Nigeria’s subsidy removal is more pressing now than ever before, given the economic crunch that has forced the federal government to bail out states that could not meet basic obligations.
Nigeria’s burgeoning economy has slammed on the brakes as a downward trend in crude prices struck Africa’s largest economy and top oil producer.
Despite that the country is gradually diversifying its oil-dependent economy and becoming more services-oriented through retail and wholesale trade, real estate, information and communication, oil remains its chief source of income.
“The federal government cannot sustain oil subsidy in the long run with oil revenue and oil export down drastically,” Temitope Oshikoya, chief executive officer, Nextnomics, said at the FBNCapital conference held in Lagos recently.
“The economic managers are caught between the hard rock and the deep sea,” Oshikoya said.
The FAAC allocations shared by the three tiers of government fell from N443 billion in August to N390 in September, representing a drop of N53 billion in September as revenues continued on a nosedive.
The economy has been on a standstill due to the absence of policy direction, which has put investment on hold and investors on the side line, analysts say.
The federal government has been unable to pay subsidy claims since August 1, 2014 till date, making outstanding indebtedness to oil marketers N470 billion, according to a wire report.
Nigeria, Africa’s biggest crude producer, spent 20 per cent of its budget in 2013 on subsidies for imported fuel, heating oil and other refined products. Costs totalled 5 trillion naira ($25.1 billion) from 2006 to 2012, according to a wire report.
The country does not have the resources to sustain subsidy payments, implying that the government needs to remove it and channel the fund to other welfare social programmes such as health, education and roads, analysts say.
According to economic experts, while ending the subsidies now may be painless because of the low oil prices, there are risks for the government if they rebound and the costs are passed on to the consumer.
Concerns over subsidy payments earlier this year caused fuel shortages that grounded flights, leading to long queues at petrol stations and even brought mobile phone companies and banks to a standstill.
While Nigeria’s economy has been battered by years of entrenched graft and a halving of oil prices in the past year, President Muhammadu Buhari said he was skeptical about removing fuel subsidies.
But Oshikoya said oil subsidy does not benefit the rural dwellers but only benefits the middle class. About two-thirds of the country’s almost 180 million people live on less than a dollar per day.
Economic woes
Nigeria’s economy where growth had averaged 8 percent per annum between 1999 and 2013 recorded GDP growth of 3.96 percent in the first quarter (Q1) of 2015 and 2.35 percent in the second quarter of Q2.
The slowdown in economic growth and other indicators, prompted Godwin Emefiele, Central Bank Governor, to say at last monetary policy committee (MPC) meeting that the economy was at risk of slipping into recession in 2016.
Oil, from which the Nigerian government earns 70 percent of budget revenues, tumbled to a six-and-a-half low of $49per barrel (Pb) as at the time of writing, 29 percent lower than the Q2 average of $63.55pb.
Five months after the new government took over power, inflation has risen month-on-month by at least 0.1 percent, hitting an-eleven-month-high in October at 9.4 percent, exceeding the Central Bank’s target band of six to nine percent for a fourth month.
Nigeria’s foreign exchange reserves fell to $30.13 billion last Tuesday, down 0.84 percent from a month ago, according to available data on the Central Bank website.
According to Bismarck Rewane, CEO of Financial Derivative Company, in a September 2 presentation at the Lagos Business School, “The economy is at near a standstill because of absence of decision makers. Leading economic indicators are slowing.”
The country will be fully excommunicated from the JP Morgan’s emerging markets local-currency government bond index this month.
Nigeria’s unemployment rate rose to 8.2 percent in the second quarter of 2015 from 7.5 per cent in the earlier quarter, according to data from the National bureau of Statistics (NBS).
The government is also struggling to contain attacks and bombings by Islamist militants in the north, with hundreds of people killed in recent weeks and more than 1.5 million displaced by Boko Haram’s six-year insurgency.
Josephine Okojie
