Nigeria Seeks to Scrap Subsidies That Could Swell to $7 Billion
Nigeria’s Annual Spending on Subsidy Could Exceed Eurobond Raise
(Bloomberg) -- Cash-strapped Nigeria has pledged to end fuel subsidies next year that the World Bank says could cost the government $7 billion over the next 12 months if oil prices remain high.
A provision in a new petroleum law compels the government to let market conditions determine gasoline prices, Zainab Ahmed, minister of finance, budget and national planning, said at an economic summit in Abuja, the capital.
“In our 2022 budget, we only factored in fuel subsidies for the first half of the year,” Ahmed said. “In the second half of the year, we are looking at complete deregulation of the sector.”
The government of Africa’s biggest oil producer has already spent 904 billion naira ($2.2 billion) in the first eight months of 2021 to cap gasoline prices, according to data from the state-owned Nigerian National Petroleum Corp. With the price of crude surging, that figure could reach 3 trillion naira over the next 12 months, Shubham Chaudhuri, the World Bank’s country director for Nigeria, said Monday.
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These expenses are depriving the state of revenue that could pay for essential services, Chaudhuri said. The money could go into “primary healthcare facilities so that so many mothers don’t die during childbirth, or basic education for every Nigerian child,” he said.
Still, President Muhammadu Buhari has shelved plans announced last March to eliminate the costly fuel subsidies. While senior government officials acknowledge the need to phase them out, doing so is politically risky -- especially with elections on the horizon in early 2023. Many Nigerians regard affordable gasoline as their single dependable benefit from the country’s misspent oil wealth.
On top of that, Buhari’s administration is on track to spend more than 300 billion naira over the course of the year to maintain power tariffs that don’t reflect the cost of producing and distributing electricity, Ben Akabueze, director-general of Nigeria’s budget office, said at the summit.
“In each of 2019 and 2020 the tariff shortfalls exceeded half a trillion naira, and in 2021 we look set to exceed our estimate of 300 billion naira,” Akabueze said.
The regressive tariff on electricity should come to an end in 2022 as those who benefit most are those who need it least, Akabueze said. “The poorest 20% of consumers only get 1.5% of the subsidy,” he said.
Combined, the fuel and power interventions in 2021 will likely surpass the $4 billion the government raised through a Eurobond in September if oil prices don’t fall.
Gasoline prices, which at 39 cents a liter are among the cheapest globally, have remained unchanged since December, leaving the NNPC, the country’s sole importer of the fuel, to shoulder growing losses as Brent crude has climbed steadily, reaching $86 a barrel. Buhari’s administration is struggling to boost its revenue at a time when servicing debt is consuming about 70% of government income -- more than the $3.8 billion budgeted for health and education in 2021.
The new petroleum law has made it illegal for the government to continue suppressing gasoline prices, Doyin Salami, head of the Buhari’s economic advisory team, said Monday. “My sense is that we will obey the law and subsidies will be gone.”
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