The premium motor spirit (PMS) subsidy removal offers Nigeria the rare strength to crawl back from the fiscal cliff, but whether the imminent doomsday is only shifted miles away or completely aborted may not only depend on how the current transition is managed but also the response of critical stakeholders to the decision.

To suggest that the country has been dancing around the abyss in the past few days is to discount the severity of the challenges. Of course, the push-and-pull narrative about subsidy removal had been elevated to a popular discourse in the past two decades or so. But never has the waste and corruption associated with it pushed the economy to its current bend-or-break position.

And the red figures as well as headshaking facts are now in the open. Volumes of books could be written about the missed opportunities but nothing calls for deep-thinking and audacious action than the current sorrowful state of public finances, poor infrastructure spending and mounting liabilities.

The argument could continue endlessly on whether the government should have toed its path in clotting the open wound subsidy and all its trappings have assumed or endure the bleeding a little longer. But it is what it is – the country is on life support and does not have the luxury of time to tarry before proceeding with the much-needed surgical operation.

First, the recent steep increase in deficits amid dissaving is a major concern. As at the end of April, the outstanding on the Excess Crude Account (ECA), according to the Federation Account Allocation Committee (FAAC), was $0.475 million, 98 per cent steep fall from $2.1 billion in the coffer about less than a decade ago.

The fiscal deficit has also grown from less than N1 trillion in the period to a projected N10.78 trillion captured in the 2023 budget. The deficit accumulation is matched with a borrowing spree that has seen national public debt stocks balloon to about N70 trillion. Sadly, much of the debt is frittered away through subsidy payments and non-productive channels rather than reinvested in infrastructure and other local capacity-building projects that could raise the output level and taxable incomes in the future. Hence, the country has consistently grappled with tattered finances amid rising deficits; which raises fears about the future ability to pay. In 2015, when ex-President Muhammadu Buhari assumed office, the Federal Government’s total earned revenue was N2.4 trillion. Seven years later, it managed to climb up by 85 per cent to N4.46 trillion.

But within the period, the total expenditure moved from N4.477 trillion to N11.08 trillion or an equivalent of 132 per cent increase. The recurrent expenditure also went up by over 100 per cent, from N4.3 trillion to N9.2 trillion. That implies that the revenue profile has been growing much slower than the government’s expenditures.

However, that is just an aspect of the problem. In dollar terms, the FG’s earned more in 2015 than they did seven years later. Using the prevailing exchange rates, the total retained revenue was $12.2 billion in 2015 but it dipped to $10.8 trillion in 2021. If the revenue earned is juxtaposed with the growth of the country’s population and widening infrastructural needs, the extent of the decline in the commonwealth becomes even more abysmal.

The growing need amid declining revenues has tipped government to debt financing, with huge consequences of rising debt service affecting the country’s credit rating and negating its ability to secure fresh loans.

As at end of last November, for instance, 80.6 per cent of the government’s N6.5 trillion retained revenue in the year was spent on debt servicing whereas only N1.88 trillion was released for capital projects. Rising debt service to revenue ratio reduces equity financing capacity and increases the tendency to take more loans, experts have warned. The dilemma could also push the government deeper into a debt trap.

The proportion of government income that goes into debt service is already alarming but the World Bank warned, last year, that it could be much higher in years to come if urgent reforms are not implemented. The Bank said it could hit 160 per cent in five years, except broad-based reforms are implemented to ‘unfreeze’ the fiscal space.

Country Director, Shubham Chaudhuri, had noted that the percentage of government’s revenue going into debt service cost would continue to trend upward in the next five years and balloon except the government bite the bullet and cut off its excesses, including subsidy removal and other public sector reforms.

Between 2015 and last November, the budgetary allocation for capital projects was N10.3 trillion, which is less than twice of N5.24 trillion the FG paid its creditors for only 11 months last year. In the past 18 months, about N7.6 trillion was budgeted for the subsidy scheme alone. The figure is over half of Buhari’s eight-year budgetary support for capital projects, assuming the N5.47 earmarked last year was fully released. Recall that only 34.4 per cent (or N1.88 trillion) was released at end of November.

Perhaps, the worst damage subsidy payment inflicts on the economy comes through external factor leakages. From about $3 billion monthly remittance to the Federation Account in 2014, receipts from the Nigeria National Petroleum Corporation Limited (NNPCL) dropped to zero last year. That means more depletion of the external reserve position, which sends a negative signal to the international market about Nigeria’s ability to meet its maturing obligation, triggering a positive feedback loop.

At the close of May, the country’s external reserves dropped to $35 billion, about 46 per cent hair shave from its all-time high of $64.8 billion reached in August 2008 (at a time the country’s import was less than what it is today). An analysis of Nigeria’s import volume vis-à-vis its peers in relation to their external reserve positions leaves the country with gaping holes.

