Why the federal government should listen to the World Bank on the removal of subsidy

The World Bank has advised President Muhammadu Buhari to remove the fuel subsidy amidst the current fuel scarcity plaguing the country.

According to the World Bank Economic Report released on Tuesday, Nigeria has spent about N6.9 billion in the last five years to subsidise petroleum products making the removal of the subsidy imperative, when the price of oil is still under pressure thanks to the current storage squeeze.

Buhari has stated that the government is yet to remove the subsidy because its impact on food and transportation which would affect both the employed and unemployed citizens in the country. However, a World Bank Lead Economist, John Litwack, said the removal of the fuel subsidy is best carried out at a time when oil price is at its lowest in order to maintain the retail pump price of N100 per litre.

Between 2010 and 2014, Nigeria spent $35 billion on the fuel subsidy which denied the federal government the opportunity to accumulate revenue in the excess crude account which, in turn, could have reduced effect of the dwindling oil prices for the country. If the federal government fails to remove subsidy now, there is a high tendency for its cost to increase over time as rising domestic demand for petrol out paces growth in oil output or revenues.

It is seemingly outrageous that the government spends about one-fourth of its budget on a fuel subsidy that is significantly greater than the entire executed federal capital budget as well as the combined spending on education and public health. “Nigeria currently needs fiscal consolidation since it is not earning because oil prices are down, it is pertinent, therefore, to cut down all expense lines… Fuel subsidy must go” said, the Emir of Kano and former Central Bank of Nigeria (CBN) Governor, Mallam Muhammad Sanusi.

This subsidy was sustainable when the global price for oil was well above $100. But with the current price hovering around $37.89 – $38.09 per barrel and a debt service cost that is likely to increase to 35 percent of the country’s revenue in the next four years, the fuel subsidy can no longer be accommodated.

While it appears that the president has tactically scrapped the kerosene subsidy in the Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), which he presented to the National Assembly this week, the fuel subsidy is yet to be removed. More needs to be done in order to setup a well-designed framework which will allow for development in the gas sector.

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