Business

June 10, 2024

ASAP: FG set on a rough road to economic recovery

Nigeria

•Expect recovery in 2026 under best scenario

•Analysts paint conflicting picture of subsidy return

By Udeme Akpan, Peter Egwuatu and Nkiruka Nnorom

 The economic recovery efforts of the Federal Government, under the Accelerated Stabilisation & Advancement Plan (ASAP) will set  stormy waters following the return of fuel subsidy and continued depreciation of the Naira.

“Economy experts who spoke to Financial Vanguard stressed the return of fuel subsidy amidst weakened currency undermines any effort to set the economy on the path of recovery.““

Subsidy is not sustainable, will compound FGN’s debt burden – Adonri

“Also speaking to Financial Vanguard, David Adonri, Executive Vice Chairman, Highcap Securities Limited, said: “First let me commend Wale Edun for owning up to the existence of fuel subsidy. It is very disappointing that the deregulated exchange rate policy has antagonized the removal of fuel subsidy policy contrary to the expectation President Tinubu. ‘‘Notwithstanding the policy setback, discontinuation of any consumption subsidy remains a structural imperative for an economy that hopes to be competitive and built to last.

“Hoping that when Dangote Refinery starts local production of PMS, the subsidy will disappear, but at the current state of affairs this subsidy is not sustainable and will compound FGN’s debt burden’’.

Why fuel subsidy will persist – Adeleke

“Speaking on why the government was compelled to bring back fuel subsidy, Adebayo Adeleke, Group Managing Director, Lancelot Ventures Limited, said: ‘‘What will solve the problem of fuel subsidy once and for all is full deregulation of PMS, which means abolition of fixed pump prices by government. Scrapping of Petroleum Equilisation Fund (PEF) and open regime for petrol importation by marketers, abolishing NNPC monopoly on fuel importation and distribution. Only a regulatory framework like PPPRA is needed to check profiteering.

“The truth is that there will always be subsidy for as long as the value of our currency keeps going down. You can only remove subsidy as at a given point. A week or a month after, if the value of the currency goes down and the government insists on maintaining uniform or near uniform pump selling price, subsidy kicks in immediately.”

Subsidy spending to strain FG’s budget – Egbomeade

Clifford Egbomeade, a public affairs analyst & Communication expert, while expressing concern over the seeming sharp rise in subsidy spending from about N3.6 trillion in 2023 to N5.4 trillion in 2024, said: ‘‘This sharp rise in subsidy spending will inevitably place a significant strain on the federal budget. Given Nigeria’s limited revenue streams, primarily from oil, this allocation risks diverting much-needed funds from critical sectors such as infrastructure, health, and education. The fiscal pressure of maintaining such a high level of subsidy could undermine other essential government functions and investment in long-term development projects.

Moreover, while subsidies may provide short-term relief from inflation, they pose a significant challenge to implementing a sustainable, market-driven pricing framework for petroleum products. Persistently high inflation erodes the purchasing power of Nigerians and exacerbates socio-economic disparities. Although subsidies can help stabilize prices temporarily, they delay necessary structural reforms in the energy sector, leading to inefficiencies and economic distortions in the long run.

“The Accelerated Stabilisation & Advancement Plan (ASAP) report acknowledges these challenges, emphasizing the need for a framework that transitions towards market-driven pricing and sets a definitive end date for fuel subsidies. Such a move is critical for stimulating growth in the oil sector and reducing the fiscal burden on the government. However, this transition must be carefully managed to avoid significant social unrest and economic disruption. The current subsidy regime, while providing immediate financial relief, risks creating a dependency that is unsustainable in the long term.”

 “ While the N5.4 trillion fuel subsidy estimate for 2024 is aimed at providing immediate economic relief, it presents some concerns for Nigeria’s fiscal health and long-term economic stability. Under the Accelerated Stabilization and Advancement Plan (ASAP), government must navigate the delicate balance between short-term relief and long-term sustainability. Phasing out subsidies, enhancing revenue diversification, and implementing structural reforms will be crucial for Nigeria’s economic recovery and growth. The success of these efforts will depend on careful planning, robust policy implementation, and a commitment to addressing the underlying structural issues that have long plagued the Nigerian economy.”

Why fuel subsidy has to return – Akinloye

Commenting on the return of fuel subsidy regime, Ayorinde Akinloye, an investment analyst and economic strategist, said, “Given the current state of consumers, PMS subsidy has become a necessary evil the government must bear to take some pressure off consumers.

“However, this has the likelihood of limiting the FG’s ability to implement critical capital projects. This is because sustaining the subsidy comes at a cost to government revenue and with debt service and recurrent expenditure as huge chunk of the nation’s budget, we are likely to see poor implementation of capital projects.

“In addition, this will likely force the government to increase borrowings in bid to bridge the resultant revenue shortfall.”