The Subsidy Debate: Between the Devil and Deep Blue Sea

Wednesday, October 27, 2021 / 08:49 AM / by United CapitalResearch / Header Image Credit: Down To Earth

Earlier in the week, theWorld Bank's Country Director for Nigeria, Shubham Chaudhuri, condemned theFederal Government's (FG) sustained spending on petrol subsidy which isexpected to hit N2.9tn by the end of the year. This criticism comes on the backof the recent rally in oil prices, which we have tagged "a double-edgedsword" for Nigeria, as it, on one hand, facilitates revenue generation, andon the other results to an overwhelming spike in petroleum importation costsand consequently subsidy expenditure.

Over the years, amind-boggling progressive amount has been expended towards subsidizing petrolin Nigeria. Between 2006 and 2018, the FG spent c.N9.8tn to subsidizeimported petroleum products. In 2019, an estimated N1.2tn was designated forpetroleum subsidy, while subsidy payments in 2021 is expected to hit N2.9tn.The negative impact of subsidy payments is largely on the fiscal position ofthe FG which in our opinion is precarious. According to data from the 2022budget presentation, revenue performance for the FG in the first eight monthsof the year printed at 66.7%. While the underperformance in revenue can belinked to weak oil production, clearly, removal of subsidies would help improvethe FG's revenue position. To provide a perspective, subsidy expenditure in2021-YTD is estimated at c.25.0% of aggregate National revenue.

Clearly, the FG and theeconomy at large should benefit from a removal of fuel subsidies given itimproves the spending ability of the FG while reducing reliance on borrowings.In line with this, the Minister of Finance has stated the government plan toeliminate petrol subsidy payments in Jul-2022. However, doubts remain on thepossibility of the removal considering similar statements have been made in thepast with fear of public backlash and resistance from labour unions restrainingthe government. We note that based on available information, the FG is still innegotiations with labour unions to reach an agreement on subsidy removal. Thatsaid, we believe an unavoidable public backlash awaits any decision to removesubsidy payments. Thus, we think the FG may be caught between the devil anddeep blue sea.