Why Nigeria’s Petrol Subsidy Is Bad Business For All

As in many other resource-rich countries, the Nigeria government introduced a fuel subsidy regime as part of strategies for cushioning the macroeconomic impacts of oil price shocks on the economy. Under this arrangement, the government regulates the domestic price of fuel and pays domestic marketers the difference between the regulated domestic price and the Expected Open Market Price (EOMP).

In recent times, however, there has been an increasing call for fuel subsidy reforms globally as policy-makers have expressed concerns regarding the efficacy of such programmes as well as its implications for fiscal sustainability. It has also been argued that, contrary to its intention, badly-targeted subsidy programmes have worsened the problem of inequality.

And as is evident in Nigeria today, the potential benefits of fuel subsidy are diminished because of the existence of significant subsidies on imports of petroleum products.

The costs of these subsidies have risen dramatically in recent years along with increased volatility in world petroleum and petroleum product prices and increased illegal exportation of subsidized petroleum products into neighboring countries.

Corroborating this, the Minister of State for Petroleum Resources, Chief Timipre Sylva, succinctly called Nigeria’s fuel subsidy regime “a criminal enterprise” and said that the Nigerian National Petroleum Company (NNPC) could not tell the exact amount of petrol consumed across the country daily and that they work based on guess-work.

Asked about the earlier N3 trillion fuel subsidy proposal by NNPC, amid concerns about the country’s PMS consumption figure, Sylva replied, “I would have preferred that this question be directed to the NNPC.

“I have made my views known about this issue in the past. NNPC has agreed with me that they are not certain about the exact consumption figure.”
He said the truth was that if the country’s petroleum products were smuggled outside the country, nobody could say what volume was involved today, tomorrow or next week, adding that NNPC could not say they know these figures.

“It’s more or less fueling a criminal economy. The NNPC imports the products, and nobody knows the exact destination of the products at the end of the day,” Sylva stated.

He added, “The imported products come to Nigeria, and from there filters out of our borders to neighbouring countries.

“So, as a country, we cannot tell the exact volume of petroleum products that we consume on a daily basis. All we have been doing is to assume the level of consumption over a period and work with that.”

He, however, expressed belief that the NNPC probably had a better answer to this, stressing that “personally, I don’t.

“I have said this publicly before that I don’t know the figure. When I assumed office, initially I was told that our daily consumption was 66 million litres.

“Then, when fuel prices increased from N145 to N162, the consumption figure temporarily fell to about 40 something million litres per day, because the arbitrage opportunity reduced,” Sylva stated.

He added, “Then the value of the naira dropped again, and the number went up again to over 60 million litres. I am told the figure sometimes rise to as high as 90 or over 100 million litres. I don’t know how that happens.

“At this rate, I have said if anyone is looking at a criminal enterprise, look no further than the fuel subsidy.”

Sylva said that was why he had continued to advocate the removal of fuel subsidy from the country’s PMS pricing template and deregulate.

This January, the NNPC demanded a N3 trillion subsidy fund for the 2022 fiscal year. The demand was premised on a daily consumption rate of 65.7 million litres and an oil price peg of $80 per barrel.

The daily rate of consumption determines how much will be spent on subsidy; and the bill for subsidy payments as presented by the NNPC has been subject to arguments on the authenticity of figures and subsequently the amounts spent on Subsidy.

In August 2021, NNPC figures showed that the country consumed 1.516 billion litres of petrol in one month. This would mean the average daily consumption of petrol in the country as at August, 2021 stood at 48.903 million litres/per day.

Consumption rates between January to August 2021 shows that the average daily consumption for the eight months stood at 55.39 million litres.

A BusinessDay analysis shows that the landing cost of petrol imported into the country was N309.87 per litre on February 25, using the official exchange rate of N416.46/$.

With daily petrol consumption put at about 60 million litres by the NNPC and a subsidy of N168.87 per litre, the daily subsidy amounts to N10.1 billion as the pump price of the product remains steady at N162-N165 per litre.

Other cost elements that make up the landing cost include lightering expenses (N4.81), Nigerian Ports Authority charge (N2.49), Nigerian Maritime Administration and Safety Agency charge (N0.23), jetty throughput charge (N1.61), storage charge (N2.58), and financing (N2.17).

