March 2, 2024

Experts rue economic impact of suspension of subsidy removal, as FG forms expanded committee on implementation 

 

Oredola Adeola

 

Economic experts said that worsening public debt due to need to borrow more to finance the economy would serve as a major fallout of the suspension of petrol subsidy removal, recommending that the incoming Nigerian Government should explore all options to effect a drastic change in the prevalent scenario and avoid potential disruptions that may undermine macroeconomic stability, as it settles for business of governance.

 

This was the views expressed by industry experts and economists in their reactions to the decision of outgoing Government to put the June deadline for petroleum subsidy removal on hold, pending the review of existing plans to provide palliatives for Nigerians.

 

Mrs. Zainab Ahmed, Minister of Finance, at the end of National Economic Committee meeting held on Thursday April 27, 2023, announced that the fuel subsidy removal programmed to commence as the incoming Administration debuts has been deferred to a subsequent date.

 

The experts therefore warned that Nigeria is already losing the battle as above 20 % increase in inflation rate and the direct impact of subsidy payment on forex exchange demand.

 

Prof. Wumi Iledare, is an emeritus professor of petroleum economics and policy research, and currently the Director, Society of Petroleum Engineers (SPE) African Region on his part charged the next administration to do a phase deregulation, adding that a fiasco removal is not advisable at the moment.

 

According to him, subsidy removal should have been done when the crude oil price was low.

 

He said, “The major issue of subsidy is its impact on forex. About 40 % if forex demands us for petroleum products import.  The next impact is downstream market failures leading to resource misallocation.”

 

Professor Iledare further charged the incoming administration to partially deregulate petroleum products.

 

He also encouraged the next administration to practice price modulation for six months by law and target January 2024 to invoke the provision of full deregulation, captured in the Petroleum Industry Act(PIA) 2021.

 

According to him, the price modulation will cushion the shock as the price will rise gradually and not dramatically. He added that the subsidy will be on what quantity of crude oil Nigeria sold and not the volume of petroleum products imported.

 

Prof Iledare said, ” The price modulation will ensure that the shock of subsidy removal is gradual and not sporadic. I don’t like it,  but anything else may be consequential. We have waited for too long to do the right thing in the right way.”

 

Dr. Boniface Chizea,  MD/CEO – BIC Consultancy Services, in his chat with EnergyDay disclosed that the suspension of the subsidy removal confirmed that there was a consensus that it was not a favourable time to take such a decision.

 

According to the renowned economist said the inappropriateness of the timing was too glaring to be missed by anyone.

 

He said, “How do we logically expect a new administration that will be needing all the time to come to grips with the many problems confronting the economy to dabble into the problems surrounding fuel subsidy removal in Nigeria which is patently crisis-inducing?

 

 

“The problem associated with petroleum subsidy removal has been so contentious that it is almost a no-go area. The last time an attempt was made to remove the subsidy was in 2018 by the Jonathan Administration, we recall that the economy was shut down by protests with massive crowds at Freedom Park to protest the decision.

 

“The airports were closed and planes did not fly and workers were all at home. It was also a similar experience in 2015 and therefore we now know what to expect with any determined attempt to remove subsidy on petroleum products.

 

“Organised Labour is vehemently opposed to the removal of subsidy because it rightly concluded that such a move will further undermine the welfare of its members. I have always argued that Labour must allow those who have been elected to manage the economy to do exactly that.

 

“Those in leadership positions must be allowed to make decisions and thereafter live with how to mitigate the harsh consequences of the decision by agreeing on suitable and appropriate palliative.

 

Dr. Chizea further hinted that it is time for Nigerians to think outside the box in the realization that the actual removal of subsidy as they are today will remain a tall order, saying, “we shall end up seeing us postponing the evil day.

 

He said, “This explains why most of us anchored high hopes for the coming on stream of 650,000 barrels a day Dangote Refinery.

 

“Unfortunately, word coming out from there is that even the viability of the refinery is now in doubt as it is faced with liquidity problems. The Refinery is now highly leveraged and there is little or no slack for additional debt.

 

He also charged the incoming government to explore all options to effect a drastic change in the prevalent scenario. But thinking of direct removal of subsidy is so very problematic with tremendous potential for disruptions undermining macroeconomic stability.

