Fuel subsidy removal saved Nigeria N53trn, stopped naira slide to N3,500/$ — NRS chair

Nigeria’s petrol subsidy could have cost the Federal Government as much as N53 trillion under current market conditions and pushed the naira to about N3,500 to the dollar, according to Zacch Adedeji, chairman of the Nigeria Revenue Service (NRS).

Adedeji spoke during an interview with Channels Television, arguing that retaining the subsidy would have imposed severe fiscal and foreign exchange pressures on the economy.

What the subsidy would have cost

Adedeji said the estimated N53 trillion subsidy bill reflected what the country could have faced if President Bola Tinubu had not removed the petrol subsidy in May 2023, particularly amid changes in global economic conditions.

“The subsidy today would have been N53 trillion if Mr President had not removed it, given what is happening in Iran, given what is happening globally,” he said.

He added that the continued subsidy regime could have triggered significant pressure on the foreign exchange market, projecting that the exchange rate could have reached N3,500 per dollar.

According to him, the potential subsidy cost would have represented a substantial burden on the Federal Government’s finances and created an unsustainable fiscal obligation.

Tinubu’s reform defended

President Tinubu announced the removal of the petrol subsidy shortly after assuming office in May 2023, ending a system under which the government absorbed the difference between the market-related cost of petrol and the regulated pump price paid by consumers.

The policy resulted in a sharp increase in petrol prices and transferred a larger portion of the cost of fuel consumption from government finances to consumers.

Adedeji rejected arguments that the government should have first accumulated a fiscal buffer before removing the subsidy, arguing that the subsidy itself was effectively being financed through borrowed funds.

“Subsidy is not an income. It is like you are borrowing money to buy a product and that product is N10, and you are selling it at N3,” he said.

He argued that maintaining the policy would have continued to weaken government finances while increasing demand for foreign exchange required to finance petroleum imports.

Link to forex reforms and refining

The NRS chairman also linked the subsidy reform to the government’s foreign exchange reforms, arguing that the previous exchange-rate regime did not adequately reflect the naira’s market value and had discouraged investment.

He said the reforms had contributed to improved foreign exchange conditions and helped create stronger incentives for investment in domestic refining capacity.

The comments come as Nigeria continues to adjust to the economic consequences of the subsidy removal, including higher petrol prices, exchange-rate reforms and efforts to expand domestic refining.

However, the N53 trillion subsidy estimate and N3,500-to-the-dollar projection represent hypothetical estimates of what could have occurred under a different policy scenario rather than actual costs incurred by the government. Adedeji did not provide details of the assumptions or methodology used to calculate the N53 trillion estimate or establish the projected exchange rate.

What it means for the naira

The potential cost of maintaining the subsidy would depend on several factors, including international crude oil prices, domestic petrol consumption, exchange-rate movements, domestic refining output and the size of the subsidy per litre. The projections nonetheless underscore the fiscal and foreign exchange implications that policymakers associated with retaining the petrol subsidy regime, as the government continues to defend the reforms as necessary for long-term fiscal sustainability.