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World Bank Urges Nigeria to Halt Subsidy Payments and Raise Petrol Prices to N750/Litre

December 14, 2023

Photo Credit: Daily Trust 

 

The World Bank has said the federal government may still be paying for petrol subsidy as fuel prices in Nigeria are currently not cost-reflective.

It said Nigerians should pay about N750 per litre as against the current price of N650 in some places.

Daily Trust reports that petrol is already selling at around N690 in Kano and Sokoto, and over N700 per litre in far northeastern states of Yobe and Borno.

With current prices, many Nigerians have parked their vehicles even as costs of basic necessities of life have skyrocketed and value of income of citizens eroded by inflation.

Many observers have already condemned the World Bank’s prescription and advised the federal government to look for a home-grown solution to the prevailing economic challenges in the country.

Daily Trust had reported in September that despite the numerous assurances by President Bola Ahmed Tinubu that the petrol subsidy regime was gone, the government paid N169.4 billion as subsidy in August to keep the pump price at N620 per litre.

The World Bank’s lead economist for Nigeria, Alex Sienaert, confirmed the continuous payment of petrol subsidy by the government in Abuja yesterday during his presentation of the Nigeria Development Update (NDU), December 2023 Edition.

He said: “It does seem like petrol prices are not fully adjusting to market conditions. So, that hints at the partial return of the subsidy if we estimate what is the cost reflective of the retail PMS price of the would-be and assume that importation is done at the official FX rate.

“Of course, the liberalization is happening with the parallel rates, which is the main supplier, the price would be even higher. These are just estimates to give you a sense of what cost-reflective pricing most likely looks like.

“We think the price of petrol should be around N750 per litre more than the N650 per litre currently paid by Nigerians.”

According to the NDU report, on the fiscal front, it will be crucial to sustain the savings from the PMS subsidy reform.

The report said the high cost of the gasoline subsidy was weakening Nigeria’s fiscal position, in turn leading to a rapid increase in deficit monetization through CBN Ways and Means financing and fueling inflation.

“It is important that the subsidy is not reinstated, and that continued progress is made to ensure market-reflecting pricing,” it said.

The report noted that removing the PMS subsidy creates an opportunity to open up the gasoline market, enabling other market players apart from NNPC to import gasoline.

“This would yield benefits to consumers from market competition, and more revenues to the Federation Account, ultimately flowing to all tiers of government.”

Nigeria should have over N11trn fuel subsidy savings by 2025

The World Bank’s NDU report also stated that by 2025, Nigeria should have over N11 trillion saved from fuel subsidy removal.

The removal of subsidy on fuel which came into effect on June 1, 2023, is expected to save the government around N2 trillion in 2023, which is about 0.9% of the country’s total economic output.

“Looking ahead, between 2023 and 2025, the anticipated savings could exceed N11 trillion compared to a scenario where the subsidy continued.”

Subsidy removal hasn’t brought expected gains in oil revenues – OAGF

According to the Office of the Accountant General of the Federation (OAGF), fiscal accounts reports, gains in net oil revenues of the federation were lower than what they should have been given the removal of the costly gasoline subsidy.

It stated: “The subsidy used to cost about N380 billion monthly, and it was assumed that removing it would significantly boost the country’s oil revenues.

“However, most of the reported revenue gains in the second half of 2023 were due to exchange rate improvements.

“Without these gains, oil revenue from January to August would have dropped by 0.2% of the entire yearly economic output, mainly occurring between July and August.

“In August, there was some additional revenue from production-sharing contracts (PSCs) and yearly dividends, but these gains did not match the expected benefits of removing the fuel subsidy.

“As petrol prices have not adjusted in line with market factors like exchange rates and global oil prices, there is a risk of an implicit fuel subsidy re-emerging, potentially keeping oil revenues lower than anticipated.”

‘NNPC needs to be more transparent’

According to the World Bank’s report, revenue gains from the FX reform are visible, but more clarity is needed on oil revenues, including the fiscal benefits from the PMS subsidy reform.

The report stated that nominal oil revenue gains have been evident since June. “These are mostly categorized as “exchange rate gains”, suggesting that they are due to Nigerian naira depreciation.

“Except for the exchange rate-related increases, however, there is a lack of transparency regarding oil revenues, especially the financial gains of the Nigeria National Petroleum Corporation (NNPC) from the subsidy removal; the subsidy arrears that are still being deducted, and the impact of this on federation revenues.

Sienaert said for the government to accomplish its renewed hope agenda, the NNPC Limited has to be open and honest.

This openness, he noted, should make sure that the oil revenues and earnings that are going to the federation account are accurate.

The World Bank suggested that the government posts information explaining petrol pump pricing regularly.

It stressed that the government should ensure transparency at its own oil company – the NNPC, “with regard to profits and oil revenues to be remitted to the Federation Account.”

Increase VAT rate

The World Bank also asked the federal government to increase the VAT rate as a measure to boost non-oil revenue into the FG’s coffers.

In the report, the bank recommended hiking the current VAT rate of 7.5% as a measure towards creating more fiscal space and increasing non-oil revenue.

However, the bank noted that such an increase should allow for input tax credits while exemptions on petrol should be removed as some of the measures recommended to raise non-oil revenues.

Other recommendations from the bank geared towards increasing non-oil revenue include; the use of data towards tax auditing and the introduction of simple turnover tax for SMEs at the state level rather than the multiple levies and fees.

‘Tinubu’s reforms will be of benefit if sustained’

The report also noted that the reforms of President Tinubu if sustained can help reduce inflation to 19.6% in 2025. Nigeria’s current inflation rate stands at 27.33% for October 2023.

President Tinubu is targeting an inflation rate of 21.4% for 2024 according to his budget presentation speech.

The president has carried out two massive reforms since his inauguration in May – the unification of the foreign exchange market and the removal of the costly subsidy on petrol.

The bank further highlighted other benefits of the reforms if sustained in the long run to include an increase in GDP growth to 3.7% in 2025, a reduction in fiscal deficit ratio to GDP from its current 5.1% to 3.7% in 2025, and a reduction in the public debt service as a percentage of revenue from 102% in 2022 to 51% by 2025.

Advice on fuel price increase insensitive – Prof. Uwaleke

A professor of Finance and Capital Market at the Nasarawa State University, Keffi, Uche Uwaleke, in his reaction, said; “This is not the kind of advice Nigeria should expect from a development partner at this point in time.

“Another bitter pill being suggested too soon after a painful fuel subsidy removal smacks of insensitivity on the part of the World Bank.

“I consider this call a distraction and urge the president to ignore it and remain focused on measures to improve the living conditions of Nigerians in line with his eight-point agenda.”

 

 

Credit: Daily Trust

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