UPDATED Explainer: No subsidy in 2021 budget, who is paying for it?

Media reports indicating that subsidy is back on account of rising oil prices has sent the landing cost of petrol above the pump price and has been met with scepticism by many Nigerians.

For many, their doubt is based on the absence of any official acknowledgement that the government is paying subsidy. Since this is an issue that affects everyone in some way, clarity is needed.

What is a subsidy?

A subsidy is a benefit given to an individual, business, or institution, usually by the government. It can be through cash payment or tax reduction/exemption. It removes a burden and generally given in the interest of the public.

Fuel subsidy occurs when the government pays the difference between the landing cost of petrol and the price at the pump.

Fuel subsidy benefits every Nigerian who buys petrol at a filling station. Since rich people own more cars and bigger generators, and more of them live in Lagos (which represents 40percent of Nigeria’s GDP) and many others live in Abuja, they benefit more from the subsidy.

You in Afikpo, without a generator or a car to your name, if you board a bus where the driver bought petrol at N250 a litre in the local filling station, may not be benefiting.

Nigeria’s neighbouring countries especially the Benin Republic benefits too. Since a litre of fuel is sold for above N300 a litre in petrol stations, black market operators buy smuggled petrol from Nigeria and sell in Cotonou for about N250 a litre. It is believed that as much 30m litres leave Nigeria’s porous borders daily.

The Nigerian government pays this subsidy because it does not refine its own crude oil. Oil companies including the NNPC produce over 1.5million barrels of oil daily and the NNPC gets at least 445,000 as government share.

Since its refineries have become as useless as a toilet paper inside a stream, it sends the crude oil to refineries in Europe and pays them by swapping the crude for refined products at the prevailing oil price.

The Petroleum Products Pricing Regulatory Agency (PPPRA) fixes the depot price based on a template and afterwards, marketers set prices at the pump. This is how the Nigerian government understands deregulation.

In September, crude oil sold for $40.19 a barrel and when all the other component of pricing each litre of crude was added – including freight charges, port dues and taxes – PPPRA raised petrol price from N125 per litre to N151.56. So marketers began selling petrol between N160 and N165 in major cities.

How the subsidy is paid?

Now the price of crude oil in the international market has risen to over $60 per barrel, therefore when the other pricing components on the pricing template are added, the pump price of petrol should be around N185 – N190 a litre.

However, petrol still sells at N160/N165 this means that the NNPC is paying the difference of N30/N35 on each litre.

NNPC in the past books this cost as under-recovery – which simply means a notional loss in revenue to the extent the international price of the fuel is higher.

The Federal Government insistence that subsidy has been removed is simply because NAPIMS, a subsidiary of NNPC is no longer allowed to deduct under-recovery from FAAC remittances.

This means that the NNPC or the Federal Government alone is bearing this cost. The impact is that it will reduce NNPC dividends at the end of the year.

How it affects you

On Monday, BusinessDay reported that the subsidy bill has now climbed to N1.8bn daily at an international oil price of $57 a barrel and at an official exchange rate of N380. At over $60 a barrel, it is could be approaching N2billion daily.

This is why some oil marketers say the pump price of petrol in Nigeria today should be north of N190 a litre and not the current pump price of N160 in the country.

Nigeria is looking to borrow about N5 trillion to balance its federal budget, it makes no economic sense to burn billions daily to fund the fuel subsidy.

Worse still, it deprives the Federal government of critical revenues required to fund healthcare, infrastructure and pay workers.

Labour leaders argue that due to the government’s inability to fix the refineries, it will not allow a market rate for petrol. This argument is inane because previous efforts to fix the refineries have failed and counsel to sell them has been sabotaged by this same labour movement.

The refineries have become so inutile that their only value is the real estate they sit on.