The fuel subsidy is fiscally irresponsible – SBM Intelligence

One of the most fiscally irresponsible spending in this current administration has been fuel subsidies. The subsidy payments have seen the Nigerian National Petroleum Commission remit zero to the federal account allocation (FAAC) for 2022. This was a massive drop from the $3 billion it remitted in 2020 which fell to about $1.4 billion in 2021, now to zero.

What this means is that Nigeria has not benefited from the increase in global oil prices despite crude prices averaging $94 a barrel so far this year, a 42% rise from last year. This is disturbing for a country that is heavily oil-dependent.

According to a report by SBM Intelligence, the costs of fuel subsidies in Nigeria increased by 890% over a five-year period (2017-2021) with subsidy payments gulping ₦1.43 trillion by 2021.

The World Bank’s Country Director Shubham Chaudhuri also stated that Nigeria’s decision to postpone the full deregulation of the downstream sector of the industry by 18 months may cost the country over ₦4 trillion in subsidy payments in 2022, adding that these subsidy payments impose a massive and unsustainable fiscal burden on the country’s economy. He said that fuel subsidy costs rose from just 4% of the oil and gas revenues in 2020 to a staggering 35% in 2021 – an equivalent of about 2% of GDP.

“Within the first five months of 2022, NNPC has expended ₦1.27 trillion on petrol subsidy — about 31 percent of the ₦4 trillion provision for the year. The subsidy regime is not economically justifiable,” SBM Intelligence said.

Finance Minister Zainab Ahmed has repeatedly warned about the high cost of subsidies, saying the bill could reach $16.2 billion in 2023. And the World Bank estimated that foregone oil revenues would total ₦5 trillion this year due to the subsidy, equivalent to 30% of Nigeria’s entire budget.

Despite Nigeria being Africa’s biggest oil and gas producer – a position it is gradually relinquishing to Angola and Libya as its oil output fell to 972,000 barrels per day in August 2022 – it depends almost entirely on imports to cover its gasoline needs. This is a major problem.

It then subsidises the cost to consumers, which has created a disparity between the pump price and what people pay to fill their tanks in neighbouring countries, thereby creating an incentive for smuggling. Furthermore, massive crude oil theft estimated at 200,000 barrels per day has dwindled oil production and made it difficult for Nigeria to consistently meet its production quota. Nigeria’s oil production has fallen way below pre-pandemic levels of 1.8 million barrels per day after decades of under-investment in upstream assets.

Another major challenge is the fact that there are no known numbers of actual oil consumption in the country as there have been discrepancies in different quarters of government about the actual volume of petrol Nigerians consume.

A senior analyst at SBM Intelligence, Ese Osamwonyi said, “we have moved from 30 million litres a day to 90 million during this administration without anything to show that consumption has actually increased.”

As the government continues to pay subsidies on this unconfirmed volume of oil consumption, the government’s ability to spend on basic services that will better the lives of citizens and ameliorate poverty levels is being limited. And the World Bank has estimated that inflationary pressures will push seven million more Nigerians into poverty this year.

There have been several calls that the government should remove fuel subsidies but the government has repeatedly shelved its plans towards it. The government announced plans to remove fuel subsidies last year but it withdrew the plans in July saying the time was “problematic” and would worsen the suffering of Nigerians.

With the current inflation figures over 20%, plundering Nigeria’s shrinking revenue on a wasteful venture is more than capable of worsening the suffering of Nigerians. These funds should instead be freed up and diverted to more productive activities that will benefit the entire populace and not just a few privileged politicians who sit at the helm of affairs.

Ms Osamwonyi of SBM Intelligence has rightly said, “subsidy is a complete waste at this point.”