Nigeria plans $5.8bn in cash handouts to replace fuel subsidies

Nigeria is planning to give cash handouts to the poor, that may cost the government 2.4 trillion naira a year ($5.8 billion) in a bid to replace fuel subsides.

The government will give 5,000 naira each to as many as 40 million people every month, beginning from July when fuel subsidies end. A new petroleum law compels the government to allow market forces determine gasoline prices. The cash transfers will happen over a period of six to 12 months, Finance Minister Zainab Ahmed, said Thursday.

That’s when Nigerians will vote to elect at least 30 state governors and a successor to President Muhammadu Buhari.

Cutting fuel support will support the ruling party’s long-term policy goals of freeing up revenue while allowing the party to bolster support among poor Nigerians ahead of the 2023 polls, Eurasia Group said in a note to clients Thursday. “The category of voters who are most likely to benefit from the transport grant are more likely to vote for Buhari’s party, and they also benefit the least from the current gasoline subsidies” Eurasia Group said.

Cash support programs have helped the poor from Togo to India but in a nation where few have bank accounts, the process may lead to corruption, said Cheta Nwanze, a lead partner with SBM Intelligence.

The government will make sure that the payments go to the rightful recipients by using biometric verification numbers, national identity cards and bank account number, Ahmed said last week. It is working with the World Bank to design and fund the plan.

Nigeria wants to scrap fuel subsidies because the nation’s budget can no longer contain the financial burden. The subsidies will drive budget shortfall to 6.3% of economic output this year, according to the International Monetary Fund.

The subsidies currently cost the government about 250 billion naira a month, Ahmed said. The IMF recommended that the West African nation do away with the subsidies and implement a “well-targeted social assistance plan” to cushion the negative impact of cutting subsidy on the poor.

Africa’s most populous country hosts the world’s largest number of people living in extreme poverty, or those who leave on about $1.90 a day. The monthly grant would therefore be a significant boost in income for such people.

Still, the 2.4 trillion naira a year cost could become a big burden and President Buhari’s successor may be saddled with the decision of extending or ending it.

The West African nation does not have a good record of taking politically difficult decisions. It has struggled for decades to end fuel subsidies, which is expected to cost 3 trillion naira over the next 12 months if oil prices remain at current prices. In addition, it has been unable to end electricity subsidies.

These payments are not sustainable because they are simply another consumption subsidy which are not productive in any way, Nwanze said.

“I would have preferred such grants go to small businesses so they can expand and put a dent in our rather high unemployment rate.”