Last year alone, Nigeria spent about N3,271,934,406,053.75, an average of N272,661,200,504.48 on keeping fuel subsidies. Experts have said that the process of subsidising the petroleum industry is hugely inefficient and does not add value to government’s revenue drive.
Many have claimed that it does not alleviate the sufferings of low-income earners nor end fuel scarcity. While some people are taken aback by the government’s decision to remove the subsidy, others believe subsidy did not exist in the first place. That it is surcharge that exists and not subsidy. All this points to too much inefficiency in the Nigerian oil industry.
Beneficially, both the government and the petroleum product marketers have justified the decision to increase the pump price of petrol, explaining that the decision has taken into consideration developments at the international oil market, where prices of oil have been recording recoveries.
On the basis of the development at the international market, the government has reiterated its position that the subsidy on the refined product, premium motor spirit (PMS) or petrol, has to go and would never return, so that the cost of petroleum products would henceforth be determined by the factors of the international crude oil market.
The Minister of Finance, Budget and National Planning, Mrs. Zainab Shamsuna Ahmed, who advanced the government’s decision on the issue while speaking at a session, had stressed that incurring further costs on under-recovery has now been stopped permanently.
In her words: “Specifically, in relation to the extractive industry, we took the opportunity to remove fuel subsidy that has been a significant drain on our resources and on the economy.
The government has decided to do this by adopting a price modulation mechanism, and the government strongly looks to removing the fuel subsidy provision from its revised budget and also from the Medium-Term Expenditure Framework (MTEF) for 2021-2023. Therefore, it would not nurse any plans to incur any expenditure on fuel subsidy, going forward.
What that means is that the price of petrol will be determined by the global price of crude oil, so the price will keep changing, according to how the global market operates.
The Minister of State for Petroleum, Mr. Timipre Sylva, would say that Nigeria was no longer in the business of fixing fuel prices, and that global oil price crash had made removing the subsidies inevitable.
“It is about the survival of our country,” he said.
Recall that while declaring that removing subsidy was the way to go, he disclosed that the government was spending over N1trillion yearly on under-recovery, a development he described as unsustainable.
Based on reports submitted to Federation Account Allocation Committee (FAAC), while the total of NNPC cost-under-recovery for 2020 was N63,689,544,114.74, an average of 5,307,462,009.56, that of 2021 was 1,266,305,102,000.27, an average of 105,525,425,166.69; and that of 2022 was 3,271,934,406,053.75, an average of 272,661,200,504.48. All these were between the months of January and December.
Retrospectively, Nigeria started subsidising its petroleum industry in the 1980s after the state-owned company, Nigerian National Petroleum Corporation (NNPC), had planned to unify the price of crude oil in accordance with the global market. But then Head of State, Olusegun Obasanjo, reasoned that average Nigerians would not be able to afford a gallon of petrol at the pump. He instead introduced subsidy plan to keep the price of petrol low.
Recall also that Mr. Ibe Kachikwu, former Minister of State for Petroleum, had said that a large volume of petroleum products was diverted by corrupt senior government officials. He also said that the officials connived with marketers and transport owners to divert already subsidised fuel from depots to neighbouring West African countries.
In December 2015, after many years of providing fuel subsidy, the Nigerian government announced a withdrawal of the subsidy. The reason given was that the government could no longer afford the payment due to a dip in the country’s revenue, caused by the huge drop in crude oil prices at the international market. At the time, the subsidy withdrawal led to no increase in the pump or retail price of petrol at local stations, only because oil prices in the international market had fallen so low that the full economic cost of supplying a litre of petrol was lower than local retail price.
Subsequently, about four years after, oil prices at the international market were beginning to rise again, putting familiar upward pressures on unregulated local retail price of petrol. Precisely in April 2016, with the intention of soaking up the inflationary pressures and keeping pump price of petrol at its then level of N86.50 per litre, the government announced the return of the subsidy.
Apparently, the indecision surrounding the subsidy issue has been a recurring theme for a long time; this is just one of the reasons that the subsidy should be removed. According to the Nigerian Ministry of Petroleum, removing fuel subsidies will lead to more players and competition in the oil industry.
On foreign exchange crisis as it affects the industry, the Nigerian government determines how much foreign currencies private businesses receive to import fuel into Nigeria. There are 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) sources. This means fuel importers have to spend more local currency (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, do not automatically translate into low fuel prices in the country.
In analysing the economic importance of the fuel subsidy, the subsidy affects the local pump price of petrol directly and – based on the law of demand – the quantities of petrol consumed by Nigerians indirectly.
The two variables are respectively important; although Nigeria is a crude oil-producing state, the nation does not – mainly due to mismanagement of her refineries – refine its crude oil into component fuels, one of which is the petrol.
Instead, the country exports the crude oil produced, and imports the refined products for most of the domestic consumption. Thus, domestic pump prices of petrol, if unregulated by the government, will ordinarily fluctuate with crude oil prices at the international market.
