Why FG wants costly fuel subsidy scheme to go away [Pulse Explainer]

The FG spends about N270 billion per month on PMS subsidy.

Why FG wants costly fuel subsidy scheme to go away.

In the past few days, the planned subsidy removal by the Federal Government has been the major topic in the Nigerian media space.

The Federal Government had in 2019 mooted to look into a gradual removal of fuel subsidy as part of strategies to boost revenue.

The government reportedly spends billions of naira to subsidise petroleum to keep its price low for Nigerian consumers.

According to Governor Godwin Obaseki of Edo State, the FG must have spent almost N2 trillion subsidizing petroleum products in 2021.

And based on the assessment that Nigerians consume 65.7 million litres of petrol per day, the Nigerian National Petroleum Corporation (NNPC) estimated that the cost may rise to N3 trillion in 2022.

Currently, the FG according to the Minister of Finance Budget, and National Planning, Mrs Zainab Ahmed spends about N270 billion per month on PMS subsidy.

If you do the math, that is N3.2 trillion a year.

In view of this, the International Monetary Fund had advised the FG in November 2021, to completely remove fuel and electricity subsidies early in 2022 and implement revenue-based fiscal consolidation.

The organisation has also advised the FG to channel the funds it spends to subside fuel and electricity to health and social development.

Removing subsidy on petroleum implies that the FG will withdraw the billions or trillions of naira it spends to make Nigerians buy fuel at N162 per litre.

But once the PMS subsidy is removed, the price of a litre of petrol will rise from N162 to over N300 per litre.

So, in a bid to effect its plan on subsidy removal, the Federal Government had made provisions for payment of fuel subsidy scheme in the 2022 budget only until June.

With this arrangement, the price of petrol is expected to go up in July.

But this week, following intense pressure from labour unions and political leaders, the FG made a U-turn and suspended its planned subsidy removal.

According to the Minister of Finance, the FG realised that the timing for the removal of fuel subsidy is problematic as the country still experiences high inflation.

The minister admitted that removing fuel subsidy at this period would ultimately worsen the living conditions of Nigerians, especially those struggling to make ends meet.

Ahmed during her meeting with the Senate President on Monday, January 24, 2022, in Abuja also said President Muhammadu Buhari does not support the immediate removal of subsidy on PMS.

She said, “Let me start by stating the fact that we did make a provision in the 2022 budget for fuel subsidy from January to June and that suggests that from July there will be no subsidy. And this provision was made sequel to the petroleum industry act that has made a provision that oil products will be deregulated.

“Subsequent to the passage of the act, we went back and amended the fiscal framework that was submitted to National Assembly to incorporate this demand. But after the budget was passed, and we have had consultations with a number of stakeholders, it became clear that the timing is problematic; that practically, there is still heightened inflation and also removal of subsidy will further worsen the situation, thereby imposing more difficulties on the citizens and Mr President clearly does not want to do that”.

The Minister of State for Petroleum Resources, Timipre Sylva also agrees with Ahmed saying removing fuel subsidy in June was bad timing, politically and economically.

However, shortly after the FG suspended its planned subsidy removal, it on Tuesday, January 25, 2022, proposed an extension of the programme by 18 months.

The extension according to Sylva will give all stakeholders time to ensure that the implementation is carried out in a manner that ensures all necessary modalities are in place to cushion the effect of the PMS subsidy removal, in line with prevailing economic realities.

Yes, the planned fuel subsidy removal has for now been suspended, the FG is still bent on removing it and that will most likely happen after the 2023 general elections.

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