The World Bank has revealed that Nigeria’s National Petroleum Corporation lacks transparency about the economic benefits of removing fuel subsidies.
The bank pointed out that this also extends to the arrears of subsidies that are still being deducted and the impact on the federation’s income due to the abolition of subsidies. The Washington-based agency made the call in its December 2023 issue of the Nigeria Development Update, titled “Turning The Corner.”
Finance Minister and Coordinating Minister for Economic Affairs Wale Edun has disclosed that the government is ready to scrutinize the revenue flow from NNPCL.
According to the World Bank, while revenue increases from exchange rate reform are visible, more clarity is needed on oil revenues, including the fiscal benefits of PMS subsidy reform.
The report states that “increases in nominal oil revenues have been evident since June. These are primarily categorized as “exchange rate appreciation”, suggesting that they are due to the depreciation of the naira.
“However, apart from exchange rate-related increases, there is no transparency regarding the impact of oil revenues, especially the Nigerian National Petroleum Corporation’s financial benefits from subsidy abolition, subsidy arrears that are still being deducted; Lacking. This is about federation income. It is also unclear why retail gasoline prices have not changed much since August, despite fluctuations in exchange rates and world oil prices.”
The Bretton Woods institution further expanded that the increase in the federation’s net oil revenues was lower than the consideration amount that would have been added to its accounts by the removal of fuel subsidies.
According to the report, the fuel subsidy costs the federation approximately N380 billion per month and if the fuel subsidy were removed, the federation’s accounts would have recorded an increase in net oil revenue. .
“However, most of the increase in oil revenues reported by OAGF for the second half of 2023 could be due to exchange rate appreciation. Without exchange rate appreciation, net oil revenue from January to August Revenues were down 0.2 percentage points year-on-year as a percentage of full-year GDP, all realized in July-August.
“In August, the 40% profit on production sharing contracts and additional income from the annual interim dividend were reflected in the financial results. However, these were not as high as the gains from the removal of gasoline subsidies. Petrol pumps Implicit fuel subsidies have resurfaced, keeping net oil revenues lower than expected, given that prices have not moved in line with market fundamentals (particularly exchange rate movements and global oil prices). There is a possibility that it will be.”
The agency further stated that the fuel subsidy reforms will help NNPCL resolve its arrears and begin paying the full share of the federation’s costs in joint venture operations, thereby allowing oil production to gradually increase over time. He pointed out that this would make it possible.
Coordinating Economic Minister Edun also said at the report’s launch that the government’s finances had been saved by eliminating fuel subsidies.
He said that although there were hopes that the removal of subsidies would increase government revenues, the government faced debt financing and a large budget deficit.
He said, “When it comes to government finances, it is correct to say that a fiscal dividend is expected after the subsidy abolition, and without it, it is no exaggeration to say that government finances would currently be in complete disarray. ” he said. . But there is debt financing, budget deficits and pressure on government finances, and inherited borrowings.
“Our borrowing levels are decreasing and we have plans to reduce the budget deficit over time. In terms of revenue, the primary source is oil, and I am committed to increasing oil revenue and production. We expect there will be intense scrutiny and a strong case for increasing oil production and for revenue to be constitutionally included in the federal accounts as well. Further scrutiny will follow. I think it will happen, but I am sure that NNPC is preparing for it.”
Furthermore, Mr. Edun declared that he would strongly implement measures to increase tax revenue in the near future. However, he stressed that while tax rates would not increase, much work would be done on efficiency, digitization and improving collection.
He added that exemptions and tax incentives would be scrutinized, especially to prevent leakage between ministries.
Subsidy removal and controversy
On May 29, President Bola Tinubu announced the abolition of fuel subsidies in order to secure foreign exchange revenue, saying, “The subsidy is gone.”
In a national address on August 1, Tinubu revealed that the federal government had saved about N1 trillion in the two months since the petrol subsidy was abolished, which could be used for other purposes in the economy.
“In just over two months, we have saved more than one trillion naira that would have been wasted on counterproductive fuel subsidies that only benefit smugglers and fraudsters,” he said.
He said the money saved by eliminating the subsidy “will be used more directly and beneficially for you and your family.”
However, there are concerns that the benefits of subsidy removal are not reaching the average Nigerian.
Recently, former Central Bank of Nigeria Governor Sanusi Lamido Sanusi claimed that the NNPCL may not have transferred enough funds to the federation’s account despite the abolition of subsidies.
“The exchange rate needs to be stable and we have to address the fundamental problem of why money is not coming in,” Sanusi said at the Bank Directors Summit organized by the Nigerian Bank Directors Association recently.
“Why can’t NNPCL bring in dollars? Sorry, this is the question that will cost me my job and I am going to keep asking this question until NNPCL solves the problem or until I die. Where are the dollars? We need to shine a light on NNPCL. The Minister of Finance cannot tell you because he does not have a monitoring system that reports to the Minister of Finance.
