By Adewole Kehinde
Fuel subsidy means that a fraction of the price that consumers are supposed to pay to enjoy the use of petroleum products is paid by government so as to ease the price burden. However, they have caused unsustainable financial problems in some countries in which they have been implemented such as Nigeria.
It will be recalled that the Group Managing Director of the Nigerian National Petroleum Corporation, Mal. Mele Kolo Kyari few months ago said that it costs the Corporations N120Billion monthly to subsidize fuel which is about N1.4Trillion in a year!
Fuel subsidy is calculated as the difference between the Expected Open Market Price (EOMP) and the retail price at the pump, currently fixed at N167, all provided in the relevant pricing templates. The EOMP is calculated as the sum of allowable landing costs (primarily cost of imported product & freight costs) plus distributor margins. Landing costs represent around 85% of total allowable costs in the calculation and therefore factors that affect landing costs will also affect the eventual subsidy paid.
The two main drivers of these costs are Global Oil Prices, as changes in imported product and freight costs often reflect underlying crude prices, and the $:N exchange rate, as the pricing template is denominated in Naira, with actual costs of product and freight often financed in $.
Corruption is one of the major causes of subsidy regime. Since January 2021, Nigeria has spent an excess of N600Billion on keeping fuel subsidies.
The process of subsidizing the petroleum industry was corrupt and hugely inefficient; it does not alleviate the sufferings of low income earners nor end fuel scarcity.
Another issue on subsidy is the drop in Global Oil Price. With global crude oil prices dropping to unprecedented levels, the International Monetary Fund (IMF) several times advised the Federal Government to remove subsidies. We are known for our over dependence on oil revenue, but we cannot sustain a continuous subsidy payment.
Diversion and smuggling is another major problem. According to a recent foreign media documentary, a large volume of petroleum products is diverted by corrupt senior government officials. These officials connive with marketers and transport owners to divert already subsidized fuel from depots to neighboring West African countries including Cameroon, Chad, Togo and Benin.
Removing fuel subsidies will lead to more players and competition in the oil industry.
The last in my own opinion is Foreign Exchange Crisis. Since it is the Federal Government that determines how much foreign currency private businesses receive to import fuel into Nigeria. There a few oil refineries in the country, but most of them are unable to meet domestic demand. Hence the country relies on fuel importers to fill the gap.
But due to less availability of foreign currencies in the Nigerian market, fuel importers have had to turn to local ‘black markets.’ This means fuel importers have to spend more local currency, the Naira, on buying the dollar. Fuel importers hence have a major influence on the prices of fuel. So low fuel prices at the international market, does not automatically translate into low fuel prices in Nigeria.
With the above analysis, I will support the call by the Presidential Economic Advisory Council call on President Buhari to remove subsidy on petrol and adopt a pricing regime that reflects the cost of the commodity.
It will be recalled that President Buhari had in 2019 set up the Council chaired by Prof Doyin Salami to replace the regime’s defunct Economic Management Team led by Vice-President Yemi Osinbajo.
The council, charged with the responsibility of advising the President on economic policy matters including fiscal analysis, economic growth and a range of internal and global economic issues working with the relevant cabinet members and heads of monetary and fiscal agencies, reports directly to President Buhari.
Its advice that petrol subsidy be removed formed part of its presentation at its sixth regular meeting with the President last Friday, when it also warned that the subsidy regime would worsen solvency of state governments.
According to the document presented at the meeting, the council drew President Buhari’s attention to three issues that it said required urgent attention.
They include the need for policy clarity with regard to fuel subsidies which it said would help resolve the dilemma which rising crude oil prices present; the worsening security environment which it said had adversely affected food production leading to higher prices; and the need for the Petroleum Industry Bill to encourage investment in Nigeria’s oil and gas sector.
The Council noted that improving crude oil prices had led to what it called the Nigerian ‘dilemma.’
The dilemma, it said, resulted from the conflicting implications of higher crude oil prices on the nation’s economy.
According to the Council, rising crude oil prices improve public sector revenue and reserves of foreign currency while higher crude oil prices mean that the cost of imported petrol should be higher than the N167/litre being paid at filling stations.
It noted that the restoration of subsidies created a set of significant problems. It added that as there was no provision for subsidy payments in the 2021 budget, such payments would have to be done by the Nigerian National Petroleum Corporation thereby further reducing revenues accruing to the Federation Account.
This situation, it said, was capable of worsening the solvency of many state governments and could take the country back to 2015 when the Federal Government had to provide ‘bailout’ funding to the states.
The council stated, “As there is no provision for subsidy payments in the 2021 budget, such payments will have to be done by the NNPC thereby further reducing revenues accruing to the Federation Account.
“The solvency of many state governments will worsen – this could take us back to 2015 when the Federal Government had to provide ‘bailout’ funding to the states.”
The Salami-led group added that restoration of subsidy made investment in Nigeria’s downstream oil sector unattractive.
The document read, “Council advises as follows: there is an urgent need for clarity and consistency in petrol pricing policy.
“Subsidy on petrol be removed and a pricing regime which reflects the cost of petrol adopted.
“It is noteworthy that with the exception of petrol, the prices of all other petroleum products have been deregulated; the cost of retaining the subsidy outweighs the benefits, or that the benefits of removing the subsidy are far greater than the costs.
“Data published by the National Bureau of Statistics also show that petrol prices are not the same across Nigeria.
“In March 2021, petrol prices range between N162.17 and N200.87/litre –the highest being in Lagos State whilst the lowest prices are obtained in Adamawa State.
“Council is especially concerned that in addition to further worsening government revenue, re-introduction of subsidies will jeopardise investment in the oil sector and also create uncertainty about general government policy on pricing.”
On the PIB, the council noted the progress of the bill through the National Assembly.
It said, “The importance of this bill to the national economy cannot be overstated.
“When enacted, this law will have a profound effect beyond the oil and gas sector.
“Potentially, this bill could provide a basis for building and industrial economy for Nigeria.
“Implementation of the Paris Agreement has seen a continuous global transition away from fossil fuels towards renewables as primary energy source.
“The PIB will join the National Petroleum Policy and the National Gas policy in defining the environment for investment in the oil and gas sector and also influence sentiment around Nigeria as an investment destination.”
Any plan to remove the subsidy will be a balancing act; artificially low petrol prices are seen by many as the only benefit Nigerian citizens have gained from the discovery of oil in 1958. The subsidy programme cannot continue indefinitely, but with rising fuel consumption, how can Nigeria address increasing subsidy costs whilst maintaining fuel supplies and without sending shockwaves through Nigeria’s delicate socio-economic fabric?
The subsidy may not be President Buhari’s immediate priority, but one thing is clear: demonstrating that this Administration is seriously tackling corruption around the subsidy will go a long way to garner public support should the subsidy be removed in the future.
Adewole Kehinde is the Publisher of Swift Reporters and Energy Fellow of the Abuja Chamber of Commerce and Industry Policy Centre. He can be reached via 08166240846, 08123608662
