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Fuel subsidy removal by the Federal Government of Nigeria on Premium Motor Spirit (PMS), popularly known as petrol, has garnered significant attention as a pivotal move towards generating revenue for key national priorities.
President Bola Tinubu has directed the National Economic Council to devise strategies for implementing palliatives and reviewing the minimum wage to mitigate the hardships arising from subsidy removal. Economic and oil sector experts widely acknowledge that this reform, along with complementary measures, holds the potential to alleviate the budget deficit, stimulate economic growth, and improve overall financial stability.
Raising Funds through Subsidy Removal
The cost of fuel subsidies in Nigeria for the current year is estimated to range between N6trillion and N7trillion hence the need for fuel subsidy removal. By eliminating these subsidies, the government can substantially reduce the budget deficit, which currently stands at approximately N12trillion.
Moreover, ending subsidies on foreign exchange is expected to unlock an additional estimated minimum of about N4trillion in revenue, assuming the adoption of a unified exchange rate. The cumulative savings from subsidy removal and other financial reforms could generate substantial revenue, potentially reaching N10trillion, which can be directed towards supporting critical government initiatives.
Emphasizing Tax Reforms
Experts stress the importance of comprehensive tax reforms in addition to fuel subsidy removal to augment revenue generation. Expanding the tax net and improving tax administration through data-driven strategies and compliance enforcement can significantly boost government income.
Leveraging technology to connect economic activities with tax records can enhance tax enforcement and minimize tax evasion. Experts estimate that such reforms have the potential to increase revenue by 200% to 300% within a few years, highlighting their transformative impact.
Addressing Non-Remittance by MDAs
Non-remittance of funds by Ministries, Departments, and Agencies (MDAs) poses a substantial challenge to the government’s revenue collection efforts. Analysts advocate for stringent measures to ensure compliance among MDAs and the establishment of frameworks that enforce proper remittance.
By shining a spotlight on non-compliant MDAs and implementing robust monitoring mechanisms, the government can effectively tackle this issue and maximize revenue generation.
Reducing the Cost of Governance
Excessive spending and the need to minimize expenses are vital concerns in Nigeria. To address this in addition to fuel subsidy removal, recommendations include reducing the number of aides and assistants for government officials, as well as curbing excessive spending on service-wide votes, pensions, and overheads. Streamlining the cost of governance will free up resources that can be directed towards developmental projects and essential services.
Stimulating Investments and Economic Growth
Successful implementation of these reforms is projected to bolster investor confidence and attract increased investment inflows. Nigeria’s commitment to sustained reform will serve as a catalyst for economic growth and development.
The government’s emphasis on efficient management of revenue-yielding assets through the Ministry of Finance Incorporated (MOFI) is encouraging, with the potential for listing certain assets on stock exchanges, thereby unlocking their value.
Market Forces and Downstream Sector Efficiency
The removal of fuel subsidies is expected to usher in a market-driven pricing mechanism for petroleum products, fostering healthy competition and efficiency within the downstream sector. Deregulation will encourage technological advancements and lead to reduced prices, benefiting consumers and facilitating sectoral growth.
Federal Government’s decision of fuel subsidy removal marks a significant step towards economic reform and resource optimization. By combining subsidy removal with tax reforms, enforcement measures for non-compliant MDAs, and cost reduction strategies, the government can generate substantial funds to meet its obligations, provide relief measures, and minimize the need for excessive borrowing. These reforms, when sustained and effectively implemented, hold the potential to stimulate investments, drive economic growth, and position Nigeria on a path of fiscal stability and prosperity.
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Olatunji is the founder Taxmobile.Online and Managing Partner/CEO of AOA Professional Services. Prior to this,Olatunji worked as Director,Tax & Regulatory Services at Nolands Nigeria Professional Services, Senior Manager -Tax,Regulatory & Advisory Services at Saffron Professional Services.
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