Subsidy Removal: KPMG Calls for Tax Cuts, Transport Vouchers

*Says  transparency critical in managing gains

Emmanuel Addeh in Abuja

KPMG a global audit, tax and advisory services firm has called for the deployment of alternatives to money in cushioning the severe impact of the recent petrol subsidy removal.

In a report it titled: “ Removing Nigeria’s PMS Fuel Subsidy: We Can’t Have Our Cake & Still Eat it”, the organisation stated that to minimise the negative impacts of subsidy removal, there was 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.

It stated that  the  $800 million World Bank proposed “Compact with the People” was therefore a step in the right direction, but noted that communication was also key in ensuring that stakeholders are properly informed and engaged in the decision-making process.

The renowned accounting and audit company also suggested that the government and other stakehokders will have to increase the minimum wage to cushion the impact of the removal on the purchasing power of consumers.

However, it explained that some of the measures could further worsen inflation that it is intended to resolve by stimulating money supply further, advising that they must be handled carefully.

“Accordingly, we will advocate using alternatives to money supply boosting actions such as transport vouchers for the rural and urban poor and tax cuts (PAYE, VAT, CIT) for the middle class.

“The benefit of this is that it has limiting effects on money supply while at the same time cushioning the negative impact on purchasing power,” it maintained.

However, it stated that the economic challenges precipitated by the naira redenomination cash crunch in early 2023 had a significant and negative impact on growth.

In Q1, 2023, it stated that growth in Gross Domestic Product (GDP) was at 2.31 per cent, year-on-year, slowing down from 3.52 per cent in the 4th quarter of 2022, with agriculture contracting for the first time since 1987 and declining by 0.90 per cent .

KPMG stressed that oil and gas continued to contract at 4.21 per cent, following past contractions of -13.38 per cent in Q4, 2022 and -26.04 per cent in Q1,2023.

 It recalled that the services sector remained the major driver of growth at 4.35 per cent as the non-oil sectors grew by 2.77 per cent in Q1 2023, compared to 4.84 per cent in Q4 2022 and 6.08 per cent in Q1 2022 even as Gross Domestic Product (GDP) growth in 2022 was estimated to range between 2.85 per cent and 3 per cent in 2023.

“In conclusion, the removal of subsidies on PMS in Nigeria is a complex issue that requires careful consideration of its potential economic, social, and political impacts. While subsidies have provided some benefits, they have also been a significant drain on the country’s resources and have contributed to inefficiencies and corruption.

“While success at the PMS fuel subsidy removal will require political will and commitment by the federal Federal government, this must be complemented by a robust coordination with the states.

“Coordination by the fiscal authorities and the Central Bank of Nigeria (CBN) in managing the monetary aspects of deregulation and subsidy removal are key. Without foreign exchange reforms, and an elimination of the gap between the official and parallel exchange rate, the reforms will not work,” the report argued.

In addition to demonstrating very clear and unambiguous transparency in the process, the government, it said, will also have to demonstrate that as much as it is rightly asking the public to tighten its belt and expect temporal inconveniences, it also must be seen to be cutting wasteful expenditure and reduce the rising costs of running government.

Thus, KPMG noted that there must be the courage and political will needed to fully implement the Orosanye report which is estimated to save the government N1.3 trillion.

Nigeria, according to the report,  can learn from the experiences of other countries that have undergone subsidy reforms, particularly in the areas of stakeholder engagement, and effective communication.

“With careful planning and implementation, the removal of PMS fuel subsidies in Nigeria has the potential to promote greater economic efficiency, reduce corruption, and create opportunities for more sustainable and inclusive economic growth.

“However, in sum, the PMS fuel subsidy is clearly unaffordable and unsustainable: Nigeria cannot continue trying to simultaneously have its cake and eat it,” it stated.