Lukman Otunuga,
FXTM Research Analyst.
The IMF has once again called on
Nigeria to phase out government fuel subsidies, citing better use of the funds
on social safety nets like healthcare, education and freeing up fiscal
resources for infrastructural projects. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html Historically, fuel subsidies are an extremely
sensitive issue which can have various impacts on economic growth and investor
confidence. Following the IMF’s recent report, the finance ministry was quick
to reject the idea of completely dropping the popular fuel rebate on the basis
that the state imports all fuel and includes the subsidy as a cost of doing
business.
The money factored into energy imports as
a fuel subsidy for 2018 was at an eye-watering level of N713 billion, far
higher than the budgets for education or healthcare, according to reports. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html The cost of the fuel subsidy fluctuates according
to global Oil prices, meaning that inflation in the international Oil markets
can spike the subsidies overnight, risking unexpected drains on public coffers.
At the time of writing, Nigeria’s economy is improving and the IMF projects
full-year GDP growth results of 2.1 percent in 2019 and 2.5 percent in 2020.
When balanced out against the prospect of negatively impacting growth, one can
understand the caution over abandoning fuel subsidies.
Let’s take a look at both sides of the
coin. What if the finance ministry decides to listen to the IMF? In this
scenario, it could reinvest the fuel subsidy into social support infrastructure
and fiscal savings. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html These savings could be used to improve Oil refining
resources and lessen Nigeria’s reliance on imported processed fuel, thereby
boosting the local Oil industry’s domestic market instead of selling foreign
fuel. This process would take a long time and risk the likelihood of
instability if there is a backlash but in the long term it would increase
Nigeria’s fuel independence. Having said that, inflation could rise along with
fuel prices, negatively impacting economic growth and consumer spending on
fuel. So, if subsidies were to be removed, it’s likely the policy change would
be in phases to avoid unexpected economic shocks.
And what if the government decides
against the IMF’s advice? The risk of outright instability could be lowered and
the economy can stay on track to grow as expected, but the vulnerability of Oil
price spikes remains a constant short-term threat amid a steadily climbing
national debt. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html Nigeria’s gross national debt is seen rising to
31.4 percent in 2020, according to the IMF. That’s compared to 28.4 percent in
2018 and 30.1 percent in 2019. When total external debt is factored in, Nigeria
faces a cash-flow dilemma that’s not easily solved. External debt, including
private and public sector debt, is seen rising to $69.8 billion for the
full-year 2019, from $63.4 billion in 2018, while foreign reserves stand at an
estimated $38.5 billion. Increased risks to the financial and banking sectors
can’t be ruled out if the state doesn’t improve its fiscal strength and
readiness to rescue any systemic entities.
The good news is that the economy is
back on track towards sustainable growth. If a policy solution to the
fuel-subsidy predicament is found which increases fiscal strength while
avoiding inflationary pressures, there could be long-term benefits to Nigeria’s
economy.
Lukman Otunuga, FXTM Research Analyst
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