Here’s why petrol subsidy is not sustainable

The Nigerian National Petroleum Corporation (NNPC) is bending over backwards to reassure Nigerians that it has an adequate supply of products as queues return and prices climb to N170 in some retail outlets in Lagos.

The NNPC stocks up on petroleum products often maintaining about 90-day sufficiency, but as oil prices look to go higher, it will increasingly have to tap into its reserve to keep the market wet. This will bring home the reality of rising crude oil prices.

Analysis indicates that petrol prices will continue to follow the oil price. Crude oil, the critical feedstock needed to refine into petroleum products, is bought by refineries at the international market price and after adding refining costs, it mirrors the direction of oil prices.

Nigeria’s subsidy bill 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 could be approaching N2 billion daily based on the petrol pricing template of the Petroleum Products Pricing Regulatory Agency (PPPRA).

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Nigeria’s debt situation puts it in a difficult position to continue to fund subsidies. Public debt, including the Central Bank overdrafts, as a proportion of gross domestic product, rose to 34.4 percent in 2020 from 29.1 percent in 2019, according to IMF data.

The lender forecasts the debt-to-GDP ratio will remain largely unchanged until 2023 when it will rise to 35.5 percent of GDP. This puts the economy in a precarious position and makes plans to continue funding over N2 billion daily subsidy untenable.

Petrol subsidy will also make it difficult to maximise oil revenue. Zainab Ahmed, Nigeria’s minister of finance, budget and national planning, said the government was targeting to grow income earned as a fraction of total economic output – revenue as a percentage of GDP – to 15 percent by 2023.

A 15-percent revenue-to-GDP of that size would mean Africa’s most populous nation would need to rake in over N22.7 trillion gross revenue in 2023 alone, according to BusinessDay analysis of data.

“But subsidy will hurt government finances,” said Gbolahan Ologunro, senior research analyst at Cordros Securities.

Ologunro said the fact that current revenue is unable to accommodate recurrent and capital expenditure means the Federal Government has to bridge the resultant deficit with borrowing.

Due to petrol subsidy, Nigeria is losing the opportunity to maximise oil revenues due to high levels of recurrent expenditure.

“Debt service is also high which is also a fallout of weak revenue,” Ologunro said.

At less than 10 percent, Nigeria’s revenue-to-GDP ratio is one of the lowest on the continent and pales into insignificance in comparison to South Africa’s 29 percent and Algeria’s 33 percent.

Petrol subsidy will negatively impact Nigeria’s plan to spend more on infrastructure. Nigeria is making another push for a major public-private initiative aimed at rebuilding its derelict infrastructure and generating badly-needed jobs in Africa’s largest economy through InfraCo.

The company has been seeded with N1trn in equity capital to give it a good chance of success. The government said the initiative has been approved by President Muhammadu Buhari who had asked his vice president to lead the steering committee.

It hopes to capitalise on private capital to deepen infrastructure in the country. But this cannot be achieved by burning billions of naira daily subsidising petrol.

The Federal Government has said it is not paying subsidy and did not make provision for it in the 2021 budget, but the national oil company, the NNPC, could be quietly picking the tab which will still impact how much returns it makes.

Omotola Abimbola, a macro and fixed-income analyst at Lagos-based Chapel Hill Denham, said it would take ‘political will’ to stop the subsidy.

“It is not going to be very easy. It is a very sensitive topic for the public and you need a very strong political will to make sure that it goes away,” Abimbola said.