Nigeria’s Fiscal Deficit to Worsen as Subsidies Pressures Mount
With oil prices trending higher, the Federal Government’s failure to remove subsidies on the premium motor spirit (PMS) will impact the nation’s fiscal performance in 2022, analysts have said.
In its macroeconomic report, CardinalStone said Nigeria’s fiscal deficit is likely to worsen in 2022, rising as oil prices inched up the scale amidst the global energy crunch.
Nigeria’s planned N3 trillion subsidies for 2022 but oil price of $100 per barrel would mean N3.60 trillion subsidies payment, according to CardinalStone estimate.
At $100 per barrel, Nigeria’s fiscal deficit will widen to N10.7 trillion, a 5.8% equivalent of the nation’s gross domestic product (GDP). At $120, Nigeria would be making a total payment of N4.7 trillion as subsidies while the fiscal deficit is expected to widen further as oil jump higher.
Reactions have been negative from local and international markets following the government’s decision to postpone the implementation of the Petroleum Industry Act by 18-months.
In 2022, Nigeria is projected to borrow more than initially planned with increased global prices of oil which have widened the gap between petroleum landing costs and fuel pump price.
Already, diesel price has skyrocketed to an all-time high, nears N750 per litre today, according to channel checks with the expectation that the steep price will drill down on local prices of goods and services.
Early in the year, Federal Government had moved to implement the removal of subsidies but labour unions and other stakeholders kicked against it citing unfavourable economic conditions.
It’s a wrong time to implement removal of subsidies, some analysts told MarketForces Africa, saying Nigeria has had many chances doing so even when global prices of oil were lowered and outright effects on the street would have been minimal.
Due to a rally in the global oil market, crude prices are making an upward trajectory, hitting 2013 amidst Russia’s invasion into Ukraine that drives energy costs upward, thus raising pressures.
Russia’s military action on Ukraine and associated sanctions have sent commodity prices soaring, with Brent crude oil price reaching $139.9/bbl, the highest level since July 2008.
Brent has also inched up near $150 per barrel while some global analysts predicted oil could be sold for $200 if the Russia-Ukraine war persists, with the United States, and the European Union’s sanctioning Russian Federation – though, Vladimir Putin, Russia’s President has remained largely unfazed.
In a commentary, CardinalStone Limited said historically, rising crude oil price is usually a bittersweet pie for Nigeria, as an expensive PMS subsidy regime offsets pass-through to FGN’s revenue.
Initially, the government planned to halt PMS subsidies in the second half of 2022, providing only N443.0 billion in the 2022 budget. But this plan was later upturned, possibly due to fear of potential backlash in a pre-election year, according to CardinalStone.
Amidst unstable policy and lack of institutional capacity to implement reforms, the Federal government was forced to float a supplementary budget of N2.6 trillion to cater to the expected associated expense.
“Holding other variables constant, we estimate that a crude oil price of $100.0/bbl could translate to a subsidy payment of N3.6 trillion, which is notably higher than the N3.0 trillion earmarked for 2022”, CardinalStone said.
“This exercise has also resulted in a revision of our 2022 fiscal deficit estimate to N10.7 trillion (5.8% of GDP) from N10.1 trillion previously”, the multi-assets investment firm explained.
Analysts added that from a fiscal standpoint, the net impact of elevated crude oil price is biased to the downside, with limited pass-through to the federation account.
“For context, while the rebound in crude oil price resulted in a 30.9% year on year increase in Nigeria’s gross revenue in 2021, the net amount available for oil and gas revenues transferred to the Federation Account by the NNPC contracted by 51.0% due to expensive subsidy payments”.
The firm sees higher energy costs amplifying inflation risk in the year.
“At our base case crude oil price of $100.0/bbl, if the federal government fails to make additional subsidy provisions and chooses to pass on the cost in excess of N3.0 trillion (budgeted subsidy for 2022) to consumers, we expect a 19.2% increase in PMS price to N174.0/litre”, it said.
According to the note, this hike could add about 95 basis points pressure on core inflation by CardinalStone estimate. In the short term, analysts at the firm think that inflation will likely tick up due to a prolonged period of fuel scarcity and elevated prices of AGO & aviation fuels.
Specifically, the global jet fuel touched a 14-year high, resulting in about 80.0% to 100.0% increase in airline fees. READ: FG to Use Eurobond Cash, Borrow More to Pay Subsidies
“We expect the higher aviation fuels coupled with the 170.0% year on year surge in AGO (diesel) price to N650.0/litre to pressure the core inflation, with a negative pass-through effect on the food basket due to higher logistics costs”, CardinalStone said.
#Nigeria’s Fiscal Deficit to Worsen as Subsidies Pressures Mount
