Subsidy Palliative Loan: Need For Caution 

The Minister of Finance, Budget and National Planning, Zainab Ahmed, announced that the Federal
Government had borrowed $800 million from the World Bank. According to her, it would be used as a palliative before the total removal of petrol subsidies in June. This announcement sparked outrage among Nigerians. At the official rate, the borrowed amount is equivalent to N368.2 billion, while at the black market, it is N596 billion.
Petrol subsidy has been a cardinal topic in Nigeria’s public space and economy for over 40 years. Reductions in the subsidy and subsequent increases in petrol pump prices have led to nationwide strikes, protests and social upheavals since the late 1980s. These events have been led by trade unions, students, civil society organisations, and professionals. The cost and impact on public finances have been significant. Recently, there have been incremental reductions in the subsidy.
Economic and financial experts have expressed doubts about the viability of the subsidy that is currently being implemented in Nigeria. They suggest that the N368.2 billion intervention will not cushion the economic challenges that will arise from the removal of ‘under-recovery’, as stated by the government. Zainab has said that post-subsidy palliative plans will be distributed to 50 million Nigerians, which represents 10 million households.
The issue of subsidy could have been resolved if previous governments had addressed the root cause. Palliatives are only a temporary solution that barely scratches the surface since the underlying issue will resurface. Marketers and other groups in the downstream sector of the petroleum industry claimed that fuel prices might double once the subsidy is removed, creating a ripple effect on everything.
Debates about the implications of eliminating petrol subsidy have intensified. Those who oppose the withdrawal include labour, trade unions and some oil and gas industry experts. They argue that it would increase inflation and harm Nigerians. Organised labour has always insisted that the refineries must be functional before subsidy is taken off. The incoming government must be prepared to face challenges in sustaining or withdrawing the subsidy.
Nigerians are questioning the lack of transparency regarding the World Bank’s funding and raising concerns about the potential for it to be another fruitless endeavour. In September 2022, a report from the Nigeria Extractive Industries Initiative (NEITI) revealed that over the last 15 years (2005-2020), the country had spent N17.6 trillion ($74.386 billion) on fuel subsidies. Meanwhile, the nation’s total debt stock continues to increase, with the latest figure standing at N44.06 trillion, due to unequal revenue generation capacity.
In 2022, Nigeria’s revenue collection reached N10 trillion, according to Federal Inland Revenue data. The possibility of the country taking out an $800 million loan from the World Bank has caused concern among stakeholders. We believe that borrowing to finance post-fuel subsidy removal palliatives is not feasible. Hence, we insist that the incoming administration should handle fuel subsidy removal and palliatives.
In the past, the country funded palliative care through savings from subsidy removal without resorting to borrowing. That is why the current proposal to fund palliative care through borrowing is unacceptable and unconventional. Additionally, there are policy considerations that need to be taken into account when delivering palliative care. The government should explore fiscal and monetary policy options to encourage investment in sectors that can help alleviate the pain caused by subsidy removal.
Investors in various sectors, such as refineries, pipelines, petrochemicals, marketing, and fertiliser plants, can benefit from incentives that facilitate investment in the power sector and the use of autogas. The elimination of fuel subsidies would reduce the Federal Government’s debt burden and is necessary for the country’s economy.
However, the $800 million loan from the World Bank cannot alleviate the burden of fuel subsidy removal on Nigerians, who are already groaning loudly. The new government must prioritise restructuring the government’s revenue profile to boost foreign investment in crucial sectors of the economy.
The government must return the borrowed money if the fuel subsidy removal process has indeed been suspended as declared by the Finance Minister after the National Economic Council (NEC) meeting last month. Nigeria is at present in a calamitous financial situation, with records from both national and international financial and debt institutions indicating a State in crisis. Continuing to borrow money without a coherent plan for repayment only exacerbates the problem and puts the country further into a debt trap.
According to the National Bureau of Statistics (NBS), Nigeria’s public debt stock reached N44.06 trillion or $101.91 billion in Q3 of 2021. The debt might increase to N77 trillion with the addition of the Central Bank of Nigeria’s (CBN) Ways and Means expenses, which have caused controversy. In just three months, the debt grew by 2.84 per cent, rising from N42.84 trillion or $103.31 billion in Q2 of 2022 to N44.06 trillion in Q3.”
Following far-reaching corruption, the country’s subsidy system is currently unsustainable. It is crucial to carefully and gradually approach this problem to prevent resource waste and financial hardship. The Federal Government must be open about its strategy for removal.