The Subsidy Around Our Neck

The Subsidy Around Our Neck


In the collective high generated by the drama of the election season, many critical issues get shunted out of view. One of them is the continuing and life-threatening bleeding from fuel subsidy. A few days ago, the International Monetary Fund (IMF) projected that Nigeria’s fuel subsidy bill for 2022 may hit N6 trillion. That will be 50% higher than the budgeted N4 trillion, itself a dizzying record. The IMF projection did not generate the customary sighs in many circles. Few, even among those furiously campaigning for the highest office in the land, appeared shocked or agitated enough to say enough of this unremitting leakage.

If they were bothered, they did not show it. At least, none of them used that disturbing projection to focus or refocus the mind of the country on a lingering problem shouting for collective leadership. None outlined a reasonable policy response for saving our increasingly ailing economy from this destructive national addiction. And you can safely bet that the real contenders in the 2023 elections will expertly dance around the issue during the campaigns and debates. The stubborn fact is that fuel subsidy removal remains a politically sensitive issue, and most of our politicians are adept at either avoiding controversies or in just pandering to the public.

However, neither avoidance nor pandering will pause the problem or make it disappear. And the longer we dither, the more difficult it will be to address the increasingly suffocating subsidy challenge in an orderly manner. While we need to acknowledge that this is a hot-button issue and reassure those who have solid concerns about subsidy removal, it is better we take action before the decision is forced on us. Publicly available data indicates that Nigeria is only some inches away from a financial rock-bottom. Continuing on this carefree trajectory will make the crash inevitable. And if that happens, the room to fashion a minimally-painful response to subsidy removal will be non-existent. The best time to act was yesterday. The next is now.

All the arguments for and against fuel subsidy are well known. We have been on this endless debate, if it can be termed a debate, for more than three decades. Despite the weight of evidence about how fuel subsidy is an ineffective poverty alleviation or wealth redistribution mechanism, how its benefits are mostly captured by the elites and urban dwellers at the expense of the poor, how it fuels corruption and smuggling and how it is a major and growing burden on public finances and it crowds out public investments in areas that benefit the poor and the economy at large, attempts to remove fuel subsidy are stoutly resisted or even approached by the government either half-heartedly with trepidation. This is because there are entrenched mindsets and narratives that sustain the everlasting thirst for fuel subsidy in Nigeria.

It will amount to a waste of precious time to continue to recite the arguments that have not convinced most Nigerians, including some highly-placed government officials. The most compelling and the only useful argument is that the country simply can no longer afford the subsidy bill. There is no way of sugar-coating this: the nation’s finances are in anything but sound health. To put it grimly, our public finance is already on life-support. Imagine a patient in such a critical stage still bleeding uncontrollably. The haemorrhaging needs to stop first for the patient to stand any chance of survival. For Nigeria’s public finances to stand a chance, leakages such as petrol subsidy need to be blocked first and the savings channelled to more productive uses.

A quick look at publicly available data. According to information from the Ministry of Finance, Budget and National Planning, total revenue retained by the Federal Government (FG) in 11 months in 2021 was N4.3 trillion. From this, total revenue retained by the FG can be extrapolated to N4.7 trillion. Out of this, N4.2 trillion was used to service debts. Assuming that this was the full figure for the full year; that meant that at least 89% of FG’s retained revenue went into debt servicing. Or put differently, for every N100 revenue retained by the FG, N89 was used to service debt while only N11 out of the N100 was available for non-debt recurrent expenditure, statutory allocations and capital budget.

It is apparent that to pay salaries and other personnel expenses, to provide for overhead, to build rail, roads and other infrastructure, the country has to resort to borrowing, which not only increases the debt stock but also increases the amount that will be needed for future debt servicing. If the pattern continues, we may get to a point where the FG may need to borrow to even service debts. And the FG is in a much better place than most of the states. 

If we continue on the current road, we may also need to borrow to fund our appetite for cheap petrol, and at that point something has to give. The FG budgeted N4 trillion for petrol subsidy in the amended N17.3 trillion 2022 Appropriation Act. This means that if the appropriated amount and IMF’s N6 trillion projection are taken into consideration, fuel subsidy for 2022 will range between 23% and 35% of FG’s budget. That is the budget for just one item, an item without any discernible contribution to human or economic development.

For more context, the FG budgeted N7.1 trillion for recurrent and N5.4 trillion for capital expenditures in 2022. Even when these two are unlikely to be fully funded, the amount budgeted for subsidy is 56% of recurrent and 74% of capital expenditures and the IMF projection for subsidy represents 84% and 111% of budgeted recurrent and capital expenditures respectively. Since subsidy will fall under the recurrent budget, this means that between N56 and N84 of every N100 budgeted by FG for recurrent expenditure will go to petrol subsidy alone. And while the recurrent budget will not be released in full, the subsidy component definitely will.

Also, when compared to the N4.7 trillion extrapolated as FG’s retained revenue for 2021, the N4 trillion budgeted for subsidy in 2022 and the N6 trillion projected by IMF amount to 85% and 127% respectively. The point must be made that the Federation, and not just the FG, bears the petrol subsidy burden. So, comparison to FG’s budget is for illustrative purposes, and it is an important illustrative point since the FG will bear most of the burden anyway. And as a percentage of the nominal gross domestic product of N176 trillion for 2021, the subsidy budget for 2022 amounts to 2.4% of GDP and the IMF subsidy projection represents 3.6% of GDP. That’s just fuel subsidy alone. If all these data points do not give us a serious reason for pause, then nothing else will.

Already, Nigeria is at a curious pass where current high oil prices resulting largely from the ongoing war in Ukraine are not translating to increase in our foreign reserves, improving the value of our national currency or increasing government revenue. This is precisely because, the higher the price of oil, the higher the subsidy element as Nigeria imports all the petrol that it consumes. The revenues and the dollars that high oil prices should give, high fuel subsidy costs dutifully take. For three consecutive months, the national oil company has made zero remittance to the Federation, and this is likely to continue for a while. Fuel subsidy is a major reason behind this conundrum. While other oil producing countries are making the bank because of high oil prices, Nigeria can only boast of shortfalls, not windfalls, while battling negative consequences of the war.

Without a doubt, petrol subsidy has become an ever-tightening noose around our neck. We need to throw it off. Otherwise, it will suffocate us. However, the fact that fuel subsidy removal is a necessary thing does not mean that it will be easy to do or that it would not be stoutly resisted or that some would not make political capital out of it. It will always be a contentious piece of reform.

Whether we get back to fuel subsidy removal after the general election or at the beginning of the next administration, we need a thoughtful, practical and strategic reform package. Such a package should include: strategic communication designed to secure the buy-in of key stakeholders and effectively counter the entrenched narratives supporting fuel subsidies; earmarking of a portion of the potential savings from fuel subsidy for targeted and visible investments in health, education, transportation, and other areas that will directly benefit the poor and produce tangible human and economic benefits; and a leadership ready to withstand popular and political backlash and ensure diligent execution of the different phases of the reform.

Removing fuel subsidy won’t be an easy duel. But it is a frantic battle for health, for air. One that must be fought and won. Otherwise,…

WAZIRI ADIO  Until recently the Nigeria Extractive Industries Transparency Initiative (NEITI) Executive Secretary, Adio had stints as THISDAY editor-at-large, special adviser to the senate president, communication specialist at UNDP etc. He obtained his first degree in Mass Communication from the University of Lagos, a master’s in journalism from Columbia University and another master’s in public administration from Harvard University, where he was, at different times, a Fellow of the Neiman Foundation for Journalism, and an Edward S. Mason Fellow in public policy and management.

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