World Bank Warns Nigeria to Remove Fuel subsidy 

World Bank Warns Nigeria to Remove Fuel subsidy

World Bank yesterday decried the costs of fuel subsidy in Nigeria saying that if the current regulated prices were maintained, fuel subsidy cost would increase to more than 30 per cent of all government revenues by 2018 reports National Mirror

The Lead Economist of the World Bank, John Litwack, who gave the hint in his presentation at the official launch of the third edition of the World Bank Nigeria Economic Report (NER) said there was a strong tendency for the cost of the subsidy to increase over time as increasing domestic demand for petrol outpaces growth in the oil output or revenues.

According to Litwack, the cost of fuel subsidy during 2010-2014 period was one of the reasons why Nigeria was unable to accumulate a fiscal reserve in the fuel Excess Crude Account that could have protected the country from the recent oil prices shock.

His words: “The $35 billion cost of the fuel subsidy during 2010-2014 was one of the reasons why Nigeria was unable to accumulate a fiscal reserve in the fuel Excess Crude Account that could have protected the country from the recent oil prices shock.

“Fuel subsidy obligations are expected to reach 18 per cent of all government revenues in 2015, and if the current regulated prices are maintained, this is projected to increase to more than 30 per cent by 2018.”

The World Bank’s Country Director for Nigeria, Rachid Benmessaoud, said Nigeria had a unique window of opportunity to diversify its economy and improve the efficiency of public finance and regulation.

“With the right policies, the country can emerge stronger and more diversified from the oil shock,” he said.

He noted that the recent sharp decline in oil prices, in the context of the high dependency of Nigeria’s public finance on oil revenues, had created major challenges in the form of external imbalance, steep falls in government revenues, and slower economic growth.

According to him, “Nigeria is hard pressed for a major fiscal adjustment to lower oil revenues – even if oil prices rebound, the general rapid trend toward a decline in the share of oil revenues in GDP should continue.”

He said that adjusting to new fiscal realities would be a critical challenge for Nigeria in the short and medium term.

On the upside, however, the latest World Bank report highlights that important gains can be made by increasing efficiency in the public sector and improving regulatory effectiveness.

Also presenting a paper entitled ‘Unlocking the Potential of Nigeria’s Natural Gas Sector’ the Lead Energy Specialist of the World Bank, Masami Kojima, lamented that although Nigeria boasts 9th largest natural gas reserves in the world, it still suffers chronic gas shortages in the domestic market.

According to her, gas shortages contribute to power shortages, pointing out that power shortages act as a big brake on economic development and diversification.

She disclosed that there was nearly 1400 MW of stranded generation capacity in November, more than 2,500 MW in May in 2015.

According to the Lead Energy Specialist, during the first 10 months of 2015, 7.8 bcf/day produced, of which 13 % (1 bcf/day) delivered to domestic market, 3.4 exported, and another 3.4 re-injected, used as fuel gas, or flared.

In order to get its gas development plan right, Kojima said Nigeria needs to consider appointing champion and establishing a task force and also consider dedicated gas bill for midstream and downstream and create independent regulator in order to separate regulatory and commercial roles.

Kojima said there was need to unbundle Nigeria Gas Company and officially publish tariffs, domestic supply obligations, issue supplementary agreements for Production Sharing Contracts (PSCs), urgently renew licenses promptly and review regulated and pseudo-regulated prices among other things.

“The authorities will also need to re-examine critical issues, including regulatory institutions and uncertainty, pricing policy and payment arrears. Realising the vast potential of Nigeria’s natural gas sector will demand a bold new strategy that includes revisiting the pricing policy and regulation from 2008, taking steps to ensure that gas prices paid ensure reasonable returns to investment, and establishing an independent regulator.

“With a new administration in place and the recent announcement by NNPC of its change agenda, there is a historic opportunity to transform the gas sector,” said Kojima.

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