Wednesday, 9 December 2015

FG Spends N7trn on subsidy in FOUR Years

The Federal Government has spent $35 billion (N7 trillion) between 2010 and 2014 to sustain subsidy on petroleum products, according to the World Bank. Lead Economist of the bank, Mr. John Litwack, disclosed this yesterday in Abuja during the launch of the bank’s third Nigeria Economic Report (NER).

New Telegraph reports that Litwack noted that the $35 billion cost of fuel subsidy from 2010 to 2014 accounted for why Nigeria was unable to accumulate a fiscal reserve in the Excess Crude Account (ECA).
“Fuel subsidy obligations are expected to reach 18 per cent of all government oil revenues in 2015 and if the current regulated prices are maintained, this is projected to increase to more than 30 per cent by 2018,” the bank said.

According to the report, in the face of recent sharp decline in oil prices and Nigeria’s high dependence on oil revenues coupled with slower economic growth, the country is hard pressed for a major fiscal adjustment to lower oil revenues.

“Even if oil prices rebound, the general rapid trend toward a decline in the share of oil revenues in Gross Domestic Product (GDP) should continue.
“Adjusting to new fiscal realities will be a critical challenge for Nigeria in the short and medium term.

On the upside, however, and as the report highlights, important gains can be made by increasing efficiency in the public sector and improving regulatory effectiveness,” the report said. The NER report examines the costs and benefits of the fuel subsidy in Nigeria in the light of current prospects for oil prices and revenue.

“Overall, the fuel subsidy appears to have very modest benefits for the majority of citizens, but the costs are quite high. There is a strong tendency for the cost of the fuel subsidy to increase over time as increasing domestic demand for petrol outpaces growth in oil output or revenue,” Litwack said.
The lead economist said the bank would not influence Nigeria’s decision on the issue of fuel subsidy, adding that it could only point out the costs and benefits.

“We did not make any recommendations on fuel subsidy because, precisely, we don’t think it is our place to do that; we understand this is a difficult decision for Nigeria. “There are implications that should be considered, but we think Nigeria will ultimately decide. So, what we are trying to do is to inform the debate by pointing out the cost implications.

“The costs quite frankly look very high and the benefits for the ordinary Nigerian does not look that high,” he said.

Litwack said that although fuel subsidy appeared to have very modest benefits for the majority of Nigerians, the cost implications were quite high. He noted that the annual spending on fuel subsidy in the country accounted for about one-fourth of all budgetary spending.

According to him, this is significantly greater than the entire federal capital budget and greater than all federal spending on education and public health combined.
He, however, said that weak enforcement of administrative prices of petrol and kerosene had, in no small measure, reduced the benefits of fuel subsidies to Nigerians.

The World Bank representative noted that uncertainty about the fuel subsidy had strongly discouraged investment in domestic oil refining.

“Allegations of corruption and fraud surrounding the implementation of the fuel subsidy were costly to the reputation of the government. “Subsidy-related fuel shortages have repeatedly disrupted economic activity and imposed serious welfare costs on Nigerian households,” he said.

The World Bank also advised Nigeria to seriously reform its tax system to address economic challenges being faced in the country. He said the country should build a tax system that was not dependent on oil.

Earlier, World Bank Country Director, Mr. Rachid Benmessaoud, said that Nigeria has a unique window of opportunity to diversify her economy and improve the efficiency of public finance and regulation if the right policies are put in place.

Meanwhile, former Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, yesterday declared that the $13 billion worth of petrol subsidies requests during her administration was blotted by many fraudulent claims from marketers.

Okonjo-Iweala, in an article published in Financial Times, tasked the government to cut subsidy to benefit both the rich and poor. She said that the subsidy claims had burdened the country’s economy. “One of the most common concerns about removing subsidies is that it will hurt the poor.

But in reality, the subsidies benefit high-income populations and industry much more than low-income households,” she argued. “It makes more sense to remove subsidies and redirect cash into investments that go directly to those who need it most.

That was the aim of Nigeria’s programme and it is being tried elsewhere. In Germany and Poland, for example, coal subsidy reforms were supported by cash assistance for workers affected by mine closures,” she added. Stating that the government support for fossil-fuel subsidies would amount to almost $650 billion this year globally, the former minister added that the cost of these subsidies far outweighs the benefits and burdens the middle classes.

She said: “In 2012, in Nigeria, we reformed petrol subsidies. Conscious that the public might be concerned, we ran an information campaign to explain how the savings would be used to help everyone.

“Political pressure, however, led to the policy being introduced earlier than planned and, as a result, the changes came as a shock to many.

This led to protests and the reform had to be partially rolled back. “Despite this, we were right to act. Even phasing out half of the subsidies was a substantial achievement.

“Some $13 billion worth of petrol subsidies, including many fraudulent claims, had burdened the national budget, and we were able to redirect some of those funds.” She advocated the phasing out of fuel subsidies.

Her words: “The International Monetary Fund (IMF) has estimated that more than 40 per cent of fuel price subsidies in developing countries accrue to the richest 20 per cent of households, while seven per cent of the benefits go to the poorest 20 per cent….

“Done correctly, phasing out subsidies will have the added bonus of lowering greenhouse gas emissions and reducing air pollution.
In the context of the current effort to secure a global agreement of measures to combat climate change, that is great opportunity. Governments should seize it.”


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