Poor subsidy removal interventions can worsen inflation – Experts

If cash handouts form the basis for the government’s plan to introduce interventions that will cushion the impact of petrol subsidy removal, the country’s inflation rate will worsen, experts say.

Economic experts who shared insights at a national dialogue organized by The Trumpet News on fostering a sustainable downstream sector said the potential benefits of deregulation could be lost with the wrong kind of intervention.

Subsidy removal can foster competition, attract investments, and promote sustainable practices but the buy-in of the people is critical for its success. But acquiring this support can be costly.

Yemi Kale, partner, and chief economist at KPMG Nigeria, said it was important to create an attractive investment climate to draw investors to alternative fuels such as Compressed Natural Gas (CNG) and Liquefied Petroleum Gas (LPG).

For this to happen, regulators should be business enablers, ensuring favorable returns on investment, and addressing factors such as ease of doing business, production, and cost.

“By creating a conducive environment, Nigeria can position itself as an attractive destination for investments in sustainable energy sources,” he said.

Kale advised the Federal Government not to take loans for palliatives. “We have maxed out our credit as far as borrowing is concerned.”

In April this year, former President Muhammadu Buhari secured an $800 million grant from the World Bank, as part of its subsidy palliative measures to cushion the impact of subsidy removal.

“I think we have gotten to the point where if we keep other indicators the way they are, I think borrowing is out. The focus at this point should be to push and drive revenue,” Kale said.

On his part, Taiwo Oyedele, fiscal policy partner and Africa Tax Leader at PwC Nigeria emphasized the need to support small businesses affected by the subsidy removal.

Oyedele proposed registering businesses in the informal sector and providing them with tax-free credits for a period of at least two years.

“This targeted support aims to cushion the impact of the subsidy removal on urban low-income earners and small business owners,” he said.

“Additionally, the registration process will generate valuable data for future economic decision-making, enabling a more informed approach to support the business ecosystem.”

A cross-section of the participants condemned the recent introduction of Value Added Tax on diesel, saying the policy was ill-timed and will worsen the plight of businesses already seeing poor supply from the national grid.

Olumide Adeosun, chairman of the Major Oil Marketers Association of Nigeria (MOMAN), in his presentation, said corporate governance practices and fairer tax policies will make the downstream sector sustainable.

The reforms accompanying deregulation must include supply liberalization, policies to mitigate price and supply volatility, and the enforcement of sustainable development practices and regulations, he said.

Concerning transiting to other fuels, Adeosun stressed the importance of thoroughly examining the viability of CNG, including its feasibility, required capital investments, infrastructure setup costs, and implementation strategies.

“With Nigeria’s abundant natural gas resources, CNG offers a promising opportunity to reduce reliance on petrol and promote a more sustainable energy landscape,” he said.

Ogbugbo Ukoha, executive director of distribution systems, storage, and retailing infrastructure at Nigerian Midstream and Downstream Petroleum Regulatory Authority, said the deregulation has opened doors for increased competition and transparency in the sector.

Ukoha said that multiple players will now have the opportunity to import fuels, including LPG, Premium Motor Spirit, and CNG, thereby fostering healthy competition and giving consumers more choices.

He said: “Deregulation has unlocked lucrative investment opportunities in pipeline infrastructure, marine transportation, and reception facilities. By facilitating quality control and enhancing product testing, the market aims to ensure efficient and reliable supplies.

“Embracing technological advancements and automation will play a crucial role in improving transparency and efficiency throughout the value chain. These developments are expected to not only boost foreign exchange earnings but also alleviate pressure on the naira.”

To maintain a fair playing field, industry experts are emphasizing the need to address restrictive agreements, dominance, and mergers and acquisitions.