Nigeria faces obstacles to removal of PMS subsidy

Abuja’s plan to eliminate gasoline price supports has drawn criticism from labour groups and questions from legislators and business leaders

WHAT: Finance Minister Zainab Ahmed says gasoline subsidies will be halted in mid-2022.

WHY: The price supports have been a financial burden on the Nigerian government.

WHAT NEXT: The process of policy change is likely to prove slower and more chaotic than Abuja would like.

Nigeria’s government said last week that it intended to eliminate its long-standing policy of subsidising the price of gasoline, known locally as premium motor spirit (PMS), next year.

Finance Minister Zainab Ahmed made an announcement to this effect on November 23, on the same day that the World Bank published the latest edition of its Nigeria Development Update (NDU) report. She stated that Abuja intended to eliminate the PMS subsidy completely as of mid-2022 and said the government would work to mitigate the impact of higher gasoline prices on impoverished Nigerians. One of the measures being contemplated, she said, is the payment of a NGN5,000 ($12.20) per month travel grant to the country’s poorest citizens, which number 20-40mn, for a period of up to 12 months.

Ahmed’s announcement has drawn mixed reactions, with some Nigerians rejecting it outright and others hailing it but focusing on the financial aspect of how to help the poorest Nigerians weather the transition. This essay will examine various public figures’ statements on the matter.

The burden of gasoline subsidies

The removal of state support for domestic gasoline prices is likely to draw applause from international financial institutions (IFIs).

Both the International Monetary Fund (IMF) and the World Bank have been pressing Nigeria to eliminate the subsidy for years, on the grounds that it is burdensome and a drain on government revenues. The World Bank repeated this recommendation on November 23, saying that it hoped the West African country would take this step within three to six months.

Ahmed, for her part, reported that the government’s most recent revenue count showed that Abuja was spending NGN243bn (nearly $593mn) per month on fuel subsidies. If subsidy payments remain at this level, Abuja will have to spend nearly NGN3 trillion ($7.32bn) per year to keep PMS prices artificially low, she said.

At this rate, she added, most of the money that the national oil company (NOC) remits to the government will have to be used for subsidies. She did not offer any specific figures, but state-owned Nigerian National Petroleum Corp. (NNPC) reported in its most recent audited financial statement that it had earned after-tax profits of NGN287bn ($700mn) on revenues of NGN3.718 trillion ($9.07bn) in 2020.

In any event, the subsidy has already proved to be costly. According to a study commissioned by the British government, Abuja spent NGN10 trillion ($24.4bn) on the gasoline subsidy between 2006 and 2018, and according to NNPC, it spent more than NGN816bn ($1.99bn) just in the first seven months of 2021.

Opposition from labour groups

Despite these heavy costs, there have been calls to keep the subsidy in place.

One such call came from Nigeria’s Trade Union Congress (TUC), which argued that the decision to eliminate gasoline price supports was premature. Abuja should not have taken this step, since it is still in negotiations with representatives of labour unions on the elimination of the subsidy, representatives of TUC said last week.

A second labour group, the Nigerian Labour Congress (NLC), was even more critical. In a statement dated November 24, NLC President Ayuba Wabba described Abuja’s approach to the issue as misguided, declaring that the problem was primarily the result of Nigeria’s dependence on imported petroleum products, despite its own large oil reserves. He proclaimed that NLC would continue to back the subsidy and reject deregulation unless the government abandoned its “import-driven” fuel market policies and offered more support to the domestic refining sector.

In the meantime, Wabba argued, abandoning PMS price supports will have the negative effect of furthering inflation. “The contemplation by government to increase the price of petrol by more than 200% is a perfect recipe for an aggravated pile of hyperinflation and astronomical increase in the price of goods and services,” he said in the statement.

Questions about funding, timing

The plans announced by Ahmed also drew objections in the Senate, the upper house of Nigeria’s National Assembly, but for different reasons.

Olamilekan Adeola, the chairman of the Senate’s Finance Committee, told reporters on November 24 that he was concerned about the proposal for paying out monthly travel grants to the Nigerians who were likely to hit hardest by higher PMS prices. The 2022 budget bill, which is now under discussion in the National Assembly, does not allocate the funds that will be needed for these payments, he noted. Additionally, he said, the government has not yet said exactly how it will determine who is eligible for the grants.

“I believe that if such a proposal is to come to pass, a document to that effect must be sent to the National Assembly for us to see how feasible this is and how we identify the 40mn Nigerians that are going to benefit from this process,” he was quoted as saying by Vanguard. “There are still a lot of issues to be deliberated upon and looked into if eventually this will come to pass, [such as] how do we raise the money to pay these 40mn Nigerians.”

Other observers have asked whether the travel grants would truly help the government achieve its aim of freeing up funds now spent on the gasoline subsidy for infrastructure projects. Lagos Chamber of Commerce and Industry (LCCI) President Toki Makobunje and other prominent business leaders cited by Vanguard on November 29 pointed out that if Abuja paid 40mn Nigerians a sum of NGN5,000 per month, it would end up spending NGN2.4 trillion over a period of 12 months. This is roughly equivalent to current PMS subsidy levels, they commented.

Also on November 29, This Day reported that Shubham Chaudhuri, the World Bank’s country director for Nigeria, had raised a question about the timing of the elimination of the gasoline price supports. In an interview with the newspaper, Chaudhuri noted that Nigeria’s Petroleum Industry Act (PIA) called for the subsidies to be eliminated within six months of its adoption. Since President Muhammadu Buhari signed the PIA into law in mid-August of this year, he explained, the policy change should take effect in mid-February of 2022 and not at mid-year, as Ahmed suggested.

Meanwhile, Ian Simm, principal advisor at consultancy IGM Energy, raised questions about the cost of implementing the travel grants and the mechanism for their distribution. “Given Nigeria’s history of unrest in response to efforts to remove subsidies, there is room for scepticism that the grants are little more than a means for avoiding public anger [over inflation],” he told NewsBase.

“However, long-awaited progress in the Nigerian downstream is set to significantly reduce the cost of PMS and other petroleum products with the launch of several modular refineries over the next few months, and bigger facilities like Dangote and the NNPC units will enter the picture later in 2022 and 2023,” he added. “Apparently set for a refining renaissance, Abuja may have been emboldened to the point that it is ready to rip off the subsidy band-aid.”

Bumpy road to policy change

None of the objections raised to the plan for halting the PMS subsidy are likely to prevent Abuja from moving forward on this front. The Nigerian government has reasonably compelling reasons to stop keeping domestic gasoline prices far below market levels, and it is now legally obligated under the PIA to change its policy.

Even so, the uncertainties surrounding the process indicate that the change may not happen as quickly as anticipated. As TUC noted, the government has yet to wrap up negotiations with labour unions. And as Adeola noted, Abuja has not yet identified a source for the money it will need to cover the transport grants.

As a result, Nigeria has no chance of meeting the mid-February deadline mentioned by Chaudhuri – and very little chance of changing course in the summer of next year, as suggested by Ahmed. Instead, the policy change is on track to unfold more in a slower and more chaotic fashion.