The pump price is the sum of the landing cost, wholesaler margin (N4.03), admin charge (N1.23), transporters allowance (N3.89), bridging fund (N7.51), marine transport average (N0.15), and retailer margin (N6.19).

Later, the Federal Executive Council (FEC) meeting presided by President Buhari announced the receipt of a bill of N3 trillion from NNPC as payment for petrol subsidy in 2022.

However, last week, the President requested the House of Representatives to adjust the Medium Term Expenditure Framework (MTEF) to accommodate a projected N4 trillion for petroleum subsidy in 2022.

The president, in a letter read by the Speaker of the House of Representatives, Femi Gbajabiamila, is seeking an increment of $11 to the oil benchmark to accommodate subsidy consumption and other expenses.

According to him, N442.72 billion was earmarked for fuel subsidy in the 2022 budget (January-June), but because of the hike in the price of crude oil, Nigeria is paying more for PMS subsidy, therefore, the country will require an additional N3.557 trillion for subsidy.

And without any interrogation, both chambers of the National Assembly approved the President’s request for adjustments to the 2022 fiscal framework on which the 2022 budget is predicated.

The lawmakers approved US$73 per barrel as proposed by President Buhari. They also approved Oil Production Volume of 1.600 million per day; Petroleum Motor Spirit (PMS) subsidy of N4.00 trillion (NGN); and a cut in the provision for federally funded upstream projects being implemented by N200 billion from N352.80.

“How the president arrived at the N4 trillion is not stated in the letter to NASS and it is not available in the public domain,” said Eze Onyekpere, a lawyer and the Lead Director of the Centre for Social Justice, Nigeria.

According to him, drawing from the N4 trillion subsidy payment, some fundamental analysis is imperative.

He said “If oil had continued to sell at the former prices, by the calculation of the president, we would have required N442.72 billion multiplied by two. This would amount to the sum of N885.44 billion. If this calculation is correct and the price of crude oil doubled in the international oil market, the implication is that Nigeria will require N885.44 billion multiplied by two to pay the subsidy. This would be the sum of N1.770 trillion. The request for a fuel subsidy vote of N4 trillion is not only outrageous but unsupported by empirical evidence.”

According to Onyekpere, the Centre for Social Justice believes that such a huge amount lacks credibility and appears as an attempt to create a slush fund for political campaign expenses.

“It cannot be true that fuel consumption rose from 35 million litres a day in 2015 to 65 million litres a day in 2022 after two recessions, high-level inflation and the worst unemployment figures since independence. That quantum of PMS is enough to power the whole of West Africa.

“This is not the way to run a depressed economy where all the macroeconomic fundamentals are headed south, buffeted by unsustainable debt (debt service in excess of 95% of retained revenue), etc. The tragedy is that the regime has failed to position Nigeria to take advantage of high oil prices, to meet our OPEC quota and even exceed the same considering our poor finances. While we cannot meet our OPEC quota, we keep borrowing to even pay salaries and overheads. Yet, the same administration presides over the inflation of consumption figures for oil subsidy claims,” Onyekpere said.

“The outcome of these approvals include increased borrowing, higher debt service, surge in fiscal deficit, heightening inflationary pressure and a risk of further depreciation in the naira exchange rate,” the chief executive of the Centre for the Promotion of Private Enterprise Chief Executive, Dr Muda Yusuf said.

He said infrastructure financing might be negatively impacted as recurrent expenditure increases sharply.

He added: “The combination of debt service and petrol subsidy is likely to consume the entire revenue.

“We should brace for more challenging times. Major reforms necessary to return the economy to a recovery and growth path are unlikely to happen in the near term. This is coupled with the distractions that come with electioneering and transition periods.”

Paying such huge sums for petrol subsidies is bad economics for Nigeria because every year, the government runs huge budget deficits that could have been avoided if money budgeted for oil subsidies were allocated to other critical projects.

Subsidies should be used to spur investment in activities that raise the productive capacities of an economy (such as education, health, entrepreneurship, and infrastructure). They should be targeted at strategic sectors of the economy. They should not be used to finance non-durable consumption items like petrol.