December 5, 2022

It Is Time To Remove Premium Motor Spirit Subsidy

9 min read

By Adewole Kehinde

The Group Managing Director, Nigerian National Petroleum Corporation, Mele Kyari, on Thursday, 25th March, 2021 said the Federal Government subsidizes Premium Motor Spirit with about N120bn monthly.

He said while the actual cost of importation and handling charges amounts to N234 per litre the government had been selling at N162 per litre therefore bearing the difference.

He also said the NNPC could no longer afford to bear the cost, saying Nigerians would have to pay the actual cost sooner or later.

Although he claimed the nation was not in a subsidy regime, he said the government was trying to exit what he described as ‘under-price sale of PMS’.

What really took my interest is Kyari’s statement; “Today, NNPC is the sole importer of PMS. We are importing at market price and we are selling at N162 per litre today.

“Looking at the current market situation today, the actual price could have been anywhere between N211 and around N234 per litre.

“The meaning of this is that consumers are not paying for the full value of the PMS that we are consuming and therefore, someone is bearing that cost.

“As we speak today, the difference is being carried on the books of the NNPC and I can confirm to you that the NNPC may no longer be in the position to carry that burden and because we can longer afford to carry it on our books.

“As we speak today, I will not say we are in subsidy regime but we are in a situation where we are trying to exit this under-price sale of PMS until we come to terms with the full value of the product in the market.

“PMS sells across our borders anywhere around N300 per litre and in some places up to N500 to N550 per litre.

“Our current consumption is evacuation from the depots about 60 million litres per day; we are selling at N162 to the litre, and the current market price is around N234, actual market price today.

“So, the difference between the two, multiplied by 60 million x 30 will give you per month. I don’t have the numbers now. This is a simple arithmetic that we can do but if you want exact from our books, I do not have it at this moment but it is somewhere between N100bn and N120bn per month. I don’t have the exact number.”

What is subsidy?

A subsidy is an incentive given by the government to individuals or businesses in the form of cash, grants, or tax breaks that improve the supply of certain goods and services. With subsidies, consumers are able to access cheaper products and commodities. Markets that have positive externalities, which are extra benefits to society, tend to be favored in policy to provide a greater supply of that good and service.

Nigeria started subsidizing its petroleum industry in the 1980’s after the state-owned company, the Nigerian National Petroleum Corporation (NNPC), had planned to unify the price of crude oil in accordance with the global market. But then-incumbent president, Olusegun Obasanjo, said average Nigerians would not be able to afford a gallon of petrol at the pump. Instead, President Obasanjo introduced subsidy plan to keep the price of petrol low.

Despite being Africa’s largest oil producer, Nigeria still relies heavily on imported refined oil. Its four refineries Port Harcourt I and II, Warri and Kaduna have a combined capacity of around 445 thousand bpd, which covers 63 percent of domestic demand. However, these refineries are running far below their capacity due to operational failures, poor maintenance, sabotage on crude oil pipelines feeding refineries, theft, and fire.

In 2009 and part of 2010, particularly low refinery runs forced the country to import about 85 percent of its refined oil needs. Other estimates show the domestic refineries to satisfy a maximum of 25 percent of domestic consumption.

With the proclaimed objective to alleviate high levels of poverty, the Nigerian government subsidizes private consumption of imported refined fuels to maintain a stabilized price at the consumer pump; the dollar value of the subsidy increases with increasing refined oil prices or increased import volumes. Rising world fuel prices have caused this subsidy to increase significantly over recent years; damaging the country’s fiscal health and economy.

The Nigerian Petroleum Products Pricing Regulatory Agency (PPPRA) determines the daily and monthly subsidy rates as follows: the subsidy is determined daily and monthly by PPPRA based on the gap between the expected price of imported fuel, including margins, and the pre-established, regulated, domestic price.

Though the subsidy helps the poor, by keeping Nigerian prices lower than world prices, the biggest beneficiaries have been importing companies and local wholesalers that smuggle some of the subsidized fuel into neighboring countries and sell it at higher prices. Illegal trade is not well recorded in official trade statistics, which makes it difficult to analyze. According to a report, the Federal Government paid the subsidy on 59 million liters of fuel a day in 2011, although domestic consumption in Nigeria was approximately 35 million liters a day. Thus, fuel importers were paid hundreds of millions of US dollars to import fuel that was never delivered to the Nigerian people.

For the past 30 years, governments have attempted to remove the fuel subsidy due to the damaging fiscal impact. From a political economy perspective, subsidy removal is difficult because it impacts a broad spectrum of Nigerian households. Despite the majority of the subsidies benefiting wealthier households, lower and less volatile fuel prices are popular to all population segments. For these reasons, attempts to remove the subsidy have always generated opposition from consumers.

It will be recalled that in September, 2020 the Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPPRA), Abdulkadir Saidu, stated that PMS prices would henceforth be determined by the forces of demand and supply and the international cost of crude oil. The agency said it would no longer release guiding price bands for Premium Motor Spirit (PMS).

According to him, the role of the agency would henceforth be to ensure that oil marketers do not profiteer, as petroleum marketers are now free to source for product and fix their prices.

In 2020, a steep decline in global crude prices triggered by the global pandemic completely wiped out the subsidy via significantly lower landing costs, paving the way for a reduction in the pump price of Petrol in mid-March.

