BY EMEKA EJERE
The outlook for Nigeria’s economic recovery is bleak, with inflation in gasoline subsidy payments posing a serious threat to federal and sub-national government growth activities.
It is even then that the situation strongly explains the increase in government borrowing, which raises concerns about a possible over-indebtedness among economic experts.
A government plan to deregulate the sector, following the enactment of the Petroleum Industry Act (2021) which mandates a free market for the downstream sector of the petroleum industry, has been shelved as the government seeks and securing legislative approval to spend N4 trillion on petrol subsidies in 2022.
According to the latest data from the Nigerian National Petroleum Corporation (NNPC), the total subsidy cost in January and February 2022 alone was N396.72 billion, the product subsidy cost in 2020 was N450 billion.
Petrol subsidy payments increased by 349.42% from 350 billion naira in 2019 to 1,573 billion naira in 2021, propelled by the rise in the price of crude oil in the international market and the decline in the value of the naira.
Information Minister Alhaji Lai Mohammed previously revealed that the federal government spent N10.413 billion on fuel subsidies between 2006 and 2019.
The Executive Secretary of the Major Oil Marketers Association of Nigeria (MOMAN), Mr. Clement Isong, in a monitored interview on Tuesday, cited the soaring international crude oil price, the exchange rate and the high rate of gasoline smuggling. across Nigeria’s borders as three factors responsible for the astronomical increase in gasoline subsidies.
He said: “The first is the international cost of crude oil and derivative products like Premium Motor Spirit (gasoline) which has increased dramatically as a result of the Russian war in Ukraine. Thus, the price of crude itself, as well as the price of gasoline, diesel and all petroleum-derived products, have risen more than they normally would because of the war and the sanctions imposed on the Russia, which is a big crude exporter.
“Secondly, the exchange rate is extremely high at the moment. That is, the Naira exchange rate is at its all-time high. I’m not talking about the black market which is even higher, I’m talking of the Central Bank of Nigeria rate which is N411-N414 per dollar.It is higher than it has ever been historically.
“Finally, and this is the most important reason because you have capped the price, at a third or a quarter, of the price it is across borders, the propensity of the product to cross borders is at the highest .
“What I mean by that is that so many people, ordinary Nigerians, ordinary human beings on both sides of the border are committed to moving the product from the Nigerian side to the other side. Whether it is Cameroon, Chad, the Republic of Benin, Niger or Equatorial Guinea, this product goes to all regions of Central and West Africa.
Isong thinks that usually the volume imported into the country should be lower, but it has been soared by the activities of smugglers.
The director of the Center for Petroleum, Energy Economics and Law at the University of Ibadan, Professor Adeola Adenikinju, noted that the government’s decision to continue with the payment of subsidies was more political than economic. , given the revenue challenges faced by governments at all levels.
He argued that by keeping the gasoline subsidy, the government would have a hard time meeting other commitments.
“It’s a political decision, not an economic one. Economically, we know that the subsidies have been very costly for the country and this is going to have a serious impact on government revenues, especially state governments.
The states are going to feel it more because they are heavily dependent on revenue from the Federation account and secondly they don’t have the power to borrow like the federal government.
“If this goes ahead, the states are going to be hit hard financially and it will be extremely difficult for them to meet all their commitments in terms of paying salaries and meeting their obligations to retirees.”
Trigger more loans
Reuters reported that the Minister of Finance, Budget and National Planning, Ms. Zainab Ahmed, said at the Arab-African Conference in Cairo, Egypt that the fuel subsidy was widening the government deficit gap so much that it was planning to tap into the 2 billion euros it raised in the sale of Eurobonds last year to support its fiscal position.
The minister said the administration would target more local borrowing this year to help finance the budget deficit that has been exacerbated by rising oil prices, due to Russia’s war in Ukraine.
“Rising oil prices have put us in a very precarious position…because we are importing refined products…and that means our cost of subsidy is really going up,” Ahmed noted.
Meanwhile, economic experts oppose the federal government’s propensity for debt, which they have called unsustainable, calling for increased productivity to raise revenues.
Data from the Debt Management Office (DMO) showed an increase in Nigeria’s total public debt from N32.92 trillion in 2020 to N39.56 trillion at the end of last year.
It was only recently that the DMO disclosed that the Federal Government had taken on new domestic borrowing of N950 billion between January 2022 and March 11, 2022.
Disclosing the new borrowing in the public debt data presentation as of December 31, 2021, DMO Director General Patience Oniha revealed that the federal government is considering all options to raise funds externally.
According to the document, the federal government still plans to borrow an additional 1.6 billion naira, while the 2022 debt target for domestic borrowing is 2.57 billion naira. There are also plans to borrow N2.57 billion from foreign creditors, while N1.16 billion is expected to come from multilateral/bilateral drawings.
In total, the federal government plans to add 6.3 tn of new debt to the current debt stock, which would bring the country’s total debt stock to 45.86 tn by December 2022.
Although Nigeria’s current debt to gross domestic product (GDP) ratio of 22.47% is relatively low, leaving room for borrowing, its inability to generate adequate revenue has compounded its debt problem.
The debt to GDP ratio stood at 22.47% compared to 21.61% in 2020. At this level, the ratio is within the 40% limit that Nigeria has imposed on itself, the limit recommended by the World Bank/IMF 55% for Nigeria peer group countries and 70% for ECOWAS countries.
Nigeria’s revenue to GDP ratio remained low at 9% compared to countries like Ghana at 12.5%; Kenya at 16.6%; Angola at 20.9%; and South Africa at 25.2 percent.
Reacting to the situation, an economist, Dr Muda Yusuf, said the country was on the brink of debt distress.
He said Nigeria is on the brink of debt distress because our debt profile is no longer sustainable.
“We had a debt service to income ratio of 76% in November last year. The situation is likely to get worse as our deficit in the 2022 budget is N6.4 billion and we need to borrow to fund the deficit,” he said.
“In addition, the Federal Government submitted a supplementary budget proposal for the N2.55tn grant after the passage of the budget. Adding this to the deficit, we will get approximately N9tn.
“How much is the revenue? It’s about 10.7 billion naira, and we probably won’t get the full revenue, maybe 70%. So we’re getting to a point where by the time we pay off our debts, which should be around N4tn, and still spend N4tn on grants this year, we’ve consumed almost all of our income for the year. Does this now mean that we will use the debt for staff costs? For overhead? ; for the investment budget? This is where we are headed. »
Yusuf, who is the director general of the Center for the Promotion of Private Enterprise (CPPE), regretted that instead of the country benefiting from the increase in the price of oil like other oil-producing countries, the government loses money on fuel import and fuel subsidy
“As the price of oil increases, the price of the subsidy will have to increase beyond what NNPC requested. While other oil-producing companies are happy, as their reserves grow and currencies strengthen, we lament that we are not fully benefiting from the oil windfall,” Yusuf said.