World Bank to Nigeria: End fuel subsidy in six months

The World Bank has called on the federal government to end what it described as ‘its expensive fuel subsidy regime’ within three to six months.

The Global lender in its report advised that the removal of the subsidy must be accompanied by ‘aggressive reform effort’ that could contribute more to growth than a sustained period of high oil prices.”

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According to the World Bank Update, the poorest 40% of people in Nigeria consume less than 3% of the total available Premium Motor Spirit in the country, noting that the rich benefitted more from the subsidies.

World Bank is the second international lender to advise Nigeria to remove the fuel subsidy in November. International Monetary Fund last week noted that Nigeria must remove the subsidy completely in early 2022.

“The complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor,” IMF said in its preliminary findings at the end of its official staff visit to the country under Article IV Mission.

The federal government has spent at least $2.1 billion (about N864 billion at N410 per $) on fuel subsidies in the first nine months of 2021.

“Urgent priorities for the next three to six months include reducing inflation, improving exchange-rate management…eliminating the PMS subsidy…and improving infrastructure,” the World Bank said in a report.

’40 million Nigerians to get transport grant’

Minister of Finance, Budget and National Planning, Zainab Ahmed said last month that fuel and electricity subsidies had not been included in the spending plans for 2022.

 Like the World Bank and IMF, Ahmed described the subsidies as “retrogressive”.

Ahmed said poor Nigerians would get N5,000 per month as a transportation grant after the removal of fuel subsidies.

According to the Minister, the Federal Government will remove fuel subsidies by 2022 and give the poorest Nigerians a transportation grant of N5,000 every month.

Ahmed who also spoke at the launch of the World Bank Nigeria Development Update in Abuja, said about 30 to 40 million Nigerians, who are the poorest in the country, would have access to the grant.

Ahmed also noted that the removal is set for June 2022, but hoped that it would be done before June, to be in line with the PIA.

State governments’ position

The Governor of Kaduna State, Malam Nasir El-Rufai, says state governments are ready to support the Federal Government in the elimination of the fuel subsidy regime.

El-Rufai gave the assurance on Tuesday in Abuja, at the presentation of the World Bank Nigeria Development Update, November 2021 edition titled “Time for Business Unusual”.

 He said if the regime of fuel subsidy was not eliminated, 35 out of the 36 states of the federation may not be able to pay salaries in 2022.

According to him, kerosene which matters most to the masses had been regulated without any hitches, while diesel which was most important to transporters had also been regulated for a long time.

Creative management of the transition

Prof. Uche Uwaleke, the Chairman, Chartered Institute of Bankers of Nigeria (CIBN) Abuja branch said fuel subsidy doesn’t benefit the poor

“Fuel subsidies have become a drain on government’s dwindling revenue. These subsidies actually benefit the rich and over the years have become avenues for massive corruption,” he said.

According to him, “the opportunity cost is high considering what the government could have done with the huge amount that is sunk into subsidies annually”.

“So, the call to do away with fuel subsidies is in order. It will make way for more investments into the downstream sector of the petroleum industry in line with the PIA,’’ he added.

He however advised that the Federal Government must provide robust palliatives.

“Be that as it may, the government should be ready to come up with compensation schemes to cushion the impact of the removal of fuel subsidy on the Nigerian masses. In addition to the cash transfer of N5,000, the government should work out an arrangement with organized labour for the provision of mass transit vehicles.

This should be in place before implementation,” he advised.

Similarly, an economist and Chief Executive Officer (CEO) of  Centre for Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf has identified the need to creatively manage the transition from the current pricing regime to a fully deregulated arrangement. 

Yusuf who is the immediate past Director-General of Lagos Chamber of Commerce and Industry (LCCI) affirmed that it is a tricky issue that could pose a serious challenge to the government if not tactically managed. 

The reality according to him is that the sentiments among the citizenry are not favourable to the deregulation of petroleum product pricing or petroleum subsidy removal.

“Even some elites are curiously not persuaded on the justification for the subsidy removal. If the policy transition is not properly managed,  the risk of a social and political backlash could be quite high. No doubt there is a sound economic and business case in favour of fuel subsidy removal but the social and political contexts are equally critical,” he said.

“Certainly,  the subsidy is not sustainable, which is why there is a need to accelerate engagement with the relevant stakeholders to come up with a policy transition strategy that is sustainable, realistic and pragmatic. The conversation should not only be economic but also social and political,” he said. 

He also stressed that the proposal of direct cash transfer to the vulnerable segments of the population is not a bad idea but noted that the credibility of the database must be assured and must be inclusive.

Also commenting on the removal, the Lead Economist and Enterprise Partner at SPM Professionals,  Mr. Paul Alaje, said “I doubt the ability of the government to end the subsidy in Nigeria because of a number of factors. One of the factors is the implication on disposable income.”

According to him, successive governments have tried to end subsidies in Nigeria but they have been able to do that when the price of crude drops globally.  “In the real sense when global oil prices increase, the government finds it difficult to end the subsidy.”

“Subsidy should be removed when we have one or two producers locally. That’s when subsidy removal would make sense,” he stated.

By Sunday Michael Ogwu,  Chris Agabi & Christiana T. Alabi (Lagos)