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October 4, 2023
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Insights: Targeted safety net programs will protect Nigerians from fuel subsidy removal burdens – KPMG

Article summary 

  • KPMG Nigeria has outlined several ways the Tinubu administration can redeploy fuel subsidy savings, following the full removal of the regime.  
  • According to KPMG, Fuel subsidies have hampered social protection all these years especially as Nigeria’s crude oil production is no longer what it used to be.  
  • Fuel subsidies do not benefit the Nigerian masses, rather they benefit those who can already afford to buy fuel at increased prices.  

 KPMG Nigeria believes that if Nigeria were to keep the fuel subsidy regime, the country will suffer from underdevelopment.

According to the company, targeted safety net programs will protect Nigerians from fuel subsidy removal burdens.   This was stated in the June 2023 Removing Nigeria’s Fuel Subsidies report.

According to KPMG, Nigeria continues to spend more on fuel subsidies at the expense of social protection, and infrastructure delivery.  

The report noted that as Nigeria produces less oil, it pays more for subsidies it can least afford at the expense of everything required to make Nigeria more habitable. So, the country simply cannot afford the expensive fuel subsidies because they continue to drive Nigeria to spend very little on everything else that is important.  

It is important to note that the subsidies are draining the government’s finances and preventing investments in critical areas such as education, health, and infrastructure. Nigeria’s public expenditure overall is already low compared to global averages, and the subsidies only exacerbate this problem.   

The KPMG report also stated that Nigeria must eliminate its subsidies to enhance its debt management. This is because due to the increasing debt burden, Nigeria’s revenue receipts are being crowded out by its debt service obligations.  

The report stated: 

  • “In 2016, Nigeria’s debt service as a percentage of revenue was 96.8%. While this number decreased to 70.4% in 2019, it increased to a projected 102% in 2022. At this rate, Nigeria’s debt service obligations will increase to as high as 160% of revenue by 2027.  
  • “These and other considerations seem to have influenced the Government to adopt the “sudden death” approach to removing PMS subsidy without delay to address the country’s insufficient revenues, growing fiscal deficits, and crowding out effect on public investment spending.”  

The argument is often made that the subsidies should remain because they are the only guaranteed economic benefit from the Government that benefits ordinary Nigerians. This is untrue. 

Some interesting stats from the report 

The International Monetary Fund (IMF) estimates that Nigeria’s fuel subsidies amounted to N1.894 trillion in 2021 or about 38% of oil revenues of N4.98 trillion. The costs rise to N4.611 trillion (or 61.4% of N7.512 trillion of oil revenues) in 2022, and N3.135 trillion (or 33% of N9.411 trillion of oil revenues) in 2023. 

How to redeploy fuel subsidy savings 

In the report, KPMG highlighted ways the Tinubu administration can allocate monies saved from the fuel subsidy regime. Some of the approaches include: 

Financing the fiscal deficit

Using Recovered Revenues to Address the Federal Government’s Financial Gap. While this approach can assist the government in fulfilling its expenditure commitments, there is a potential drawback of allocating the savings from petroleum subsidy towards recurrent expenses that may not directly benefit the impoverished and vulnerable segments of society. 

Mass transit schemes

Implementing urban Mass Transit Schemes at the State and Federal levels can provide relief for the commuting poor in key states like Lagos, Kano, Rivers, Ogun, and the Federal Capital Territory, Abuja. Some states, including Edo, Enugu, and Rivers, have already established mass transit infrastructure, while others like Kaduna are making efforts to develop robust systems. Expanding and investing more in these Mass Transit Schemes presents an opportunity to broaden their reach and explore new avenues for development. 

Concessional financing for the rural and urban poor

Allocating the recovered revenues towards time-bound programs with a direct impact on the people. Recently, the World Bank has proposed a concessional loan of $800 million that, upon approval by the National Assembly, could provide direct palliative support to both the rural and urban poor. 

Utilizing new and greener transportation technologies

The proposed World Bank lending can be directed towards implementing innovative technologies to benefit impoverished and vulnerable Nigerians. This includes adopting environmentally friendly energy sources for public transportation, such as gas-powered Bus Rapid Transit (BRT) buses in urban areas like Lagos. This initiative aims to reduce pollution and provide more cost-effective transportation solutions in light of the significant increase in fuel prices. Additionally, the government may consider expanding the use of Liquefied Petroleum Gas (LPG) powered taxis in Nigeria. 

Utilizing private sector financing to boost the use of gas as a greener transitional fuel

Recognizing the significance of gas as a transitional fuel in achieving the government’s commitment to Net Zero emissions under the Paris Agreement, it is essential to explore avenues for the private sector and multilateral involvement to enhance gas utilization. Considering the government’s limited fiscal resources, partnering with the private sector can bring in investments, expertise, and innovation, offering various benefits beyond sharing the financial burden. 

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