quarter because of the dislocations that have happened around logistics, SME and welfare," he said.

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