Analysing the retaining, removal of Nigeria’s oil subsidy

President Muhammadu Buhari had on Jan. 25 approved 18-month suspension of the removal of fuel subsidy, following consultations with stakeholders in line with the current economic realities in the country.

The removal of subsidy on Premium Motor Spirit (PMS), otherwise known as petrol, was earlier scheduled to take effect from July 2022.

According to Chief Timipre Sylva, Minister of State, Petroleum Resources, arrangements have reached advanced stage by the executive arm of government, to propose to the National Assembly an 18-month extension for the implementation of the Petroleum Industry Act (PIA).

The PIA which was signed into law by the President on Aug. 16, 2021 and scheduled to commence in February was expected to boost investors’ confidence in the industry and create more employment opportunities for the populace in the host communities.

The Federal Government recently announced that only N443 billion was provided in the 2022 budget for subsidy from January to June and NNPC requested N3 trillion to continue funding fuel subsidy in 2022.

Experts continue to express different views to the latest suspension of the removal of subsidy as prescribed in the recently passed Petroleum Industry Act 2021.

They underscored the need for subsidy removal, the need to get local refineries working optimally and deregulate downstream segment of the petroleum industry, as clearly prescribed by the petroleum industry law.

In his view, Mr Olabode Sowunmi, an oil and gas expert disclosed that the biggest problem of fuel subsidy in Nigeria was that it was artificial in the sense that the way it was being calculated was not transparent.

Sowunmi, Chief Executive Officer, Cabtree Limited, an energy consulting company, explained that there was need to remove the subsidy because it serves as a big drain on Nigerian economy.

“Because its calculation is not transparent, nobody knows the exact amount of subsidy, though we know how much we are told that fund the subsidy but the format is not available in a way that a third party can verify.

“At the moment there may be galloping inflation and riot from the way the government plans its removal and obviously it may affect this administration. Politically it is not expedient for the government and that is why they cannot afford to remove it at the moment.

“Until there is a verification process, you cannot ascertain how the subsidy payment is being calculated and how much is spent on subsidy. We need to know how much we pay for subsidy.

“If there are no independent people to verify it and all we have is the government that can tell us how much is spent, nobody knows whether what is going on is right,’’ he noted.

Speaking on the way forward, he said the subsidy process must be made transparent to all, and secondly the government should be careful while taking stringent measures on subsidy to avoid certain people who would take unfair advantage of the system.

Dr Muda Yusuf, an economic expert, said that the capitulation on the subsidy removal did not come as a surprise; rather there were many odds against the move.

Yusuf, Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), stated that there were obvious concerns about the potential political cost to government and the ruling party and worries about the social cost given the excruciating poverty in the country.

According to Yusuf, there is also the waning goodwill required by government to enlist the support of the people.

He explained that the whole subsidy story became a political matter and was moved from the realm of economics and investment, adding that the outcome was predictable, especially with impending general elections next year.

“But the economic cost of the capitulation is equally weighty. The truth is that you cannot eat your cake and have it. Nigerians should expect the cost of funding the subsidy to be much higher this year because of the surge in crude oil price.

“If the oil price remains high for most part of the year, the subsidy cost could go as high as N2.5 trillion or even more by the end of the year.

“This will surely affect funding for critical infrastructures such as roads, railways, healthcare, education and even security,’’ he noted.

He further explained that the petroleum products smugglers, beneficiaries of the fiscal leakages in the fuel subsidy ecosystem and their collaborators would continue to smile to the banks for the next one and half years.

According to him, some states will struggle to pay salaries, especially states that are heavily dependent on federal allocation while some may have to lay-off some of their workforce.

Many will struggle to meet their financial obligations as sub-nationals.

He noted that macroeconomic risks would become elevated as fiscal deficit and borrowing significantly surpasses projections in the 2022 budget.

On this note, he stated that the Central Bank of Nigeria (CBN) may have to continue to cover financing gaps through ways and means, which of course has serious inflationary implications.

Yusuf warned that the macroeconomic outcomes would adversely impact on the exchange rate, leading to further depreciation of the currency.

Meanwhile, he said prospective investors in the downstream oil sector would withhold their investments until the policy environment becomes conducive.

On the partial suspension of the PIA, the expert described it as another instance of policy somersault which also reflected the absence of political will to reform the oil and gas sector.

“This has been the struggle over the past few decades. Perhaps there are entrenched and powerful interests working against the PIA. These forces have succeeded in upturning a major economic reform programme,’’ he said.

Describing it as a sad development, he said this would further aggravate the political and policy risk of investing in Nigeria, adding that the oil and gas sector was one sector that was starved of investment for several decades because of policy and regulatory issues.

“Regrettably, at a time when we thought we had turned the corner, we are now faced with the stark reality of a complete suspension of a major instrument of reform.

“It also implies that the implementation of the Act will not commence in the life of the present administration. It is difficult to predict what the succeeding administration will do.

“Meanwhile, attracting investment into the oil and gas space will be extremely difficult going forward,’’ the expert noted.

According to another oil and gas expert, Mr Charles Majomi, though the Federal Government says removing subsidy will drive up inflation, but that higher inflation is the bitter short term pill that we have to swallow.

“But we have to swallow it if we are to free up money to invest in sectors of the economy that will ensure longer term growth and prosperity for Nigerians, there is no other way out.

“Failure to remove the subsidy means that three trillion Naira will be borrowed, adding to our debt. Imagine what three trillion Naira can do for the national economy and welfare of Nigerians if spent wisely.