More pain for Nigeria as petrol subsidy consumes N608bn
Nigeria’s insistence to keep petrol prices artificially low is threatening to exacerbate its already precarious economic situation, as the expensive practice consumed N608.8 billion in the first six months of 2021.
Soaring prices of petrol have put Nigeria in a rattrap situation.
The Federal Government is struggling to sustain subsidy payments as crude oil prices continue rising. Brent crude has gone from an average of $54.77 per barrel in January this year to as much as $72 per barrel as of Friday, August 6, 2021.
Although the rising price of crude oil raised Nigeria’s hope of effectively funding its 2021 budget, it also translates to a larger subsidy burden on the Nigerian National Petroleum Corporation (NNPC).
In presentations to the Federation Account and Allocation Committee (FAAC) meetings seen by BusinessDay, the NNPC deducted N608.8 billion from remittance to the Federation Account in the first half of 2021.
This development complicates the ability of the three tiers of government to meet up with their various constitutional obligations.
A further breakdown shows the state-owned corporation spent N25.37 billion on petrol subsidy in January, which increased by 196 percent to N75.13 billion in February.
In March, the petrol subsidy bill increased by 49 percent to N111.97 billion, it thereafter increased by 12 percent to N126.30 billion in April 2021.
According to the NNPC, Nigeria also spent N114.3billion and N170.4 billion on petrol subsidy for the month of May and June 2021, respectively.
“Spending more than half a trillion naira on petrol subsidy in a population suffering high levels of life-threatening hunger is an anomaly. It is a costly way to protect the poor,” a professor of economics and former president of the Nigerian Association for Energy Economics (NAEE), Wummi Iledare, says.
He admits that while the economics has never been more in favour of ditching the costly practice, the politics behind keeping the subsidy is more intense than ever before.
“It is a wrong application of whatever little money we have, the government should be bold enough to get out of this mess and allow deregulation to take its course,” Joe Nwakwue, chairman, Society of Petroleum Engineers (SPE), told BusinessDay.
He noted that every concern Nigerians including labour unions need to understand the opportunity cost of the current lower price of petrol, which is cancerous to the economy.
Experts say the implication of Nigeria’s reckless fuel subsidies means the country prioritises cheap petrol over education, health, defence, agricultural and rural development that would have increased the economic growth or standard of living of its over 200 million people.
For Mike Osatuyi, national operations controller, Independent Petroleum Marketers Association of Nigeria, N600 billion expense on fuel subsidy means Nigeria is financing the economics of other neighbouring countries, saying, “There is no doubt that Nigeria’s present subsidy scheme is currently making smuggling a thriving business.”
Over the years, subsidy payments have continued to rise in Africa’s biggest oil-producing country, not just due to low production, but also as a result of the surge in consumption, especially smuggling.
At a recent stakeholders meeting, Mele Kyari, group managing director of NNPC, disclosed that daily consumption had increased from 60 million litres to 103 million litres, with the so-called under-recovery now hovering between N140 billion and N150 billion as of June 2021.
“As long as we don’t regulate volume until we are able to exit this current level, which I know so much work is going on, then we have to manage the volume that we are exposed to between this price of N162 and N256,” Kyari noted.
With most forecasts predicting a $75 to $80 oil price in the second half of 2021, analysts expect Nigeria’s cost of subsidising petrol to hit more than one trillion naira as the country continues to grapple with fiscal deficits and rising debt levels.
“Deregulating the downstream sector is always a challenge in a country where the subsidy on petrol prices is seen as the only source of social security,” CSL Stockbrokers Limited, a subsidiary of FCMB Group plc states in a research note.
Although Nigeria currently produces about 1.5 million barrels of crude per day, it has an almost zero refining capacity and imports roughly 100 percent of its fuel for local consumption, negating much of the benefits oil-producing nations across the world get from high crude prices.
A plunge in the price of the commodity last year sent the country’s oil-dependent economy reeling into a recession from which it recently barely exited, while a rally has since pushed the oil price past the $70 mark.
But instead of reaping the benefits, Nigeria’s subsidy bill, borne by the NNPC, has surged beyond N100 billion, with the national oil company being unable to remit monies to the FAAC for four consecutive months.
The country now sits on a double-edged sword as “under-recovery” cost, the difference between what the government pays to import fuel and how much it sells the fuel for continues to wipe out the gains of the resurgence in the international price of the commodity.
On one hand, Nigeria is earning the much-needed foreign exchange but is also bearing increased importation costs for petroleum products and by extension the landing cost.