The PPPRA announced a reduction in ex-depot price to N113/litre and official pump price to N125/litre. Since then, the PPPRA has gone on to raise fuel pump price to N135-N145/litre in April before implementing a reduction to N121.50 – N123.50/litre in June. An increase to N140.80 and N143.80/litre in July was implemented and was raised again in August to N148 and N150/litre to reflect rising crude prices. In November, the NNPC increased its ex-depot price which led to an increase in the pump price of petrol to between N168 and N170/litre.

Following a meeting with the Labour Union leaders on 7 December, 2020 however, the Minister for Labour and Employment, Dr Chris Ngige, announced that the Federal Government was going to reduce the pump price of petrol from N168 to N162.44 per litre effective 14 December, 2020. Dr Chris Ngige however, noted that the reduction will not impact government’s deregulation policy. Petrol is currently being sold at between N162- N165 per litre in many filling stations across the country.

According to the Federal Ministry of Petroleum Resources, removing fuel subsidies will lead to more players and competition in the oil industry.

The decision to abolish Nigeria’s fuel subsidy is the right one. In 2011 alone, Nigeria’s fuel subsidy cost the country an estimated $8billion. This does not even take into account the country’s losses due to market distortions as a result of the subsidy. While politically costly in the short run, if Federal government can implement transparent and well-structured reforms, the funds from the fuel subsidy program could be put to far greater use.

With an estimated 37.2 billion barrels of proven oil reserves, Nigeria is one of the world’s largest oil producers. However, the country’s mineral riches have not resulted in a significant improvement in the quality of life for the majority of Nigeria’s citizens, 54% of whom live below the national poverty line. Nigeria does not lack the resources to reach its development goals, rather its resources have been utilized inefficiently.

In the wake of the global pandemic, financing for development is drying up and developing countries must now look inward to finance their growth and development needs. Crisis times require bold reforms and President Buhari has the ability to take on one of the most difficult problems in the country. But in order to succeed, he will also have to take on another challenge; transparency in the use of the $120billion fuel subsidy funds. The government must utilize these resources more efficiently to create social welfare and infrastructure improvement programs that will not only improve the quality of life for Nigeria’s poorest but also put the country on track to meet its development goals.

Nigeria’s fuel subsidy continues to crowd out other development spending. By comparison, Nigeria’s total allocation for education is about N83billion and it is not much higher for health care. Infant mortality in Nigeria remains unacceptably high at 90.4 per 1,000 live births. The N120billion from the fuel subsidy could help to address some of these issues.

In addition, keeping the domestic price of oil artificially low with the fuel subsidy has discouraged additional investment in Nigeria’s oil sector. This is especially problematic given that the oil sector is the lifeblood of the Nigerian economy. Since 2000, Nigeria has issued at least 20 refinery licenses to private companies. However, only Dangote refinery has been under construction (90% completed) as other investors could not recoup their investment under the artificially low price structure.

In debating the merits of fuel subsidy it is important to understand who benefits the most from the program. Contrary to popular belief, it is the rich not the poor who disproportionally benefit from fuel subsidy. With the Federal Government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy. Many low income earners rely primarily on public transportation as such their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles. Neighboring countries also benefit significantly from Nigeria’s fuel subsidy through smuggling.

One legitimate criticism against the Federal Government is that it has done a poor job in planning for the subsidy removal and in communicating the huge costs of the fuel subsidy and the benefits of its removal to the population. In a country where there is already a lack of trust between the people and government, communications is critical. Otherwise protesters will continue to believe that this is just another ploy by Nigeria’s elite to further capture the country’s resources. The real challenge the government faces is winning the trust of the people. Working Nigerians are hurting and their livelihoods are in danger with the doubling of petrol prices. They want to know that the government has a credible plan and the protests represent a call for the government to quickly implement post-subsidy programs. Some form of social protection must be launched immediately to protect the most vulnerable. This could include measures to reduce the cost of public transportation in the near term.

The Federal Government must implement a transparent system for redirecting and monitoring the use of funds from the fuel subsidy program so that its citizens can review and scrutinize the expenditure.

The government has announced its intention to redirect the funds from the subsidy into infrastructure, support for small businesses and safety net programs. This is a step in the right direction, but the success of these programs rests on having proper oversight and participation of civil society.

The government should assemble a committee of key civil society organizations to oversee the investment of these funds. Unlike the fuel subsidy itself, these programs should be targeted toward helping the poor including programs to reduce maternal and infant mortality and improve road quality and access. Most importantly, the programs must be tied to Nigeria’s overall development goals.

The government and the proposed civil society oversight committee must prioritize sustainable investments that will have a long-term development impact. Pork barrel type investments spread across the country to appease the people will not serve President Jonathan and his government well in the long run.

It is too early to tell whether the Federal Government will succeed in these efforts but after 20 years of dodging the issue and trillions of Naira spent, the removal of the fuel subsidy should be supported. If implemented correctly, the subsidy funds could lead to major development gains. Moreover, the removal of the fuel subsidy; if successfully implemented creates the space for Nigeria to finally develop refinery capacity and consequently increase its potential revenue from the oil sector and create jobs.

Civil society organizations should take this opportunity to fully engage in the debate on how best to redirect the funding from the subsidy program. In turn, the Nigerian government must communicate its plans and actions transparently to the people.

Adewole Kehinde is the Publisher of Swift Reporters and can be reached via 081662408436, 08123608662

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