Towards collective decision on petrol subsidy, Nigeria’s economy
The debate on subsidy is one in which every side has a point to make. However, there are conditions to be met after which both sides can reconcile. KINGSLEY JEREMIAH examines the issues.
For political reasons, especially to keep the current government in power, the decision to stop the payment of subsidies has remained elusive and the rise of the cost of the scheme, believed to be in favour of the masses is now the leading cause of their adversity. This decision to retain subsidy was taken to the detriment of the Petroleum Industry Act (PIA).
Nigeria’s Premium Motor Spirit (PMS) currently runs on two forms of subsidy; the first is the payment of difference between the actual pump price of PMS, which is arrived at after calculating the landing cost and the extant margins. The other is the cost of transportation (about N10) paid on every litre to ensure that the price of PMS is similar across the country.
To put in perspective, in Nigeria’s 2022 budget, capital expenditure stands at N5.4 trillion while subsidy payment stands at N4 trillion. That’s about 74 per cent of the capital budget.
The International Monetary Fund (IMF) had projected that fuel subsidy will rise to N5 trillion. By implication, Nigeria may be spending more on subsidies than on capital projects. Sadly, no government has paid more on subsidy than the sitting Nigerian President – President Muhammadu Buhari.
From 2015 when the government came to power to 2019, Nigeria spent over N10 trillion on subsidy payment. The cost for 2021 to 2022, is about N5.5 trillion, bringing the payment to about N15 trillion in about eight years.
These developments persist at a time Nigeria’s economy is struggling and currently inundated with yearly widening budget deficits, rising inflation rate which has worsened prices of food items and other products, high foreign exchange challenge, unemployment rate standing at 33.3 per cent, debt burden and a period when president Muhammadu Buhari has already approached the National Assembly to borrow N965.42 billion from the domestic market to fund the deficit in the 2022 budget.
On the flip side of these daunting challenges, in a liberal market, no one subsidises transportation costs of goods they do not enjoy. Asking a Coke consumer in Lagos to pay a certain amount because of someone who lives in Adamawa for instance does not add up. That’s what Nigeria does through bridging claims. Average daily consumption is about 70 million litres. In a year, bridging claims hit about N255.5 billion.
There are implications and consequences for this misalignment. The fact that the country did not know the actual PMS consumption raises dust and in fact pegs question marks on the much trumpeted commitment of Nigeria to transparency and accountability in the extractive sector. This is because by claiming an additional one million (naira or dollars or barrels), a few government officials will be smiling to the bank while the country borrows more. Before and from the days of late General Abacha till now, the country’s refineries were bottlenecks to personal gains.
Reportedly, importing petroleum products provided more personal gain for government officials and keeping the refineries idle meant that they can do whatever they want with the 445,000 barrels of crude that’s allocated to the refineries daily.
It is important to note that all petroleum products except PMS are price-deregulated. Sadly, PMS constitutes more than 75 per cent of white products demand as consumer reliance on PMS for transportation and power generation fuel. This ordinarily makes the price-deregulated PMS market a significant challenge. Some stakeholders therefore believe that a phased deregulation could be a leeway.
Under a deregulated market, where petroleum products are eventually refined locally, the fund being spent by the government on subsidy will provide succour for the economy, enable states to thrive and aid industrial and infrastructure development. This will in turn provide employment, enable the country to export petroleum products, reduce borrowing and douse the pressure on foreign exchange thereby helping the naira to stabilise.
It is important to note that Nigeria does not only subsidise products for its citizens. It does for other neighbouring West African countries. The Nigeria Customs Service indeed said petrol is being smuggled out of Nigeria in large quantities to as far as Mali. Some marketers and Customs officials, who are less than 0.09 per cent of the population, are helping their fortunes daily.
In the few months that Nigeria tried deregulating the petroleum market, daily consumption of PMS went sharply down to about 45 million barrels per litre. In the month of June last year, a few months after subsidy returned, Group Managing Director (GMD), NNPC, Mele Kyari said smuggling across the borders increased the daily consumption to 103 million litres per day in the previous month. By implication, about 58 million litres was smuggled, making the smugglers and the other West Africans benefit even more than the citizens of Nigeria.
Reportedly, the pump price should be about N600 per litre without subsidy, meaning that the subsidy on every litre is N435. In monetary terms, smugglers alone went home with N25.3 billion. So many industries that rely on the by-products of petroleum from refineries and the many chains associated with it mostly rely on importing those by-products into the country. With a thriving downstream market, these sectors of the economy would boom providing jobs and reducing youth unemployment.
Nigerian National Petroleum Corporation (NNPC) has been the major importer of petroleum products in the country, importing in excess of 95 per cent of PMS, tying up country resources and discouraging private sector participation as the private sector neither has access to foreign exchange nor its willingness or capacity to sell at a loss. It is possible for the country to be in a net import position in the near term, until ongoing refinery projects are completed namely the Dangote Refinery and the refinery rehabilitation projects of the NNPC (Port Harcourt, Warri and Kaduna).
Although there’s moderate but sustained increase in local production of diesel from the modular refineries (Ogbelle, Waltersmith, Edo and OPAC), domestic PMS production may lag until these ongoing projects are completed.
Nigeria is strategically positioned to be the refining hub of the continent. The country needs to focus on refining crude that would serve the nation’s huge population and turn the country to a net exporter of products to the sub-region and other regions on the continent. This would be a huge foreign exchange earner for the country.
Currently, there is no competition in the market. Competition is a better tool than price control for protecting consumers, attracting investments, driving efficiency and growing the sector. It is only a competitive market that can deliver the intended benefits of the PIA to the consumers, the government and the industry.
Managing Director 11 Plc and former Chairman, Major Oil Marketers Association of Nigeria, Tunji Oyebanji, had feared that the attempt to continue to control petrol price would negatively affect investment in the sector, stressing that government has historically been constrained to retain the price due to political consideration, especially since the move has always had civil unrest as fallout.
Oyebanji disclosed that the lack of uncertainty in the sector has already led to divestments, adding that the industry needs significant investment, which could only come from certainty and full deregulation as well as a level playing field.
Demanding an enabling environment to make the sector drive the nation’s sick economy, Oyebanji said: “We need to put behind us the need to control price. What we need is an agency to come down heavily on anyone who abuses regulations and imposes significant fines as it is done in other sectors like telecommunication. That would address the concern that some people may have expressed.”
Earlier, a former Executive Director, Corporate Planning and Strategy, Nigerian National Petroleum Corporation (NNPC), who is currently a Managing Partner at Tecno Energy Resources Limited, Dr. Timothy Okon, stated that setting price for petroleum products remained illogical on the part of government considering that the government doesn’t even control the price of crude at the international market.
Okon canvassed for the introduction of a pricing formula, which would be reflective of market realities, especially pegging the prices in line with the tentative price of crude oil. Noting that the government should rather be bothered about the depleting nature of resources and the need to introduce taxes that would discourage use of the product due to the environmental challenges posed by the resources, he added that there was a need to prioritize using resources for economic development.
Already, politicians vying into offices in 2023 are making promises and will soon start a full campaign. It is necessary for Nigerians to pay close attention to the issues around subsidy. Most state governors have stressed the need to remove subsidies, knowing very well that some states are shortchanged. States like Lagos, Ogun or Kano with much population and industries are likely to consume more subsidies than others. Nigerians may need to join this call and decide even if it will require a referendum on the way forward on the subsidy issue.