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| NLC President, Ayuba Wabba |
Following the Federal Government’s plan to extend the fuel subsidy regime by 18 months, the International Monetary Fund has said Nigeria will likely depend on overdrafts from the Central Bank of Nigeria to fund its proposed N2.55tn petrol subsidy bill.
The IMF said this in its ‘Nigeria: Selected Issues Paper’ report, which was prepared by a staff team of the Fund as background documentation for its periodic consultation with Nigeria.
According to the report, fuel subsidy negatively affects the country’s fiscal position, increasing fiscal deficit.
The Washington-based lender said, “Implicit fuel subsidies have a significant negative impact on Nigeria’s fiscal position, which is estimated to increase the overall fiscal deficit by around one percentage point of the Gross Domestic Product in 2021.
“Despite much higher oil prices, the general government fiscal deficit is projected to be significantly worse at 6.3 per cent of the GDP, compared to 4.7 per cent of GDP in the 2020 Article IV staff report, mainly reflecting the reemergence of implicit fuel subsidies and higher spending in the supplementary budget for security and vaccine costs.”
It further stressed that the government would likely depend hugely on domestic financing sources, which include borrowing from the CBN, adding fuel subsidy has been a substantial burden on the country.
“Even though we assume that implicit fuel subsidies exist only until mid-2022, as stipulated in the Petroleum Industry Act and assumed in the draft 2022 budget, fiscal vulnerabilities remain elevated with public debt continuously increasing from 35 per cent of the GDP in 2020 to over 42 per cent in 2026.
“With limited IFI funding, fiscal financing for large implicit subsidy costs is likely to depend heavily on domestic sources, including overdrafts from the Central Bank of Nigeria. Thus, the recent re-emergence of implicit fuel subsidies has levied a considerable burden on the Nigeria’s fiscal position, that could have been spent more effectively on pro-poor interventions,” the report read.
Meanwhile, the World Bank had warned the Federal Government against financing its deficits by borrowing from the CBN through the Ways and Means Advances, stressing that it puts fiscal pressures on the country’s expenditures.
According to the bank, central bank financing and fuel subsidy regime tend to adversely affect investments in human and physical capital.
The Federal Government’s total borrowing from the CBN through Ways and Means Advances had ballooned by 2,286 per cent to N15.51tn in six years, according to the central bank data.
The N15.51tn owed by the Federal Government to the central bank is not part of the country’s total public debt stock, which stood at N38tn as of September 2021.
However, the DMO said that it was working out a process of restructuring the overdrafts of the CBN for government financing to a long-term tenored debt.
Meanwhile, interest payments on Federal Government’s borrowing from the CBN through Ways and Means Advances had reportedly gulped N2.03tn in two years.
Also, in the monetary policy category of the CBN’s Frequently Asked Questions page on its website, it was disclosed that the Federal Government’s borrowing from the apex bank through its Means and Ways Advances could have adverse effects on the bank’s monetary policy to the detriment of domestic prices and exchange rates.
Removing fuel subsidy’ll reduce income inequality
Meanwhile, the IMF further encouraged the government to remove fuel subsidy, stating that it would reduce income inequality.
The report further read in part, “Analysis shows that removing fuel subsidies would reduce income inequality. A fuel price increase to cost-recovery level would reduce households’ purchasing power, which calls for a distributional analysis of the impact by income groups, especially for poor households. Richer households tend to spend a larger share of their income on PMS than poorer households, while the share of kerosene expenditure is lower in richer households (above 80th income percentile). The price of kerosene—a cooking/heating fuel used mainly by poorer households—is higher than the subsidised price of PMS, which implies that the existing implicit fuel subsidy is ‘regressive’.
“Empirical studies have also supported that fuel subsidy is inequitable, finding that it is an extremely costly approach to helping the poor, with the top income quintile typically capturing six times more in subsidies than the bottom. Not surprisingly, the removal of fuel subsidies is therefore progressive.”
The Fund pointed out that there would be adverse impact on the poor if fuel subsidy was removed, but noted that the impact could be mitigated with a fraction of the fiscal resources used spent on the fuel subsidy.
Borrowing from CBN dangerous for economy, Tella cautions
A professor of Economics at the Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Prof Sheriffdeen Tella, has cautioned the Federal Government against borrowing from the CBN.
According to him, such borrowing contributes to inflation and disrupts monetary policies in the country.
“The central bank has been borrowing money from the government for some time, and that is part of what is fuelling inflation in the country. The Nigerian Bureau of Statistics is not telling the truth because those of us who go to the market know what the market prices are saying but they are saying prices are coming down. Prices are not coming down. Maybe there is the need for some independent statistical review.
“What the IMF is saying is correct. It is dangerous for the economy when the government continues to borrow from the central bank. Two things are likely going to happen. One is that the monetary policy cannot be effective when the central bank becomes lender to the Federal Government. So far, the CBN has not been able to achieve single-digit inflation, which the inflation targeting is supposed to achieve, because the Federal Government is borrowing from them.