 

Dr. Chizea said , “We must also revisit the source of the energy mix in the country. We have Solar, hydro, Geo/Thermal and biomass energy which must be optimised to reduce sole dependence on fossil fuel.

 

“We must purposefully optimised Mass transit as we discuss palliative measures. And at the level of the individual, we must begin to cultivate energy-saving habits.

 

“What are the likely consequences of this development for the country? The immediate fallout is the need for more borrowing in the process worsening the debt overhang situation in the country.

 

“The fact that we are confronted with the challenge of debt sustainability is well advertised. How are we going to be able to boost revenue in a sustainable manner?

 

“Mele Kyari the Chief Executive Officer of Nigeria National Petroleum Company is on record to have observed that in order to obviate the looming fuel scarcity, the Company has deepened the debt crises by additional borrowing thereby constraining the company’s ability to make contributions to the National treasury.

 

“And that one other consideration in this regard is that products smuggling across our borders remain difficult to stop at the level of existing premiums. And therefore as it is well known, we extend this subsidy to our neighbours. Otherwise, it is difficult to justify daily fuel consumption in Nigeria estimated at 70 million litres.

 

“Unfortunately, the attempt by the Fiscal authorities to securitize the Ways and Means Finance which stands at a whopping 23.7 trillion Naira has almost hit a dead end as the National Assembly has refused to play the game.

 

“And as all concerned have been duly put on notice, such delays only worsen an already bad situation as we end up increasing the debt situation as default in payments is capitalised. These Ways and Means are outstanding commitments which no matter how we think and feel about them, cannot be wished away.

 

“What all these developments portend for the incoming Administration is that the projected GDP growth rate of 3.75% will not be realised, thereby worsening the misery index in the land.

 

“With inflation at over 20%, we are already losing that battle, when we recall that an inflation rate of 17.6% was projected. And therefore, finding a solution for 133 million Nigerians in multi-dimensional poverty remains a mirage, ” the economist said.

 

Dr. Chizea further noted that the only bright spot in a darkened firmament has been the price of oil which has hovered around the $100 a barrel mark against the background of 70 dollars a barrel which was projected during 2023 budget preparations courtesy of the ongoing Russia/Ukraine war.

 

On his part, Dr. Muda Yusuf, Chief Executive Officer, Centre for the Promotion of Private Enterprise [CPPE]
in his reaction said that all matters relating to petrol subsidy removal should be left for the incoming administration to handle.

 

According to him, “This should be the default position since the current government has announced a budgetary provision for fuel subsidy up till June 2023.

 

The former DG of Lagos Chamber of Commerce and LCCI) said, “This is also the position of the Petroleum Industry Act as amended.  Rather than stir another round of controversy and confusion, the matter ought to be left for the new administration. The NEC announcement was really unnecessary.

 

“My expectation is that the new administration should have its strategy of managing the policy transition.  This should not be preempted by the current administration.  The National Economic Council should avoid making policy pronouncements that may create problems for the new administration.

 

“I also expect that some level of informal consultation should have commenced between the transition team of the incoming administration and key stakeholders on the matter, ” Dr. Yusuf said.

 

The CEO of CPPE also noted that the ruling APC had categorically stated that it would remove petrol subsidy on assumption of office.

 

ESTABLISHMENT OF SUBSIDY COMMITTEE BY FG

The Minister of Finance while announcing the Federal Government’s suspension of the petrol subsidy removal, noted that the plan has been agreed for the establishment of an expanded committee to consider the removal process.

 

According to her, the Committee will determine the exact time and the measures to be taken to support the poor and vulnerable and ensure a sufficient supply of petroleum products nationwide.

 

She further said that the expanded committee is currently working with representatives of the states with further plans to engage with the petroleum marketers.

 

Ahmed said, “The immediate committee comprises the Ministry of Finance, Budget and National Planning, the NNPCL, the regulator, and the downstream and upstream regulators.

 

“There’ll be an expanded committee so that it is not just a few people’s thoughts that will guide the process so that there is sufficient consultation taking inputs from key stakeholders on the measures that need to be taken,” she said.