March 28, 2024

Petrol subsidy payments grew by 349.42 per cent from N350 billion in 2019 to N1.573 trillion in 2021, propelled by the rising price of crude oil in the international market and the falling value of the Naira.

 

The cost of subsidizing the product in 2020 was N450 billion. In 2022 alone, the total cost of subsidy in January and February was N396.72 billion, the latest data from the Nigerian National Petroleum Corporation, NNPC, has shown.

Federal legislators approved the sum of N4 trillion to be spent on petrol subsidies in 2022.

The Federal Government had previously disclosed through the Minister of Information, Alhaji Lai Mohammed, that it spent N10.413 trillion on fuel subsidies between 2006 and 2019.

With Nigeria importing all its petrol from refineries abroad, the low value of the Naira has had a significant impact on the pricing of the product in-country.

None of the three government-owned refineries is currently operational, despite huge investments in their Turn Around Maintenance (TAM) by the government.

The current administration has failed on its promise to make the refineries operational within a short period of assuming office.

Deregulation on hold

A plan by the government to deregulate the sector, following enactment of the Petroleum Industry Act (2021) that prescribes a free market for the downstream sector of the petroleum industry has been abandoned, with the government seeking and obtaining budgetary approval to spend N4 trillion on petrol subsidy.

The annual expenditures on petrol subsidy under the current administration contrast very sharply when compared with fuel subsidy under the government of former President Goodluck Jonathan, which was accused of fuel subsidy fraud.

According to data published by the defunct Petroleum Products Pricing Regulatory Agency, PPPRA, the Federal Government paid a total of N2,105.92 trillion in 2011, an increase of N1,437.84 trillion from the 2010 payment.

It also noted that in 2012, N1.35 trillion was paid as a subsidy, the highest within the period under review.

“A total of N 1, 316 trillion in 2013, N1,217 trillion in 2014 and N653.51 billion in 2015 was paid as subsidy claims,” it added.

It noted that the NNPC since 2016, had been the sole importer of the product to the country.

Determined to curb fiscal leakages associated with the fuel subsidy regime, President Jonathan had announced deregulation of the downstream sub-sector, with a view to eliminating fuel subsidy.

However, incumbent President Mohammadu Buhari, and other opposition party leaders, under the Save Nigeria Group, organised nationwide protests to stop Jonathan from going ahead with the decision.

Other notable Nigerians that led the mass protest included Pastor Tunde Bakare, who was Buhari’s running mate in Congress of Progressive Change (CPC) and Governor Nasir el-Rufai of Kaduna State.

The protests forced Jonathan to rescind the policy. When Buhari took over power in 2015, his government initially refused to pay fuel importers for products imported into the country.

It took a fuel crisis, characterised by long queues, to force the government to pay the debts, as the marketers insisted that they would not import more products unless their earlier bills were settled.

The Buhari administration was to later come to terms with the realities of the rot in the industry.

President Buhari made himself Minister of Petroleum and by so doing, has directly managed the petroleum industry. However, he has failed to make any policy changes.

‘Global price of crude determines petrol price here’

Speaking in a telephone interview from Ibadan, Director, Centre for Petroleum, Energy Economics and Law, University of Ibadan, Professor Adeola Adenikinju said the price of petrol is determined by the international price of crude and cost of foreign exchange.

Adenikinju noted that the government’s decision to continue subsidy payment was more political than economic, given the revenue challenges facing governments at all levels.

He pointed out that by retaining the petrol subsidy, the government would find it difficult to meet other commitments.

According to him, “It is a political decision, not an economic one. Economically, we know that subsidies have been very costly to the country and this is going to have serious implications on government revenue, particularly the state governments.

“The states are going to feel it more because they depend heavily on revenue from the Federation Account and secondly, they do not have the leverage to borrow like the Federal Government.

“If it goes ahead, the states are going to be hard-hit financially and it is going to be extremely difficult for them to meet all their commitments in terms of payment of salaries and keeping their obligations to pensioners”.

He noted that he would not be surprised later in the year if the states and local governments are unable to meet their commitments.

The university teacher also pointed out that the decision went beyond just revenue but would also have implications for the oil industry.

“It is also at the heart of the deregulation of the downstream sector. It will have implications for the implementation of the Petroleum Industry Act 2021 significantly because the decision on pricing is about market forces being at play to allow investment decisions to be made.

“This is going to hinder investment, so we can say that until the issue is resolved there is not going to be much private investment flow to the downstream sector.”

He blamed the middle class and the elite, who he said are the main beneficiaries of the petrol subsidy regime for mounting pressure on the government to retain the policy.

“Once you touch the middle class, the elite, they react. The argument is about the protection of the privileges of the middle class to which the labour unions belong. This is because kerosene was deregulated, nothing happened, diesel was deregulated, nothing also happened but once you touch something that affects the middle class, it becomes difficult to implement because they have access to the media”, he added.

‘Loss of confidence in govt by citizens’

He also blamed the resistance to the policy on citizens’ loss of confidence in the government, pointing out that over time Nigerians no longer trusted the government.

Adenikinju urged the government to intensify negotiations with organized labour, noting that ending the costly subsidy regime is critical to the financial state of governments at all levels.

On his part, Independent Oil and Gas Governance Consultant, Mr Henry Adigun, in an earlier interview with Vanguard, argued that it is impossible for Nigerians to expect to continue to pay the same rate for petrol while it was rising in other countries due to crude oil price in the international market.