“The second thing is that the borrowing from the central bank will make it difficult for the central bank to intervene appropriately in the economy. The amount of money they are to use to intervene is part of what the Federal Government is borrowing. Therefore, it would be difficult to achieve the objective of that intervention. It is not proper.”
Tella further said that it appears that the Federal Government was bent on borrowing regardless of how it affects the economy.
He said, “It seems the Federal Government is just bent on borrowing. They don’t care whether money is coming from anywhere. They have made up their minds that they are going to borrow.”
NLC, TUC kick, say Nigeria must be independent
Meanwhile, the Nigerian Labour Congress and the Trade Union Congress have reacted to the IMF warning to Nigeria on fuel subsidy, saying the international organisation had misled Nigeria in the past.
According to the Deputy National President, NLC, Joe Ajaero, the IMF does not mean well for the masses and workers.
He said Nigeria must do away with IMF’s advice and loans if it must become economically independent.
He said, “The truth is that IMF does not pretend to work for the masses and the workers. The IMF is for the establishment. They give headlock to debtor countries to swallow and die.
“There is no country partnering with the IMF that has survived by its advice. The recent history of Greece and other places is a clear testimony for anybody who wants to take to the IMF advice.
“The IMF is giving Nigeria such advice because if they destroy Nigeria economy, it is as good as destroying African economy.
“This is another level of colonialism and if you look at the revolution of economic development, you would see that the continued subjugation of our economy to the dictate of these institution shows that we are not economically independent.
“We must seek the economic independence. If Nigeria wants to survive, it should do away with the IMF’s loans and advice and move ahead, looking at it own made recovery strategy.’”
Supporting this view, the first National Deputy President, Trade Union Congress, and National President of Association of Senior Civil Servants of Nigeria, Tommy Etim, in an interview with one of our correspondents, said the socio-econmic implication of such policy on the citizens must first be considered.
He noted that the IMF once misled the country with the Structural Adjustment Programme, adding that the country was still grappling with the effect till date.
He said, “It is unfortunate that we are not looking at the economy from our cultural perspective. We are just looking at the economy from what is happening in other clime.
“In 1985, that was how they misled us to adopt Structural Adjustment Programme which eventually led to the economic calamity we are facing today. Nobody can dictate to you how to run your country. We must look inward. They have seen Nigeria as a dumping group for their economy.
“Whatever policy they have, they bring it to Nigerian economy and we have fallen prey because of what they call aid. These are things that have perpetually kept Nigeria where we are.
“It is the right time for us to do what is right for our economy. No amount of pressure from IMF can make us derail from our economic principle which would help us reduce our borrowing.”
Fuel subsidy rose by 890% in five years – Report
Meanwhile, the amount spent as subsidy on Premium Motor Spirit, popularly called petrol, increased by 890 per cent between 2017 and 2021, the just released February 2022 report of SB Morgen stated.
In its February 2022 report entitled, “Growing Fuel Subsidy and Transport Costs: Which Way Forward, Nigeria?”, the research firm stated that the Nigerian National Petroleum Company Limited spent N144.53bn, N730.86bn and N551.22bn in 2017, 2018 and 2019 on petrol subsidy respectively.
For 2021 and 2021 the national oil firm spent N1.192tn and N1.428tn respectively. The total subsidy for the five-year period was N4.045tn.
The report, however, noted that the rising cost of transportation was not mainly due to the increase in petrol price.
“In summary, over this five-year period, petrol prices increased by 12.1 per cent, petrol subsidy by 890 per cent and transport cost by 283 per cent,” the report stated.
It explained that the average cost of bus transportation within Nigerian cities during this period rose from N122.83 in January 2017 to N470.83 in December 2021.
It stated that in 2017, Abuja had the highest intra-city bus transport cost at N290.55, while Borno had the lowest at N50, adding that in 2021, Zamfara had the highest intra-city bus transport cost at N700.22, while Abia had the lowest at N294.44.
“The data shows that the lowest cost in 2021 is 2.4 times higher than the average cost in 2017,” it stated.
The report also showed that the average cost of bus transportation from one city to another rose from N1,430.63 in January 2017 to N2,784.92 in December 2021.
In dollar terms, it said the average price of transportation had risen from $0.37 in January 2017 to $1.14 in December 2021.
“The rise in transportation costs is not altogether surprising as it is market-driven and it has moved in tandem with global price movements, as well as other factors such as security, or the lack thereof, which explains why the cost of transportation in Zamfara has gone up so high,” it stated.
It added, “However, our petrol prices have gone in the opposite direction despite gasoline prices rising globally in the same time period.
“May 2020 was the month that saw the highest transport cost at N611.92, and also one of the months that saw the lowest fuel price at N125 over the five-year period. Hence, it is clear that fuel price is not the major determinant of transport cost in Nigeria.”
The report noted that in 2020, the cost of fuel subsidy rose to trillions of naira as against the billions it used to be in previous years, yet 2020 witnessed this much hike in transport cost.(Punch)
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