The rule of thumb used in assessing reserve adequacy suggests that countries should keep amounts sufficient to cover their short-term debts or three-month imports. In the fourth quarter of last year, the country’s total imports stood at N5.4 trillion ($11.74 billion). In nominal terms, the country is in its comfort zone. But beneath the veneer are unsettling issues, chief of which is the volatility of the reserves.

Still, on per capita analysis, Nigeria’s external reserve translates to $162, which pales into insignificance when compared with other oil-producing countries or those at the same stage of development. For instance, Kuwait’s per capita reserve is above $10,000 while that of South Africa is $780. Some of the countries with healthier foreign reserve positions are even more self-sufficient, thus less import-dependent than Nigeria.

Besides, a school of thought has argued that the recommended three-month import cover does not suffice given rising unforeseeable market risks such as COVID-19. The experts are calling for much larger reserves. In the post-COVID era when Nigeria’s reserve sufficiency became a serious debate, India’s had hit an all-time high of $605 billion, providing an import cover of about 15 months. But the intellectual community of the Asian country kicked, saying that the amount did not provide a sufficient buffer. Then, the argument was understandable as the reserve of its regional rival, China, could clear import bills of 16 months while Japan had enough reserve to last for 22 months as at then.

Falling external reserves have a cause-and-effect relationship with the weak naira, which also takes a beating from rising petroleum imports. The Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, had lamented that the country spent about 40 per cent of its scarce FX on the importation of petroleum products as well as petrochemicals, which have continued to put pressure on the exchange rate.

The waste has pushed naira to a crisis level. Eight years ago, the official exchange rate was about N196/$ with the black market rates converging around the same rate or even trading slightly lower in some days. At the black market, the currency has lost about 290 per cent of its value against the dollar in less than a decade, while it dipped by close to 150 per cent at the official market.

The just-commissioned Dangote Refinery is expected to alter the course of history and move Nigeria from a net importer of petroleum products to a net exporter. But the country faces a concentration risk of relying on only one refinery to break the self-inflicted jinx. Experts have argued that a deregulated market could trigger a chain of investments in the downstream sector to halt petroleum product importation.

At full capacity, Dangote Refinery is projected to generate 135,000 direct jobs, while the indirect could be in multiple. This means more taxable incomes for the government, improvement in the standard of living and real-time poverty reduction.

Like medical surgery, deregulation will come with pains. Some economists, including Yemi Kale, the former Statistician-General of the Federation, have projected that the inflation rate could spike by as much as six percentage points in June. But a retired investment banker, Victor Ogiemwonyi, pushed back, saying the focus should shift to “driving growth faster than inflation”.

The economist, who believes the removal offers a rare opportunity to stabilise the fiscal position, also advises the authority to work towards reflating the economy, cutting the cost of governance, reducing waste and enhancing public transportation as soothing balms on the temporal wounds the surgical procedure would cause.

“Fuel subsidy is a consumption subsidy that can be used by governments with surplus income to redistribute the surplus if investment opportunities are scarce. However, for a developing economy with untapped vast opportunities, instead of consumption subsidy, the government pursues a policy of production subsidy as a strategy to direct resources to areas of production where they can catalyse growth, create wealth and generate productive employment.

“FG borrows money to subsidise consumption instead of taxing it to generate revenue. Mounting FG debt arises partly from consumption subsidies. If the subsidy is discontinued, it will help in balancing the budget and reduce debt servicing obligations. It will free more funds for the execution of FG’s capital projects… Discontinuation of fuel subsidy can impact the foreign reserve of Nigeria positively because less fuel will be imported and consumed,” David Adonri of Highcap Securities Limited, told The Guardian.

Maybe, Bismarck Rewane, an economist and member of the Presidential Economic Advisory Council (PEAC) under Buhari is more inspirational about how bold reforms (like subsidy removal) could jumpstart the economy when he puts the country’s potential output at $1.6 trillion, a mind boggling 235 per cent above the country’s current discounted gross domestic product (GDP) size – $477 billion.

Yes, Rewane’s estimation is outside the production possibility curve, which the country cannot attain with its current factors. It needs to expand its factor inputs, including injecting additional capital, to reach that level of output. The fresh investment can only come on the back of liberalisation advocated by pro-subsidy advocates.

This is certainly a bend-or-break moment for the country. And Tinubu has taken the first shot. What may be required to start pulling back the lost years and transition to a more productive environment, one that creates jobs and raises public revenues is certainly not a relapse to old culture but forward-looking initiatives.

The best time to have removed the PMS subsidy was before it started; the second best time appears to be now.

[Guardian]