According to the World Bank, the federal government of Nigeria might still be paying for fuel subsidies because the country’s fuel prices aren’t cost-reflective at the moment.
The World Bank estimates that Nigerians should pay about N750 per litre instead of the current N650 in some areas.
Our source states that gas prices in Kano and Sokoto are already about N690 per litre, while in the far northeastern regions of Borno and Yobe, they are beyond N700.
Because of the present pricing, a large number of Nigerians have parked their cars, which has led to inflation eating away at their wage and raising the cost of necessities.
Numerous analysts have previously denounced the World Bank’s recommendation and counselled the national government to seek an indigenous remedy for the current economic predicaments facing the nation.
In September, Obasanjo News24 revealed that the government had spent N169.4 billion in subsidies in August to maintain the pump price at N620 per litre, even though President Bola Ahmed Tinubu had repeatedly assured everyone that the petrol subsidy regime was no longer in place.
Alex Sienaert, the lead economist for the World Bank in Nigeria, verified yesterday in Abuja that the government continues to provide petrol subsidies during his presentation of the Nigeria Development Update (NDU), December 2023 Edition.
“It appears that petrol prices are not fully adjusting to market conditions,” he remarked. Thus, if we calculate the cost reflective of the retail PMS price of the would-be and assume that importation is carried out at the official FX rate, it suggests a partial return of the subsidy.
“Of course, the primary provider, parallel rates, are being liberalised; otherwise, the price would be much higher. These are only approximations meant to give you an idea of the potential appearance of cost-reflective pricing.
“We believe that the price of gasoline should be approximately N750 per litre, which is more than what Nigerians currently pay—N650 per litre.”
The NDU research states that maintaining the financial savings from the PMS subsidy revision will be essential.
According to the research, Nigeria’s fiscal situation was being weakened by the high cost of the petrol subsidy, which in turn caused a sharp rise in deficit monetization through CBN Ways and Means financing and increased inflation.
It concluded, “It is crucial that the subsidy be kept in place and that ongoing efforts be made to guarantee pricing that reflects the market.”
According to the study, the removal of the PMS subsidy presents a chance for the petrol market to open up, allowing firms other than NNPC to import petrol.
“This would result in increased revenues to the Federation Account, which would then trickle down to all levels of government, and benefits for consumers from market competition.”
By 2025, Nigeria ought to have saved over N11 trillion on fuel subsidies.
According to the World Bank’s NDU report, Nigeria ought to have saved more than N11 trillion by 2025 as a result of the elimination of gasoline subsidies.
Fuel subsidies were eliminated on June 1, 2023, and it is anticipated that this will save the government around N2 trillion in 2023—roughly 0.9% of the nation’s entire economic output.
“In comparison with a scenario where the subsidy continued, the anticipated savings between 2023 and 2025 could exceed N11 trillion.”
Removing subsidies hasn’t increased oil revenue as anticipated, according to OAGF
The removal of the expensive petrol subsidy meant that the federation’s gains in net oil revenues were less than what they should have been, according to fiscal accounts reports from the Office of the Accountant General of the Federation (OAGF).
According to the statement: “It was believed that eliminating the subsidy, which used to cost over N380 billion per month, would greatly increase the nation’s oil profits.
Nonetheless, improvements in exchange rates accounted for the majority of the income gains that were reported in the second half of 2023.
“Without these advances, oil revenue would have decreased by 0.2% of the total annual economic production from January to August, primarily in July and August.
Production-sharing contracts (PSCs) and annual dividends brought in a little extra money in August, but the gains were less than the anticipated advantages of doing away with the gasoline subsidy.
There is a chance that an implicit fuel subsidy will reappear because petrol prices have not changed to reflect market variables like exchange rates and oil prices throughout the world. This could hinder oil revenues from reaching their potential.
“NNPC must be more open and honest.”
The World Bank research states that while there are noticeable income increases from the FX reform, additional information regarding oil revenues—including the fiscal advantages of the PMS subsidy reform—is still required.
Nominal increases in oil revenue have been visible since June, according to the report. The majority of these fall under the category of “exchange rate gains,” indicating that the devaluation of the Nigerian naira is the cause.
“There is a lack of transparency regarding oil revenues, with the exception of exchange rate-related increases. This includes the financial gains made by the Nigeria National Petroleum Corporation (NNPC) from the removal of subsidies, the arrears of subsidies that are still being deducted, and the effect on federation revenues.”
According to Sienaert, the NNPC Limited needs to be transparent and truthful in order for the government to carry out its renewed hope agenda.
He pointed out that this transparency should guarantee the accuracy of the oil revenues and earnings that are sent to the federation account.
The World Bank recommended that the government frequently publish information on petrol pump prices.
The government’s responsibility to maintain transparency at the NNPC, its own oil firm, “with regard to profits and oil revenues to be remitted to the Federation Account” was emphasised.
Raising the VAT rate
In an effort to attract non-oil money into the FG’s coffers, the World Bank also requested that the federal government raise the VAT rate.
The bank suggested raising the existing 7.5% VAT rate in the report in an effort to free up more budgetary flexibility and boost non-oil revenue.
Nonetheless, the bank pointed out that some of the recommendations made to improve non-oil revenues suggested eliminating petrol exemptions and allowing input tax credits in lieu of such an increase.
The bank has made further proposals to boost non-oil revenue, such as using data for tax audits and introducing a single turnover tax for SMEs at the state level in place of several levies and fees.
“If maintained, Tinubu’s reforms will be beneficial.”
The research also mentioned how President Tinubu’s measures, if continued, might contribute to 2025 inflation falling to 19.6%. As of October 2023, Nigeria’s inflation rate is 27.33%.
As per President Tinubu’s budget presentation speech, he aims to achieve a 21.4% inflation rate by 2024.
Since taking office in May, the president has implemented two significant reforms: the unification of the foreign exchange market and the elimination of the pricey petrol subsidy.
A reduction in the public debt service as a percentage of revenue from 102% in 2022 to 51% by 2025, as well as an increase in GDP growth to 3.7% in 2025, are among the other benefits the bank highlighted if the reforms are maintained over time. The fiscal deficit ratio to GDP will also decrease from its current 5.1% to 3.7% in 2025.
Professor Uwaleke’s inconsiderate advice regarding fuel price increases
In response, Uche Uwaleke, a professor of finance and capital markets at Nasarawa State University in Keffi, stated, “At this stage, Nigeria should not be expecting this kind of guidance from a development partner.
The World Bank’s suggestion of yet another harsh pill too soon after the traumatic withdrawal of gasoline subsidies reeks of insensitivity.
“I think this call is a diversion, and I implore the president to disregard it and keep his attention on his eight-point agenda of improving the lives of Nigerians.”
