Nigeria: Subsidy removal is now certain

*Nigeria's Vice President Yemi Osinbajo.

*Nigeria’s Vice President Yemi Osinbajo.

Oscarline Onwuemenyi,
with agency reports

22 January 2016, Sweetcrude, Abuja – After months of pussyfooting around the issue, the Federal Government may have come out clearly on whether it would remove the controversial petrol subsidy, and it would seem the government has found an impetus in the continuing slide in prices of petroleum products on the international market.

Nigeria’s Vice President Yemi Osinbajo has said the Federal Government, which relies on crude oil for about two-thirds of its revenue, has seen a silver lining in the plunge in crude prices because it will no longer have to subsidise fuel.

“Lower oil prices also mean there is some advantage,” Osinbajo said in a panel discussion at the World Economic Forum in Davos, Switzerland, on Thursday.

The decline “means that we are not paying any subsidies, which frees up something in the order of about $5bn (about N985bn),” Bloomberg quoted the vice president as saying.

Brent oil in London has dropped more than 60 per cent to below $28 a barrel since November 2014, as shale production from the
United States increased and the Organisation of Petroleum Exporting Countries refrained from cutting output in the face of a global oversupply in an effort to defend market share.

Nigeria, Africa’s largest oil producer, will still face challenges in financing its budget deficit and aims to increase Value
Added Tax and Customs duty collection to help plug the gap, Osinbajo said.

“We think with adequate governance around budget management and around expenditure management, we can do quite a bit. If we are able to do those things, we might be able to come away with under $30 a barrel oil,” the Vice President explained.

Since coming into power last May, President Muhammadu Buhari and his officials have been hard pressed to state when and how the government intends to implement the removal of subsidy, an issue which had been a bone of contention for previous governments, given the attendant corruption and mismanagement associated with the system.

The President during a recent media chat in Abuja remarked that given the falling price of crude, subsidy would die a natural death.

The World Bank in December advised President Buhari to act now if he is seriously considering the removal of fuel subsidy.

The Bank’s Lead Economist, John Litwack, said Tuesday the best time to take such decision is now.

Mr. Litwack said at the launch of the new edition of Nigeria Economic Report that if the government really meant to take a decision on the issue of fuel subsidy removal, the best time to act would be now that global crude oil price was at its lowest level.

While presenting the economic outlook of the global economy and the crude oil market, Mr. Litwack said the Bank foresaw continuous decline in global crude oil price.

He said now is the best time for the government to scrap the subsidy, as doing so would not push retail pump price beyond an average of N100 per litre, or generate the kind pressure that would negatively impact on the people beyond what they are currently facing.

“The fuel subsidy appears to have vast modest benefits for the majority of citizens, but the costs are quite high,” Mr. Litwack noted.

“There is a strong tendency for the cost of the fuel subsidy to increase over time as increasing domestic demand for petrol outpaces growth in oil output or revenues.

“The $35 billion cost of the fuel subsidy during 2010 – 2014 was one of the reasons why Nigeria was unable to accumulate a fiscal reserve n the Excess Crude Account that could have protected the country from the recent oil price shock.”

He said fuel subsidy obligations were expected to reach 18 per cent of all government oil revenues in 2015, pointing out that if the current regulated price regime of N87 per litre was maintained, subsidy was projected to increase to more than 30 per cent by 2018.

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