“The finance minister cannot say how many barrels of petrol we produce and export every day. Only NNPCL can give such numbers. We need to know how much we sell and where that money goes. We’re not paying subsidies anymore, so where is that money? When we had subsidies, we were in restoration. Now that it has been stopped, where is the money?”
Sanusi pointed out that NNPCL has been opaque about its transactions, with many of them shrouded in secrecy.
NNPCL dollar income
NNPCL Chief Financial Officer Umar Aziya, who represented Group Managing Director Mele Kyari in defending the oil company’s finances, said that since the inflow of dollars into the country is tied to oil revenues, It has become clear that the country is facing the consequences of an economic downturn. Oil production, insecurity and lack of investment in this sector.
He also said NNPCL used the proceeds to import refined PMS and pay off debt. He said, “I just want to clarify and convey to my viewers balanced information. The inflow of dollars into the country is tied to oil revenues, and oil revenues are generated by oil production.
“The result of what we are facing today is a decline in oil production simply due to insecurity and lack of investment. The net dollars earned from oil operations are what NNPCL uses to import PMS. PMS is sold in naira and cannot be sold in dollars.As a result, you will see that the net dollars flowing into the coffers of NNPCL are essentially spent on importing PMS and debt servicing.”
Ajiya stressed that the inflow of surplus dollars to the CBN and other banks in the country could only happen if the country starts producing PMS beyond domestic requirements.
According to the CFO, if security insecurity is addressed there could be sufficient foreign exchange inflows, and these developments will attract partners who will bring in new capital in the form of investments in oil projects.
He added: “So until we have excess production that exceeds consumption, we’re going to start seeing a lot of dollar liquidity flowing into this country.” The entire consumption pattern of most Nigerians is dependent on foreign imports until we reach a situation where we start consuming what we produce and adding value to our raw materials in order to bring in more foreign exchange into the country. . ”
N750/liter petrol price
The World Bank said in a report that the federal government may still be paying fuel subsidies, which is why net oil revenues are lower than expected.
The bank’s chief economist for Nigeria, Alex Schiernaert, said in a presentation at the report’s launch that the country’s fuel processes currently do not reflect costs.
He disclosed that the market price of petrol should be around N750 per liter.
He said, “As gasoline prices do not seem to be fully adjusted to market conditions, we estimate costs that reflect the suggested retail PMS price and suggest a partial return of subsidies if imports are assumed.” “There is,” he said. Made at official FX rates.
“Of course, prices will be even higher because of the liberalization in parallel rates, which are the main suppliers. These are just estimates to give you an idea of what the cost-reflective pricing will be. We believe that the price of petrol should be around N750 per liter higher than the N650 per liter that Nigerians are currently paying.”
He says the government needs to clarify how prices at the pump will be fixed as opposed to market conditions.
He pointed out that the government needs to improve NNPCL’s transparency on profits and oil revenues transferred to the federal account, while ensuring that revenue increases are achieved through the removal of fuel subsidies.
104 million Nigerians are poor
The World Bank, while noting that important reform decisions were taken to help Nigeria avoid the fiscal cliff, said these reforms were followed by difficult economic adjustments.
Since the abolition of fuel subsidies, retail fuel prices have increased by more than 163 percent, and after the transition to a unified market-reflective foreign exchange regime, the naira has depreciated by about 41 percent in the official market and against the US dollar. 30% in parallel market.
Rising prices of fuel and other imported goods are contributing to inflation, which reached its highest level in 18 years in October at 27.3% from a year earlier.
However, the World Bank claims that recent reforms will reverse the rise in poverty seen in recent years, albeit slightly and slowly, from 2024 onwards.
The report said that slowing growth and rising inflation will increase the poverty rate from 40% in 2018 to 46% in 2023, pushing an additional 24 million people below the national poverty line.
According to the report, the number of poor Nigerians will rise from 79 million in 2018 to 104 million in 2023, with 13 million to 20 million living in the urban poor, who are more vulnerable to inflation. The number of people living in rural poverty increased from 67 million to 84 million. .
The report says: “In the medium term, reforms will reverse this trend through higher growth and lower inflation, but to a limited extent, with poverty rates rising from 46% in 2024 to 2026. “It will drop to 44%,” he said.
According to the World Bank, successful implementation of the reforms initiated will be the first step towards improving Nigeria’s growth prospects.
The report found that the abolition of fuel subsidies and the implementation of a harmonized foreign exchange rate would push the economic growth rate to 3.5% from 2023 to 2026, increasing the potential growth rate by 0.5 percentage point in the no-reform scenario. He emphasized that it will increase.
The World Bank further said that in the medium term, the economy will begin to benefit from increased fiscal space for development spending.
While noting that inflation will begin to decline in 2024, the report said: “Together, these reforms will boost investment and productivity in all sectors, helping the Nigerian economy achieve the strong growth it is clearly capable of.” It will unleash the power of economic development and allow economic development to resume its fast pace.”