The Subsidy Debate: Between the Devil and Deep Blue Sea


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

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

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

Clearly, the FG and the economy at large should benefit from a removal of fuel subsidies given it improves the spending ability of the FG while reducing reliance on borrowings. In line with this, the Minister of Finance has stated the government plan to eliminate petrol subsidy payments in Jul-2022. However, doubts remain on the possibility of the removal considering similar statements have been made in the past with fear of public backlash and resistance from labour unions restraining the government. We note that based on available information, the FG is still in negotiations with labour unions to reach an agreement on subsidy removal. That said, we believe an unavoidable public backlash awaits any decision to remove subsidy payments. Thus, we think the FG may be caught between the devil and deep blue sea.

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.
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