Case for petroleum subsidy removal in Nigeria (1)

For quite some time now, the issue of subsidy on petroleum products in the country has elicited both concerns and emotional reactions, especially as the concept had been misused/abused and the government kept removing or reducing “subsidy” in perpetuity. Organised labour and concerned individuals including this writer had argued for continued subsidization of petroleum product prices, for the key reason that as Nigeria is a major oil-exporting country, its citizens and economic agents should not pay market prices for petroleum products. Besides, subsidy, if well administered and targeted, can be a good tool for improving welfare, especially of the low-income groups. But the problem is that subsidy on petroleum products in Nigeria is not targeted. It applies to both the rich and poor consumers. And very importantly, the gross inefficiency and corruption in subsidy administration coupled with the current difficult economic situation of the country makes it imperative for us to take another look at the continued retention of subsidy on petroleum products.

Is there subsidy on petroleum products?

In the past, most citizens did not even believe that the government subsidised petroleum product prices. Only recently, the newspapers reported the opposition of the Nigerian Labour Congress and Trade Union Congress to subsidy removal. The joint chairman, 2015 May Day Committee of NLC and TUC was reported to have said that “NLC does not believe government pays any subsidy on petroleum products” and that labour would not accept any increase in the price of petroleum products. He continued that “it is better for the in-coming administration to go and look for money elsewhere”. This position is to some extent understandable and is borne out of legitimate lack of trust for the government. The behaviour and conduct of the past governments eroded the confidence and trust of the citizens to the point of perpetual scepticism. But then, if the organized labour does not believe that government pays subsidy on petroleum products, yet billions/trillions of naira is claimed to be paid on subsidy annually, then this strengthens the case for zero-budget on subsidy to eliminate that channel of looting of public funds. Also, the suggestion that the in-coming government should look for funds elsewhere is not helpful. Most other sources, for example, more borrowing and printing of money, have serious downsides such as hyper-inflation that may accompany the printing of money.

Does the government pay subsidy on petroleum products? The answer is yes and no. The sources of supply of refined petroleum products to the economy are the nation’s refineries (less than 20 percent) and imports (more than 80 percent). Although the government dedicates 445,000 barrels of crude oil to domestic refining and consumption, because of mismanagement, the four local refineries have perennially experienced very low or zero capacity utilization with a large quantity of the dedicated crude oil being exported by the NNPC which then imports refined fuel! Even though the average cost of producing a barrel of oil is less than $20, the government sells a barrel of crude oil to the refineries at international prices, hence refined products attract subsidies just like imports. Thus, the government pays subsidy to itself. But for this sale of crude oil at international prices to the local refineries, the issue of subsidy would not arise. And so, talking about subsidy on domestically-refined petroleum products is meaningless. It is improper in the first place for government to sell crude oil to its refineries at international prices. This is one of the disincentives to development of private refineries in the country.

On imported refined petroleum products, there is subsidy payment to the extent that the actual cost of importing a litre of fuel is higher than the government’s fixed pump price. The difference is paid as subsidy to the importers. But the problem is that subsidy on petroleum products in the country has for a long time been administered opaquely, inefficiently and fraudulently resulting in massive corruption and waste of scarce public resources.

Why subsidy should be removed

It is well known how in the past subsidy was paid to importers for fictitious imports. Subsidy on petroleum products had become one of the effortless avenues for privileged people and companies to corruptly appropriate the nation’s resources while the consumers are worse off. Even with the payment of subsidies, scarcities are artificially created and consumers pay pump prices for fuel that are far more than the regulated price. In the past weeks in most parts of the country, consumers have had to pay N100 or above for a litre of petrol. Yet, the oil marketers are claiming billions of naira in subsidy payment from the government.

Importantly, the subsidy payment has become excessive and unsustainable. Recent indications from the Petroleum Product Pricing and Regulatory Agency (PPPRA), as at April ending, were that the country’s subsidy on a litre of fuel stood at N41.96 compared to N15.82 in February. The amount of subsidy payment has tended to be influenced by the international price of crude oil, the prevailing exchange rate and even interest rate. Any late subsidy payment by the government attracts payment of interest to the marketers! As the country consumes about 40 million litres of fuel per day, the burden of subsidy payment has increased to about N1.6 billion per day. Should the price of crude oil increase appreciably in the world market, then the daily subsidy payment would also increase substantially, amounting to over a trillion naira annually. This is a huge amount of money which the country can no longer continue to throw to fat cats under the present circumstances. There is need to stop this payment and free resources for capital projects and programmes aimed at the development of the Nigerian economy. It can even be dedicated to electricity development under the in-coming government.

Even now, the out-going government is having a running battle with the members of the Major Oil Marketers Association of Nigeria (MOMAN) over non-payment of subsidy claims. And because of this, the nation has, for many weeks, been held to ransom by the marketers by not supplying enough fuel to the retail stations. Long queues have returned to the petrol stations and outrageous prices are being charged per litre of fuel. MOMAN in its advertorial in the Guardian newspaper of April 30 indicated that as at that date the marketers had only received about N37 billion in foreign exchange differential claims out of the N195 billion owed. In the same vein, the government owes them about N256 billion in core subsidy claims, thus bringing the total subsidy indebtedness of the government to over N400 billion. But the government does not seem to believe that it owes as much. And so, the affair continues in a ding dong manner.

Mike I. Obadan