Nigeria: Analysts Back Presidential Economic Council's Call for Subsidy Removal

11 May 2021

Abuja and Lagos — Analysts yesterday threw their weights behind the recent recommendation by the Presidential Economic Advisory Council (PEAC) to President Muhammadu Buhari for an end to fuel subsidy.

They said in separate interviews with THISDAY that petrol subsidy removal was long overdue.

The analysts described the state of the Nigerian economy as currently weak, adding that this could be worsened by payment of subsidy claims, especially given the malpractices surrounding previous disbursements.

The analysts added that subsidy created a distortion in the economy, leading to "spurious payments or in the current situation, so-called under-recovery."

They stated that the current fiscal crisis has also demonstrated that a subsidy regime in fuel is not sustainable as funds used to maintain the subsidy regime could be utilised in other critical areas of the economy.

According to them, a situation whereby the government spends about N1 trillion to subsidise fuel consumption is particularly counter-productive.

Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said the price of petroleum products should be determined by forces of demand and supply.

He said that this would increase the inflation rate "but this will be corrected when we start refining our petroleum products again soon."

He said: "I didn't expect the federal government to give further consideration to the subsidy of fuel again because I thought it was already concluded that fuel subsidy was gone for good.

"The advice of the EAC, therefore, should be implemented without delay.

"The economy is weak and cannot be further worsened by payment of subsidy claims, more so, considering the level of malpractices surrounding previous payments."

An economist, Dr. Muhammad Rislanuddeen, said the increase in the price of crude oil was no longer good news to an average Nigerian due to the fear of potential increase in the price of petrol.

He said the importation of petroleum products facilitated job export off shore, adding that the current subsidy regime implemented by the Nigerian National Petroleum Corporation (NNPC) also implied a reduction in funds to be shared by the federation account.

This, he said, reduced the capacity of sub-nationals to implement critical projects as well as pay salaries to public servants.

Rislanuddeen said: "I support a complete withdrawal of subsidy but the government should collaborate with the private sector and ramp-up efforts towards eliminating petroleum products importation by making our local refineries work and also supporting modular refineries.

"This will also help in avoiding job export while reducing unemployment, especially youth unemployment from its current unprecedented worrying level."

On his part, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, stated that the removal of fuel subsidy was overdue and remained a strain on national coffers.

He added the removal was overdue and "savings from subsidy must be used to alleviate the suffering of Nigerians."

He, however, said the timing of its removal should be weighed against the impact on Nigerians whose purchasing power would be weakened by massive inflation and the after-effects of the economic downturn caused by the COVID-19 pandemic.

"The current fiscal crisis means that a subsidy regime in fuel is simply not sustainable as funds used to maintain the subsidy could be utilised in other critical areas of the economy.

"The country spends around N120 billion ($300 million approx.) monthly on fuel subsidy. This amounts to N1.4 trillion annually.

"But on another hand, it could be argued that at least the subsidy is enjoyed by all Nigerians and if removed it is most likely going to be used to fund recurrent expenditure that may not necessarily benefit the populace," he said.

Also commenting on the development, Chairman, Chartered Institute of Bankers of Nigeria (CIBN), Abuja Branch, Prof. Uche Uwaleke, said while subsidy removal would result in some hardship for Nigerians by worsening inflation, it would, nonetheless, benefit them later, as more resources would be available to fund critical sectors of the economy.

Uwaleke, a former Imo State Commissioner for Finance, said: "I am in support of the advice to remove fuel subsidy. It is causing incalculable damage to the economy. A situation where the government spends close to N1 trillion subsidising fuel consumption is counterproductive."

He said the fiscal situation of the government could no longer support it given the rising fiscal deficit, adding that the subsidy regime has been one "fraught with corruption given the fact that there is no accurate figure of the volume of domestic fuel consumption."

"More importantly, fuel subsidy is regressive in the sense that it benefits the rich more than the poor. It also crowds out developmental funds which benefit the poor.

"In order to cushion the impact of fuel subsidy removal on the ordinary Nigerian, the government should quickly roll out compensation schemes in the area of health, such as by expanding the National Health Insurance Scheme, education and mass transportation," he added.

Also, Chief Executive, Eczellon Capital, Mr. Diekola Onaolapo, said there was no justification for the payment of subsidy by any government globally.

Onaolapo added: "We have been paying fuel subsidy for the past few months because oil has increased and landing cost of refined petroleum products and PMS has rocketed and since they are still regulating the price, there is always that shortfall which they need to pay as fuel subsidy.

"It should be taken off, but all this while, a forward-thinking government should know that it is always cyclical, it goes up and comes down, yet there are structural things that are changing around oil, and in the near future, you would see the reliance on carbon-based fuel coming down, which would lessen demand for oil and prices may start coming come.

"When prices were low, we should have been planning for when oil prices go up. Also, on the refineries we have, there is still a subsidy in the system. So, the subsidies to importers can be deployed in improving the country's production of this product as well."

Also, speaking with THISDAY, Head of Consulting, Agusto Consulting Limited, Mr. Jimi Ogbobine, said the new pricing policy, involving monthly review of pump prices had already outlived its usefulness.

He stated that it was supposed to be a stop-gap measure between subsidy and deregulation.

He said the firm had aligned with the position of PEAC on the removal of subsidy.

"What we should be talking about is deregulation and liberalisation of the downstream petroleum sector. Just as we have other products in this country, where the government is not involved in the pricing of this product and the government becomes just a regulator and not an active participant. A deregulated sector will stimulate competition and innovation," he said.

But, Head of Research, United Capital, Mr. Wale Olusi, stated that while removing subsidy remained a prudent economic decision, the economy is in bad shape, especially for the ordinary Nigerian.

Olusi said: "For us, the timing and the current realities in the economy is the issue. Again, this is more of a political decision rather than an economic one and the political class will be mindful of the implications of this decision on their chances in the next election."

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