Nigeria: Voraciously feeding the beast
With crude oil still trading at over $100/bbl, there is no gainsaying that the Nigerian government is clearly in a lavish mood. This probably explains why the government reneged on its commitment to put a stop to PMS subsidy and is poised to raise ₦4trn to fund petrol subsidies in 2022. Policy moves like this only feed the beast (i.e. government expenditure) rather than starve it. More alarming are the adverse implications of the government’s procyclical fiscal behaviour, as it tends to reinforce an already volatile business cycle. This is part of the reasons why the Nigerian economy remains stubbornly defiant to past and present efforts to cure it of its legacy weaknesses.
The subsidy regime is an unnecessary burden on the economy, not because corruption has thwarted its intended positive objectives, but because the options in its implementation are wholly unhelpful to the poor it is meant to protect. PMS subsidies are regressive because it is predominantly used in vehicles and machines that are rarely owned by the poor. As a result, governments all over the world tend to prioritize removing PMS subsidies over those that apply to other fuels, while Nigeria remains unflinching in its decision to go against the grain. This has come at a dire cost to the economy.
Nigeria is currently the 15th largest oil-producing country in the world and continues to depend on the petroleum industry for between 60%-80% of its budget revenue, depending on the phase of the business cycle the country finds itself. Despite this, inadequate investment in the oil sector has resulted in incessant breakdowns of oil trunk lines that have given rise to production shortfalls. This has resulted in foregone revenues even as the price of Brent has reached new heights since the start of the year.
Also, the persistence of inoperative refineries implies that local petroleum consumption is met largely by import, trading in some of the hard-earned FX. In addition, the country’s debt burden is heavier than before – as this consumption subsidy is largely financed by borrowing. As a result, the Nigerian government is not also able to maximize its FX earnings during oil price rallies due to its burgeoning debt service obligation. Therefore, the recent oil price rally has made not much of a difference in the Nigerian economy as access to FX remains tight.
But the prescription of the removal of subsidies by development finance institutions is not unfamiliar, and neither is the constant relapse of the Nigerian government into the procyclical fiscal policy trap. The voracity effect explains the overreaction of the government to improvements in Nigeria’s terms of trade – especially crude oil windfall – whereby the increase in appropriation outpaces the economic gains from the key sector. This means that oil sector productivity is not enough to meet the government’s financial obligations, explaining why the cycle of revenues underperforming does not seem to end. And countries plagued by voracity often converge in stagnation, as the misappropriation of financial resources ensures that the country becomes less capable of long-term growth.
While Nigeria – like any other resource-rich developing country – is looking for ways to develop its infrastructure and diversify its economy, expansive fiscal and monetary policies and non-concessional indebtedness in a rather procyclical way are not the best routes. A countercyclical fiscal stance allows the government to lean against the wind, continue providing goods and services when government revenues drop, guarantee social protection and insurance to citizens, and be more resilient in difficult times. This would include accelerating tax reforms in ways that promote growth while also encouraging investments, overall improvement of tax administration, and implementing timely fiscal policies that will generate savings to support non-oil revenue sectors.
Countercyclical fiscal policy is better achieved in the long run by setting realistic, flexible, and enforceable targets for expenditure and debt while encouraging greater transparency in the implementation of the budget and the fiscal rule.