Adigun noted that while the reluctance of the government to have petrol subsidies removed is understandable, Nigerians must know that the payment would have to come from somewhere.

According to him, “the challenge about PIA is not about the quality of the law but implementation, and so far the government has been very inconsistent in the implementation and they have not really allowed it to work.

“I understand that you cannot have subsidy removal now because the hardship on Nigerians would be immense. We have a situation whereby inflation is about 17 per cent and food prices have soared. Any attempt to increase petrol price will mean that a litre of petrol will probably sell at N270-N285.

“That would have a knock-on effect on inflation, food basket and on many other things, and at the point, we are in now, we cannot afford that as it might lead to social unrest. Our people are very angry because there is poverty in the land”.

How subsidy rose sharply, by MOMAN scribe

Speaking to Vanguard in a telephone interview, the Executive Secretary of Major Oil Marketers Association of Nigeria (MOMAN), Mr Clement Isong, explained that three factors were responsible for the astronomical rise in petrol subsidy.

Isong listed a rise in the international price of crude oil, foreign exchange rate and high rate of petrol smuggling across Nigeria’s borders.

He said: “The first is the international cost of crude oil and the derivative products like Premium Motor Spirit (petrol) has gone up significantly as a result of the Russian war in Ukraine. So the price of crude itself, and the price of petrol, diesel and all products that come from petroleum have gone higher than they normally would be because of the war and the sanctions imposed on Russia, which is a major exporter of crude.

“Secondly, the rate of foreign exchange is exceedingly high right now. That is to say, the exchange rate for the Naira is at its highest level. I’m not talking of the black market which is even higher, I’m talking about the Central Bank of Nigeria rate which is N411-N414 to the dollar. It is higher than it has ever been historically.

“Finally, and this is the most important reason because you have capped the price, at one third or one quarter, of the price that it is across the borders, the propensity for the product to move across the borders is at the highest.

“What I mean by that is that so many people, ordinary Nigerians, ordinary human beings on both sides of the border engage in moving the product from the Nigerian side to the other side. Whether we are talking about Cameroun, Chad, Republic of Benin, Niger or Equatorial Guinea, this product goes to the whole Central and West African regions.

“This is because it is a simple law of economics that the product will follow where the price is highest. The product will go there by itself. Now because there is so much product going out, and the government doesn’t want queues in Nigeria, the government has increased the amount of product that it is importing for the Nigerian people”, he added.

He explained that the combination of these factors has brought Nigeria to where it is at the moment.

Isong explained that ordinarily, the volume being imported into the country ought to be lower, but the activities of smugglers have shot up the volume.

“For all, you know, maybe our consumption in Nigeria is normally 30, 35, maybe 40 million litres per day, in the last couple of years it has been between 60 and 65 million litres per day which were already too high because of the price cap but now that the differential between the price in Nigeria and in neighbouring countries is even higher, the volume that will go outside Nigeria will be higher.

“So, this year, we are averaging between 70 and 80 million litres per day. That volume is not consumed in Nigeria. The solution is simply for Nigerians to put up their hands and say to the government, we no longer want subsidies. The subsidy is killing our country, subsidy is killing us”.

The MOMAN scribe noted that while he understood the argument behind the government’s decision, removing subsidies is in the best interest of the country.

“The position of the industry as a whole is this: the industry is against the subsidy. We have always been against it, we will always be against it. We are against the concept of price regulations which is what brings the subsidy”, he stated.

Subsidy widens FG’s deficit

The Federal Government said that the fuel subsidy was widening its deficit gap so much that it was considering tapping the 2 billion Euros it raised in the Eurobond sale last year to support its fiscal position.

Reuters reported the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, as disclosing this at the Arab-African Conference in Cairo, Egypt.

She said that the administration will target more local borrowing this year to help fund the budget deficit which has been exacerbated by rising oil prices, due to Russia’s war in Ukraine.

Mrs Ahmed was quoted as saying, “Rising oil prices have put us in a very precarious position … because we import refined products … and it means that our subsidy cost is really increasing.” The Federal Government had, in September last year, raised 4 billion Euros from the international capital market.

Although the President Muhammadu Buhari administration had announced plans to end fuel subsidies in June, it later reversed itself following a public outcry against the decision.

It then extended the subsidy by 18 months to avert any protests in the run-up to presidential elections next year, as part of its external borrowing plan.

Rather than being an advantage to Nigeria as a major oil producer, the high crude oil prices have become a burden for the country as the fuel consumed locally is imported.

The Buhari administration has failed in its promise to make the four refineries owned by the Nigerian National Petroleum Company Limited become operational, despite huge investments in their Turnaround Maintenance.

The NNPC has given the excuse of high under-recovery as the reason why it has not been remitting oil revenue to the Federation Account, from where the three tiers of government share federation revenue on a monthly basis.

Even the Monetary Policy Committee, MPC, recently aired its concern over NNPC’s non-remittance of oil proceeds at a time when oil prices have risen very high to the advantage of other oil-producing nations of the world.

The exact volume of Premium Motor Spirit, PMS, popularly known as petrol consumed in the country remains a subject of contention. The state governors had rejected the NNPC’s claim of 75 million litres of daily consumption.

The Minister of Finance had announced that a committee was working to reconcile the financial position of the NNPC, in respect of the under-recoveries, and the remittance into the federation coffers. The reconciliations have yet to be made public.

VANGUARD

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