KPMG: Underperformance of Oil Revenues Poses Risks to Fiscal Health
Partner and Chief Economist at KPMG in Nigeria, Dr. Yemi Kale, has said in spite of the remarkable boost in non-oil revenues in recent times, the underperformance of oil revenues poses significant risk to the country’s fiscal health over the short- and medium-term horizons.
He said despite recording higher-than-budgeted oil prices at various periods since 2015, negative variances in aggregate oil revenues had resulted from increasing levels of the PMS subsidy deductions for the NNPC’s previous cost underrecovery on supply PMS; higher than budgeted expenditures on pipeline security and maintenance; and more recently, oil theft.
In a document titled, “Removing Nigeria’s PMS Fuel Subsidies: We Can’t Have Our Cake & Still Eat It,” the former Chief Executive of the National Bureau of Statistics (NBS), further pointed out that between 2019 – 2022, oil revenues underperformed due to mainly production-side challenges, insecurity, theft, oil bunkering, and vandalization of energy sector infrastructure.
However, Kale also said while success at the fuel subsidy removal will require political will and commitment by the federal government, this must be complemented by a robust coordination with the states, adding that coordination by the fiscal authorities and CBN in managing the monetary aspects of deregulation and subsidy removal remained key.
He said, “Without foreign exchange reforms, and an elimination of the gap between the official and parallel exchange rate, the reforms will not work.”
According to him, to minimize the negative impacts of subsidy removal, there is a need for a set of coordinated actions that considers the inflationary impact, potential social unrest, and the need for compensating measures to cushion the poor.
He said the $800 million World Bank proposed ‘Compact with the People’ is a step in the right direction.
Nevertheless, he stated that the government’s efforts to generate taxes, customs duties and other non-oil revenues contributed to the shift in composition of revenue sources.
He said, “Over this period, oil revenues contributed only 43 per cent to aggregate revenues, while the share of non-oil revenues increased significantly to 57 per cent.
“This shift to parity between oil revenues and non-oil revenues, underscores the notable success of former President Buhari Administration in raising non-oil revenues and diversifying away from oil, given the challenges of low oil prices and production experienced during these years.”
According to him, the country’s tax revenues-to-Gross Domestic Product (GDP) ratio also improved under the previous administration.
He said prior to 2021, the tax to GDP ratio was between of 6 – 7 per cent, declining significantly from the estimated 11 per cent level in 2011 before it improved to 10.68 per cent in 2021.
He said, “However, despite