This extends to subsidy arrears that are still being
deducted and the impact of subsidy removal on federation revenues, the bank
noted. The Washington-based made this call in its Nigeria Development Update,
December 2023 edition titled, ‘Turning The Corner (from reforms and renewed
hope, to results).
This is the Minister of Finance and Coordinating Minister of
Economy, Wale Edun, revealed that the government was ready to scrutinise the
revenue flow from the NNPCL.
According to the World Bank, while revenue gains from the
exchange rate reforms are visible, more clarity is needed on oil revenues,
including the fiscal benefits from the PMS subsidy reforms.
It declared, “nominal oil revenue gains have been evident
since June; these are mostly categorised as “exchange rate gains”, suggesting
that they are due to the naira depreciation.
“Except for the exchange rate-related increases, however,
there is a lack of transparency regarding oil revenues, especially the
financial gains of the Nigeria National Petroleum Corporation from the subsidy
removal, the subsidy arrears that are still being deducted, and the impact of
this on Federation revenues. It is also unclear why retail petrol prices have
not changed much since August, despite fluctuations in the exchange rate and
global oil prices.”
The Bretton Woods institution further expanded that gains in
net oil revenue of the federation were lower than what they should have been
considering what the removal of fuel subsidy should have added to the accounts.
It stated that fuel subsidy cost the federation about N380bn
a month, and once removed, the federation account should have recorded an
increase in net oil revenues.
It said, “However, most of the gains in the oil revenues in
H2 2023, as reported by OAGF, can be attributed to exchange rate gains. Without
exchange rate gains, net oil revenue between January and August would have
declined by 0.2 of a percentage point of full-year GDP yoy, all materialising
in the July–August period.
“In August, additional revenue from 40 per cent profit of
Production Sharing Contracts and the interim yearly dividend were reflected in
the accounts. However, these were not as
high as what the gains from removing the gasoline subsidy should have been.
Given that petrol pump prices have not changed in line with market fundamentals
(notably exchange rate movements and global oil prices), there is a risk that
the implicit fuel subsidy has reemerged, potentially keeping net oil revenues
lower than expected.”
The institution further noted that the reform of fuel
subsidy should help the NNPCL to settle its arrears and start paying fully for
the Federation’s share of costs in joint venture operations, thereby allowing
oil production to gradually increase over time.
Also speaking at the presentation of the report, the
Coordinating Minister of the Economy, Edun noted that the removal of fuel
subsidy saved the government’s finances.
He stated that while expectations that subsidy removal
should boost the government’s revenue, it was faced with debt funding and a
high fiscal deficit.
He said, “In terms of the government’s finances, you have
rightly pointed out that following the removal of subsidy, there is an
expectation that there would be fiscal dividends and it’s fair to say that
without it, government finances will be in total disarray now. However, there is debt funding, pressure on
fiscal deficit, and on government finances, and borrowings which have been
inherited.
“Our levels of borrowing are being reduced and there is a
plan to reduce that fiscal deficit over time. On the revenue side, the first
source is oil, and I expect that there will be serious scrutiny on oil revenue
and production and insistence on raising oil production and similarly that the
revenues are brought into the federation account following the constitution. I
think there will be added scrutiny, and I am sure NNPC is getting ready for
that.”
Edun further declared that there would be a robust rollout
of measures to raise tax revenue soon. He, however, highlighted that tax rates
would not be increased but a lot would be done regarding efficiency,
digitalisation, and improved collection.
He added that waivers and tax incentives would be
scrutinised to revamp it and save leakages, particularly among ministries,
departments and agencies.
Subsidy removal and controversies
On May 29, President Bola Tinubu announced the removal of
fuel subsidy with, “Subsidy is gone,” to free up foreign exchange earnings.
In his August 1 national address, Tinubu disclosed that the
Federal Government had saved about N1tn in two months after the removal of the
petrol subsidy freeing up funds for other things in the economy.
He said, “In a little over two months, we have saved over a
N1tn that would have been squandered on the unproductive fuel subsidy which
only benefitted smugglers and fraudsters.”
According to him, the funds saved from subsidy removal “will
now be used more directly and more beneficially for you and your families.”
However, there have been concerns that the dividend of
subsidy removal has not trickled down to the average Nigerian.
Recently, a former Governor of the Central Bank of Nigeria,
Sanusi Lamido Sanusi, alleged that the NNPCL might not be remitting enough
dollars to the federation account despite subsidy’s removal.
Speaking during the Bank Directors Summit organised by the
Bank Directors Association of Nigeria recently, Sanusi, said, “The exchange
rate needs to be stabilised and we have to address the fundamental question,
why is there no money coming in?
“Why is the NNPCL not able to bring in dollars? Am sorry
this is the question that cost me my job and I will continue asking this
question until NNPCL fixes it up or until I die. Where are the dollars? We need
to shine a light on the NNPCL. The finance minister cannot tell you because he
doesn’t have a monitoring system that reports to him.
“The finance minister can’t tell you how many barrels of
petrol we produce and export. It is only the NNPCL that can give those figures.
