Research Document: Making Nigeria's Oil & Gas Sector Deregulation Work for Economic Growth and National Prosperity

Posted Wed, Apr 13, 2022 3:16 PM

Remove or retain fuel subsidies? This is one of the many difficult decisions Nigeria might have to take in 2022. The fuel subsidy, conceived initially as a short-term support tool, has endured over time, thereby becoming a threat to fiscal sustainability. What was introduced in the 1970s to cushion the pass-through effects of rising international crude oil prices on Nigeria's domestic fuel price has become a topical issue with substantial fiscal and social dimensions. Over the years, the Government's fuel subsidy burden has heightened, especially during periods of high crude oil price, thereby threatening its sustainability as a price stabilization tool.

The rationale behind fuel subsidies in Nigeria, like any other country, is to moderate the impact of rising global oil prices on the welfare of Nigerians. At some point, subsidy payments will constitute a significant drain on public finances, as it is one form of transfer payments. Here are some arguments in support of ending the burden of fuel subsidies:

• It is becoming unaffordable for the Government, particularly in times of persistent increase in crude oil prices. Since fuel subsidies are put in place to stabilise petrol pump prices, in periods of higher global oil prices, the Government faces two options: upward adjustment of the cost of PMS or a phase-out of the subsidy on petrol;
• When government revenues from oil and non-oil sources are under intense pressure - Rather than being captured explicitly as an expenditure item in the annual budget estimates, the cost of the petrol subsidy is treated as "forgone revenue". The NNPC directly calculates fuel subsidy costs from the gross oil and gas revenues that it transfers to the Federation Account. This is where the issue of transparency and accountability becomes essential. For instance, pre- COVID-19, fuel subsidies accounted for 11.3 percent of FGN Retained Revenue in 2019, and this share rose more than doubled to 27% in the first eleven months of 2021.
• When there is perceived widespread corruption in subsidy disbursements – about 39 percent of annual fuel subsidy payments is lost to corruption (CPPA, 2012). However, we believe that the best way to address persistent corruption is to tackle its root cause.