December 13, 2024

Petrol subsidy removal will not be effective without elimination of gap between official, parallel exchange rates, FX reforms – KPMG

Oredola Adeola

 

KPMG Nigeria has warned that without foreign exchange reforms and the elimination of the gap between the official and parallel exchange rates, the removal of subsidy on Premium Motor Spirit (PMS) will not work.

 

One of the leading professional firms providing Audit, Tax & Advisory services in Nigeria in its special report tagged: “Removing Nigeria’s PMS Fuel Subsidy: We can’t have our cakes and still eat it- KPMG”, released and obtained by EnergyDay on the sideline of the pronouncement of President Bola Tinubu signaling the end of the fuel subsidy regime in Nigeria.

 

 

Dr. Yemi Kale, former statistician general on the National Bureau of Statistics and General Partner/Chief Economist, KPMG, in a remark said that unifying the exchange rate is not difficult.

 

 

According to him, the government should collapse the two windows created by the Central Bank of Nigeria(CBN), ensure the exchange rate is determined by demand and supply, and all those demanding foreign exchange should buy at one price, rather than have a preferential price for one aspect of the market, sector, or individual.

 

 

Meanwhile, KPMG in the report stated that President Bola Tinubu’s announcement of the end to fuel subsidy the NNPC’s May 31, 2023, adjustment of retail prices for PMS to prices ranging between NGN 488/L in Lagos State to N555/L in Maiduguri, Borno State, should be supported with the targeted social safety net programs which will help to ease the burden of the removal on low-income households.

 

 

It therefore noted that poverty in Nigeria is multidimensional in nature encompassing economic, social, and environmental dimensions based on the NBS’ 2022 multidimensional index survey that indicated 63 percent of persons living within Nigeria, translating to 133 million people are considered multidimensionally poor with high prevalence rates in the Northern regions (65%) compared with 53 percent in Southern Regions.

 

 

KPMG, therefore, suggested that a multiplicity of interventions at each tier of government should be introduced to limit the adverse effect of the subsidy removal on the different segments of the working population.

 

 

Suggesting strategic and tactical consideration of redeploying PMS subsidy savings and revenues recovered, KPMG suggested the financing of the fiscal deficits, which it said will help the Government meet its expenditure obligations.

 

 

The firm advised the government to ensure that the resulting fiscal space is utilized to prioritise pro-poor capital and recurrent expenditures that would be immediately impacted by improving the welfare targets.

 

 

It also suggested concessional financing for rural and urban poor, using the recovered revenues for a set of time-bound programmes that have a direct impact on the people. Government should use the $ 800 million world bank loan to provide palliatives support directly to both the rural and urban poor.

 

 

In recommending the deployment of Mass Transit schemes across the country, KPMG also revealed that the introduction of Mass Transit Schemes for the urban working population at the state and Federal Levels, which it said will further provide additional succour to the commuting poor in key states such as Lagos, Kano, Rivers , Ogun and FCT.

 

 

The professional firm further charged the Federal Government to also leverage on new and greener transportation technologies by deploying the World Bank lending to the deployment of new technologies to improve the poor and vulnerable Nigerians including utilising greener and more environmentally friendly energy sources in fueling public transportation.

 

It said, “Provision of Bus Rapid Transit (BRT) buses powered by gas across urban areas like Lagos. This may reduce environmental pollution and afford residents of large cities more economical transportation solutions, particularity given the significant increase in pump prices from N189/l to over N500/l in some cities.

 

 

“Similarly, expanding the rollout of LPG-powered taxis in Nigeria may be considered by the Government in this connection, the Benin City experience may be expanded to other cities if taxi drivers are provided with incentives to switch from PMS to LPG.

 

 

“These alternatives will mitigate dependence on petrol and diesel consumption. Electric buses will eliminate the need for the purchase of diesel fuel, which has seen a significant price increase since the deregulations of the commodity is connection” the report said.

 

 

KPMG also urged the government to provide available and affordable electricity in order to enable end users to benefit in the form of lower costs of bus ticket prices, operational costs, labour costs.

 

 

It also emphasised that Nigeria has the potential to become a major player in the AutoGas market due to its abundant gas reserve. It, therefore, charged the FG to scale the conversion of Compressed Natural Gas (CNG) or auto-gas to power vehicles.

 

 

 

KPMG further noted that the removal of subsidy on PMS in Nigeria is a complex issue that requires careful consideration of its potentials economic, social and political impacts.

 

 

It said, “While subsidy have provided some benefits, they have also been a significant drain on the country’s resources and have contributed to inefficiencies and corruption.

 

 

“Although the success of the PMS fuel subsidy removal will require political will and commitment by the FG, this must be complemented by robust coordination with the States.

 

 

KPMG also recommended coordination between the fiscal authorities and the Central Bank of Nigeria in the management of the monetary aspects of deregulations and subsidy removal.

 

 

It said , “To minimize the negative impacts of subsidy removal there is a need for a set of coordinated actions that considers the inflationary impact, potential social unrest, and the need for compensation measures to cushion the poor.

 

 

“The $800 million World Bank proposed Compact with the people is therefore a step in the right direction. Communication is also key in ensuring that stakeholders are properly informed and engaged in the decision-making process.

 

 

“Other suggestions have been to increase the minimum wage to cushion the impact of the removal on the purchasing power of consumers,” the report said.

 

 

KPMG however noted that these measures however could further worsen inflation that is intended to resolve by stimulating the money supply further, so must be handled carefully.

 

 

It advocated for the use of money supply-boosting actions such as transport vouchers for the rural and urban poor and tax cuts (PAYE, VAT, CIT) for the middle class.

 

 

The benefit of this, according to KPMG is that it has limiting effects on the money supply while at the same time cushioning the negative impact on purchasing power.

 

 

It said, “In addition to demonstrating very clear and unambiguous transparency in the process, the government will also have to demonstrate that as much as it is rightly asking the public to tighten it belt and expect temporal inconveniences.

 

 

“it also must be seen to be cutting waste expenditures and reducing the rising costs of running government including the courage and political will needed to fully implement the Oransanye report which is estimated to save the government N1.3 trillion.

 

 

KPMG further emphasised that Nigeria can also learn from the experience of other countries that have undergone subsidy reforms, practically in the areas of stakeholders’ engagement and effective communication.

 

 

It said, “With careful planning and implementation, the removal of PMS fuel subsidies in Nigeria has the potential to promote greater economic efficiencies, reduce corruption and create opportunities for more sustainable and inclusive economic growth.”

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