Economic case mounts for fuel subsidy removal

The economic case for the removal of Nigeria’s fuel subsidy regime is mounting by the day even though the present administration seems undecided on how to proceed.

The transition committee of the new APC administration recommended fuel price deregulation and the privatization of the four NNPC refineries.

The wish of the committee, which was appointed by the APC ahead of the handover by the outgoing administration, has however not been granted despite the latest fall in the crude price.

The official Petroleum Products Pricing Regulatory Agency shows the cost of imported premium motor spirit (PMS, or petrol) at N115.54 per litre (l) as at 03 September: this is made up of the product plus freight at N88.70, other charges at landing of N11.35 and distributors’ margins of N15.49. The retail price is set at N87/l, which implies a subsidy per litre of N28.54 and a fiscal cost of N312bn per year (on the basis of the agency’s template for the one day).

The retail price stood at N97/l from January 2012 until the N10/l reduction announced by the previous government during the election campaign.

The annual cost of the subsidy peaked at N2.2trn in 2011 before the last attempt to remove the subsidies. In the 2014 budget it was projected at N970bn.

Several proposals for the construction of greenfield refineries from international and Nigerian investors have been submitted. The best known is the Dangote Group’s plan for a huge refinery and petrochemicals complex in Lagos State.

“We would not expect these projects to come to fruition without deregulation,” say FBN Capital analysts led by Gregory Kronsten in a September 09 note.

“The failure to date to take up the transition committee’s recommendation could be based on a lingering feeling that the subsidies are somehow pro-poor.”

The National bureau of Statistics (NBS) PMS price watch shows that the average costs to the household per litre of PMS in each state in July range from N90 to N100 for ten states, N100 to N110 for 16, N110 to N120 for eight and above N120 for three.

“For many reasons the retail price is elusive for most Nigerians. We struggle to see how they would do any worse from the introduction of some competition,” Kronsten said.

 

PATRICK ATUANYA