Nigeria: World Bank, Experts, Others React As Govt Ends Petrol Subsidy Next Year

24 November 2021

The World Bank, experts and operators, on Tuesday, reacted as the Federal Government moves to pay N5,000 grant to 40 million Nigerians as part of measures targeted at cushioning the negative impact of petrol subsidy to be introduced in 2022.

The Minister of Finance, Budget and National Planning, Zainab Ahmed, said the government would remove the subsidy by 2022 and replace it with N5,000-a-month transportation grant to the poorest Nigerians.

Speaking at the launch of the World Bank Nigeria Development Update (NDU), the minister, who noted that the grant would be paid to about 30 - 40 million Nigerians, said:

"The subsidies regime in the oil sector remains unsustainable and economically disingenuous.

"Ahead of the target date of mid-2022 for the complete elimination of fuel subsidies, we are working with our partners on measures to cushion potential negative impact of the removal of the subsidies on the most vulnerable at the bottom 40 per cent of the population.

"One of such measures would be to institute a monthly transport subsidy in the form of cash transfer of N5, 000 to between 30 - 40 million deserving Nigerians."

World Bank backs FG

However, rising in support of the government, the World Bank urged President Muhammadu Buhari's administration to remove fuel subsidy.

The bank disclosed this in its Nigeria Development Update (NDU) titled, "Time for Business Unusual," released Tuesday, noting that the approach was critical to addressing inflation, foreign exchange management, and fiscal pressures currently facing the nation's economy.

According to the bank, the Nigerian government took bold measures to mitigate the effects of the COVID-19 pandemic in 2020 through reforms, but that "the momentum of the reform agenda has waned, undermining Nigeria's long-term growth prospects."

The report claimed; "the insufficient supply of foreign exchange (FX) issues related to the predictability of exchange rate management, the unsustainable subsidy on premium motor spirit (PMS), burdensome trade restrictions, and the sizable fiscal deficit financing by the Central Bank of Nigeria (CBN) are undermining the business environment, compounding underlying constraints on domestic revenue mobilization, foreign investment, human capital development, and the delivery of public services."

It indicated that despite a strong initial recovery and resurgent global oil prices, Nigeria's pre-crisis challenges were threatening the post-crisis recovery, highlighting the need to depart from business-as-usual policies.

The report noted mounting fiscal pressures due to lower-than-expected revenues in 2021 and the rising cost of the premium motor spirit (PMS) subsidy.

It added that in contrast to past periods of high oil prices, this time, the government has not been able to fully benefit from the oil boom because oil production has fallen below Nigeria's estimated capacity and the OPEC+ quota due in part to rising insecurity and the higher cost of the PMS subsidy.

Experts call for caution

In a telephone interview with Vanguard, the Ghana National Petroleum Corporation (GNPC) Professorial Chair in Oil and Gas Economics and Management, Institute for Oil and Gas Studies, University of Cape Coast, Prof. Omowumi Iledare supports petrol subsidy removal.

He said: "The government missed the opportunity to do that in 2012, 2015.

"Now, the opportunity is there. They don't have a choice. It is the law with the enactment of Petroleum Industry Act, PIA.

"Removal of subsidy is more beneficial to the economy in several ways than keeping it.

"First, if the pressure of forex will be lower than it is, less volume of Naira will be required to buy energy-intensive essential goods and services.

"Priority projects with higher multiplier effects on the economy will get funded. Road infrastructure can be improved with subsidy fund.

"Education budget and medical upgraded institutions possible from the subsidy."

He however said: "I personally do not subscribe to any form of direct transfer payments. Government can suspend the Value Added Tax, VAT on food, clothes and things poor household needs.

"The government can also repair the roads, give loans for economic activities."

Similarly, an economist and Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, who called for caution, said: "I believe that there is a need to creatively manage the transition from the current pricing regime to a fully deregulated arrangement.

"It is a tricky issue, which could pose a serious challenge to government if not tactically managed.

"The reality is that the sentiments among the citizenry are not favourable to the deregulation of petroleum product pricing or petroleum subsidy removal. Even some elites are curiously not persuaded on the justification for the subsidy removal.

"If the policy transition is not properly managed, the risk of a social and political backlash could be quite high. No doubt there is a sound economic and business case in favour of fuel subsidy removal. But the social and political contexts are equally critical.

"Certainly, the subsidy is not sustainable, which is why there is need to accelerate engagement with the relevant stakeholders to come up with a policy transition strategy that is sustainable, realistic and pragmatic.

"The conversation should not only be economic, but also social and political."

He added: "Meanwhile, direct cash transfer to the vulnerable segments of the population is not a bad idea. But the credibility of the database must be assured. Also, the database must be inclusive."

Opposition mounts

In any case, the Port Harcourt-based Energy Analyst, Dr Bala Zaka, who is opposed to the subsidy removal, said the nation did not attract any positive impact from previous subsidy withdrawals.

He said: "The government had withdrawn subsidy in diesel and kerosene before, which did not make much positive impact on Nigerians and Nigeria.

"In fact, the removal of subsidy on kerosene made many households to shift to cooking gas.

"As the households were increasing their coking gas consumption, the price of the product surged, mainly due to the imposition of the Value Added Tax, VAT.

"Now, many households are going for increased consumption of firewood, which promises to culminate in further deforestation of our environment.

"The major problem is that we are not refining enough locally. As far as we are not refining enough, the government should continue to subsidise to prevent anarchy in the nation because of the total cost of the subsidy would be cheaper than the cost of such impending anarchy."

In another interview with Vanguard, Victoria Ibezim-Ohaeri, Executive Director, Spaces for Change, a Non-Governmental Organisation, who supports complete deregulation of the downstream sector, rather than subsidy removal, said cash payment to citizens would not work, due to many problems.

She said: "First, the N5, 000 cash payment is too small considering the level of inflation in the country.

"Second, it would be difficult to select or determine beneficiaries. Third, we are also not very sure of frequency of disbursement. More than these, it would be open to corruption."

Instead of cash payment, she said: "It would be better to increase the minimum wage, which would empower citizens to meet basic needs.

"Government can also invest significant funds into the power sector to supply commercial and stable electricity nationwide.

"The increased supply of power would reduce the demand for petrol products, which the citizens need to generate their independent power."

Vanguard News Nigeria

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