October 5, 2011 / 10:17 AM / 8 years ago

RPT-Nigeria to end fuel subsidies, up capital spending

(Adds byline)

* Fuel subsidies to end in 2012 - fiscal proposal

* Capital spending to rise 2012-2015, overheads frozen

* Budget to assume ambitious oil production

By Camillus Eboh

ABUJA, Oct 5 (Reuters) - Nigeria plans to end costly fuel subsidies in the 2012 fiscal year to release funds for infrastructure projects and to create jobs, while overall spending next year is likely to rise, according to plans sent for lawmakers approval.

Subsidising the cost of fuel, mainly diesel, petrol and kerosene, costs the government 1.2 trillion naira ($7.5 billion) in lost revenues but removing the support will be unpopular with many Nigerians who see it as the only benefit they gain from living in an oil-rich country.

Previous efforts to remove subsidies have resulted in nationwide strike action in Africa’s most populous nation, where most people live on less than $2 a day. There have been several protests this year in anticipation of deregulation.

“A major component of the policy of fiscal consolidation is the government’s intent to phase out the fuel subsidy beginning from 2012 fiscal year,” said a 2012-2015 Medium Term Fiscal Framework (MTFF) and Medium Term Expenditure Framework (MTEF) paper.

“This will free up about 1.2 trillion naira in savings, part of which can be deployed into providing safety nets for poor segments of society to ameliorate the effects of the subsidy removal,” the federal government document said.

The document is with the national assembly. How quickly lawmakers pass the plans will give an indication of how soon and the next budget will be ready for implementation.

The 2011 budget process was chaotic after lawmakers inflated spending plans before the president reduced them again, finally passing the budget in May.

Finance Minister and Coordinator of the Economy, Ngozi Okonjo-Iweala, has pledged to avoid the problems of the 2011 budget by getting the spending plans organised earlier.

$30 BLN 2012 BUDGET

The fiscal strategy paper hints that the government will forward a 4.8 trillion naira budget for 2012 to the national assembly later this month, up from around 4.5 trillion in this year’s budget passed in May.

Nigeria only spends around a quarter of its budget on capital expenditure, meaning most of the billions of dollars it earns in oil revenues are spent keeping its government running.

However, capital expenditure looks set to rise slightly to 1.32 trillion naira in 2012 as a component of the overall budget, while this should improve as overhead allocations are to be frozen until 2015, the documents showed.

“Although aggregate expenditure is expected to increase from 4.8 trillion in 2012 to 5.18 trillion in 2015, concerted efforts are being made to make savings from overheads as allocations will be frozen till 2015,” it said.

Okonjo-Iweala will need to persuade lawmakers to get the budget passed when it arrives at the national assembly but they have previously fought hard to defend recurrent expenditure levels, some of which make up their large wages and expenses.

The former World Bank chief has pledged to keep the fiscal deficit under 3 percent and if the MTFF is adhered to the deficit would be reduced to 2.69 percent next year.

“The Increase in capital expenditure is a welcome development, given the excesses of the recent past, in which recurrent spending was increased greatly, to the detriment of Nigeria’s oil savings and wider macroeconomic stability,” said Razia Khan, Head of Africa Research at Standard Chartered.

“Even more positive is the proposal to remove the fuel subsidy put to national assembly. The subsidy was expensive, responsible for significant distortions and rent-seeking opportunities in the Nigerian economy, with little overall benefit.”

The 2012 budget will be based on the assumption of an ambitious average oil production of 2.48 million barrels per day and a benchmark price LCOc1 of $75 dollars per barrel.

Nigeria’s current oil output is around 2.5 million bpd and the projections leave little room for manoeuvre should Nigeria suffer outages, common in the past, while global economic uncertainty by no means guarantees oil prices will stay high. ($1 = 159.300 Nigerian Nairas) (Additional reporting and writing by Joe Brock; editing by Ron Askew)

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