Stakeholders decry impact of fuel subsidy on nation’s economy, say subsidy not sustainable

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BY BAMIDELE FAMOOFO

Uba Group

Stakeholders have sustained the argument for government to abolish the regime of fuel subsidy to save the economy of Africa’s populous country from collapsing.
Uade Ahimie, a financial analyst, noted that that the current petrol pricing and huge subsidy by government is neither sustainable nor healthy for Africa’s largest economy.

It is estimated that the Federal Government spent about N4.33 trillion between August 2021 and August 2022 on subsidy (under-recovery of petrol) using the average official exchange rate and a potential additional under-recovery of N3.726 trillion, using the average parallel market exchange rate.

“When you add the fact that sourcing monies for payment subsidies have become almost impossible, deregulation becomes the obvious solution,” he argued.

A further analysis of the available data provides greater insights into the monthly percentages of the possible under-recovery amounts when compared to the amount received from consumers for the use of petrol based on the average pump prices. For example, in August 2021, the percentage of under-recovery based on the official exchange rate was about 49.09 percent of the pump price, whilst it was about 88.73 percent when compared to the parallel market average exchange rate for that period. This has since increased the average pump price amount in March 2022 to about 122.73 percent and 214.24 percent when compared to the dual exchange rate averages, peaking in June 2022 at 180.91 percent and 310.61 percent respectively.

“In all, there is the need for the full deregulation of the petrol market, like is the case with the Diesel and Aviation Fuel markets by the government. This is because it will free up trillions of Naira that could be put to better use in other areas of the economy. If this happens, then the regulators can better focus on their role as regulators by ensuring that operators meet their obligations of delivering quality products to the market as well as enforce to the letter of the law obligation due from the operators in forms of taxes, penalties for infringement and the needed investments in infrastructure to the sector for more efficiency like is the case of the Dangote refinery, Ahimie argued.

It is the opinion of other financial experts that government will be empowered to provide the necessary amenities that would drive these investments and through various partnerships create plans that would see these investments placed in the right areas for economic and social development if it could do away with subsidy.

Ahimie, citing extract of regulatory template for petrol price in July 2022, said government could begin with a price range of N190.23 and N193.78 per Litre. He hinted that though the proposed price range does not fully represent the current realities, it would reduce the potential amounts to be paid out in under-recovery amounts by N12.73 with respect to imports from Lagos, N16.28 for imports from Calabar and N14.81 for imports from Port-Harcourt, this will translate to about N99.226 billion monthly and N496.13 billion till the end of the year if these new prices are implemented from September 1, 2022.

Peter Esele, former president of the Trade Union Congress and former president of the Petroleum and Natural Gas Senior Staff Association, projected that a litre of petrol will cost about N462 if subsidy was completely removed. But he warned that both the economic and political sides of subsidy must be considered before its complete removal, considering the negative impact on the populace.

The Director General of the Budget Office of Nigeria, Ben Akabueze, says the trillions of naira spent on fuel subsidy can be deployed to other creative sectors, particularly education.

Speaking on Arise TV’s Global Business Report, Akabueze said the funds could be used to end the Academic Staff Union of Universities strike and increase the pay of government staff.

“The truth is that public servants need to be paid far better than they are now. It’s like the ongoing issue regarding ASUU and the pay for lecturers. I haven’t come across anyone in government who thinks that lecturers are adequately paid or who thinks lecturers should not be paid significantly more. The crux of the ASUU matter is the ability to pay. It is why this matter has dragged on because the government has refused to commit to a number that it does not have the ability to pay,” he said.

The Federal Government will likely spend N6.7tn on petrol subsidies in 2023 if it plans to pay for the whole year. The cost may reduce to N3.36tn if the subsidies if it remains up to mid-2023, according to the Finance Minister, Zainab Ahmed.

Akabueze noted that fuel subsidies often had a huge impact on the economy and the lives of the people, stressing that “when you eliminate fuel subsidies or cut back on it, there will be an immediate impact on people.”