To insulate Nigerians from the fluctuation, the government fixes a local pump price or retail price which is usually different from the full economic cost of supply. The government then either pays off the deficit or earns the excess, depending respectively on whether the fixed retail price is lower or higher than the full economic cost of supply at a particular point in time. Often, the amount the government pays in deficit is what is called the fuel subsidy.
Now, why is it necessary that the fuel subsidy be removed, from an economic perspective? First, it ties down a large amount of government spending and places a fiscal burden on the economy, particularly when there is a huge difference between oil prices at the international market and subsidised domestic retail price of petrol.
According to Bloomberg, the country spends on average whopping $7billion on fuel subsidy annually. Often, the fiscal burdens are financed by some combination of higher public debt, higher tax burdens, and crowding out of potentially productive public spending (for example, on health, education, and infrastructure), all of which could be a drag on economic growth.
Secondly, the subsidy or the support fund imposes large economic costs from certain negative influence.
For instance, as a result of the fund, a unit of petrol in the country is cheaper than in some neighbouring countries. And this creates an arbitrage in which money-sniffing capitalists take advantage of the price differential and smuggle out the product to neighbouring countries for sale, solely to make more profit. Thus, the Nigerian government does not just subsidise its citizens, it also somewhat does the neighbouring countries.
Another aspect of the aforementioned negative influence from the fund is corruption. Due to inexplicable inaccuracies in the record of the volumes of refined oil imported into the country, funds used to pay the subsidy are sometimes mismanaged or unaccounted for.
Again, why it is necessary to remove the subsidy? Like other energy subsidies, the petrol subsidy is provided mainly to serve the social goal of reducing fuel cost and increasing access among the poor and currently unserved households. However, energy subsidies in general have proven to be an ineffective and inefficient way to achieve the desirable social goal. As has been previously argued, the fund particularly leaves Nigeria’s economy porous to corruption and create loopholes for costly leakages.
In the event that crude oil prices have fallen sharply, as witnessed in June 2014, and are expected to stay low for a considerable period of time, and that the country’s crude oil-dependent revenue dwindles, the need to address this issue is as evident as it is very pressing.
So, how should the fuel subsidy issue be tackled? The fundamental problem created by the subsidy is that the local retail price of petrol does not reflect its true costs, including the externalities its consumption creates such as air pollution damage to the health of others through climate change, heart disease, asthma, etc.
To heed the demand to allow market forces determine the pricing of petroleum products is arguably the best of options. Two years ago, the Petroleum Products Marketing Company (PPMC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC), announced an increase in petrol price of N151.56 to N162 per litre and directed all operators in the petrol retail business to comply immediately.
The development was hinged on the deregulation of the downstream petroleum sector, whereby market forces are to determine prices of petroleum products.
The new price with its cost-reflective nature is expected to help to improve product availability and attract investments to the sector as marketers now have increased margin.
Expectedly, due to the sensitive and controversial nature of petrol pricing in the nation’s polity, the announcement received mixed reactions. While the government and those sympathetic to its decisions and policies as well as operators in the Nigerian downstream petroleum sector supported the hike in petrol price, some other Nigerians who feel that the increase would add to the hardship being experienced by the poor masses in the COVID-19 pandemic period, kicked against the new price and called for its review.
Then, at the heat of the dwindling crude oil price and its negative impact on other economic activities, which plunged many countries, especially the oil-dependent ones into revenue crisis, the federal government had approved the deregulation of the petroleum sector.
In rare radical step, it had announced an end to the wasteful petrol subsidy and also ended the sole importer status of the NNPC, paving the way for private marketers to resume importation of petroleum products.
Meanwhile, the marketers and other stakeholders in the nation’s petroleum downstream sector, speaking on the issue of subsidy removal across the country are unanimous in their views that the decision to allow market forces to determine the price of petrol was not only healthy for the downstream sector but was good for the Nigerian economy which has been quite burdened with the subsidy system.
The Chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Mr. Adetunji Oyebanji, said that the association has welcomed the government’s action in allowing the market to determine prices, noting that this would prevent the return of subsidies while allowing operators the opportunity to recover their costs. He said this will, in the long run, encourage investment and create jobs.
He explained that though prices at the pump would need to be adjusted to reflect realities of the increase of ex-depot prices by the PPMC, the magnitude of the increase, timing and location would be determined by the individual company.
Mr. Oyebanji, who expressed the views of his members in a statement, said: “Consistent with global best practices, MOMAN does not dictate prices to its members as this would be anti-competition in a fully deregulated market.”
The MOMAN chairman, however, called on the Ministry of Petroleum Resources to intensify its public awareness drive to educate the populace on the current realities.
“The Ministry of Petroleum Resources should also be telling Nigerians that we can no longer afford subsidy. If we keep it, the investment in infrastructure, health, education, etc., will not be possible. We are borrowing so much to finance our budget. We spent over a trillion naira on subsidy the other year. It is unsustainable”, he said.