The finance ministry needs to know how much oil we produce daily, how much we
sell, and where the money is going. We are no longer paying subsidies so where
are the dollars? It was under recovery during the subsidy era and that has been
stopped, so where is the money?”
Sanusi noted that the NNPCL was opaque about its dealings,
shrouding many of its dealings in secrecy.
NNPCL dollar revenues
Defending the oil company’s finances, the NNPCL’s Chief
Financial Officer, Umar Ajiya, who was representing the Group Managing
Director, Mele Kyari, disclosed that since the inflow of dollars into the
country is tied to oil revenues, the country is facing the consequence of
falling oil production, insecurity, and lack of investments in the sector.
He also said the NNPCL had been using its revenue to import
refined PMS and service debt. He said, “Just to clarify and let the audience go
with a well-balanced information. The inflows of dollars into the country are
tied to oil revenues and the oil revenues are driven from oil production.
“The consequence of what we are facing today is a fall in
oil production simply because of insecurity and lack of investments. The net
dollar accruable from oil operations is what the NNPCL uses to import PMS. The
PMS is sold in naira, you can’t sell it in dollars. Consequently, you would
find out that the net dollar inflows into the NNPCL coffers are spent on the
import of basically PMS and debt service.”
Ajiya stressed that the surplus dollars inflow to the CBN
and any other bank in the country can only happen when the country starts
producing PMS over its domestic requirement.
According to the CFO, adequate forex inflow can also happen
if insecurity is addressed, and such development will attract partners to bring
in fresh dollars in the form of investment to oil operations.
He added, “So until such a point where we have excess
production over and above what we consume, then we will begin to see much
dollar liquidity coming into this country. The whole consumption pattern of
most Nigerians is foreign import-dependent and until we come to a position
whereby, we begin to consume what we produce and also add value to our raw
materials to bring further FX into the country.”
N750/litre petrol price
In its report, the global bank noted that there is a risk
that Federal Government may still be paying for fuel subsidy which is why net
oil revenues are lower than expected.
During his presentation at the unveiling of the report, the
bank’s Lead Economist for Nigeria, Alex Sienaert, noted that fuel processes are
currently not cost-reflective in the country.
He disclosed that the market price of petrol should be
around N750/litre.
He said, “It does seem like petrol prices are not fully
adjusting to market conditions, so that hints at the partial return of the
subsidy, if we estimate what is the cost reflective of retail PMS price of the
would-be and assuming that importation is done at the official FX rate.
‘’Of course, the liberalisation is happening with the
parallel rates, which is the main supplier, the price would be even higher.
These are just estimates to give you a sense of what cost-reflective pricing
most likely looks like. We think the price of petrol should be around N750 per
litre more than the N650 per litre currently paid by Nigerians.”
According to him, there is a need for the government to
clarify how prices at the pump are fixed as opposed to market conditions.
He noted that the government must ensure that revenue gains
from the removal of fuel subsidy materialises, while improving the transparency
of the NNPCL with regards to profits and oil revenues to be remitted to the
Federation Account.
While noting that important reform decisions have been taken
for Nigeria to avoid a fiscal cliff, the World Bank stated that these reforms
were followed by difficult economic adjustments.
Since the removal of fuel subsidy, retail fuel prices have
increased by more than 163 per cent and after shifting to a unified,
market-reflective foreign exchange regime, the naira has depreciated against
the US dollar by about 41 per cent in the official market and 30 per cent in
the parallel market.
The sharp increase in the price of fuel and other imported
goods has contributed to inflation, which hit an 18-year record high of 27.3
per cent year-on-year in October.
However, the World Bank insists that the recent reforms will
undo the increases in poverty seen in recent years from 2024 onward, albeit
only marginally and slowly.
It stated that sluggish growth and rising inflation
increased poverty from 40 per cent in 2018 to 46 per cent in 2023, pushing an
additional 24 million people below the national poverty line.
It said the number of poor Nigerians rose from 79 million in
2018 to 104 million in 2023, with urban poor — more exposed to inflation —
increasing from 13 to 20 million, while the number of poor people in rural
areas increased from 67 to 84 million.
It argued, “In the medium term, the reforms will reverse
this trend through higher growth and lower inflation, but to a limited extent,
with poverty rates decreasing from 46 per cent in 2024 to 44 per cent in 2026.”
According to the World Bank, the successful implementation
of the initiated reforms will be the first step toward improving Nigeria’s
growth prospects.
It highlighted that the implementation of fuel subsidy
removal and foreign exchange unification rate would push economic growth to 3.5
per cent between 2023–2026, adding 0.5 percentage points to the growth
potential in a scenario in which the reforms had not been implemented.
The global bank further stated that in the medium term, the
economy will begin to benefit from increasing fiscal space for development
spending.
While noting that inflation will begin to fall in 2024, it
added, “Together, such reforms would boost investment and productivity across
sectors, unlocking the stronger growth that Nigeria’s economy demonstrably
capable of, and allowing economic development to regain its fast pace.”
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