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Nigeria's leading finance and market intelligence news report.

The ugly face of Nigeria’s expensive subsidy regime

In March 2020, the Nigerian government announced the removal of subsidies on petroleum products after seemingly realising the practice was a drain on the nation’s coffers.

Mele Kyari, the group managing director of the state-owned Nigerian National Petroleum Corporation (NNPC), later in that year claimed that the subsidy on petrol was removed because it was characterised by fraud perpetrated by members of a cabal and was no longer beneficial to the masses, who were the original target beneficiaries.

He had noted that over N10 trillion had been spent on fuel subsidy between 2006 and 2020 without a significant impact on the masses.

“This subsidy that the government has been paying over the years,” he had warned, “is the root of all the atrocities and fraud committed in this country. For example, if you look at it from 2006 till 2020, we have spent over N10 trillion on fuel subsidies. Apart from that, there is also a subsidy on foreign currencies, everybody knows how much is dollar in the market, but the government is also subsidising it. So, this and the fuel subsidy, within this period, have gulped between N14 trillion and N15 trillion.

Indeed fuel subsidy deprives the nation of funds needed for critical socio-economic development. For example, the N10 trillion consumed by the subsidy regime is sufficient to provide 27,000 megawatts (MW) of solar-powered electricity for stable power supply, according to civic organisation BudgIT.

“If truly President Buhari is fighting poverty, he should remove the risk on the national financial sector and stop the subsidy regime, which is fraudulent,” said former CBN governor, Sanusi Lamido Sanusi, in 2019

According to the World Bank, petrol subsidy incapacitated the country’s ability to save for the rainy day, occasioned by falling crude oil prices in the international market.

The bank, in its Nigeria Economic Report No. 3, warned that “the fiscal cost of the fuel subsidy is very high, reaching an estimated $35billion during 2010–2014. Moreover, annual costs are increasing over time due to rising fuel demand and the depreciation of the naira.

“In recent years, numerous audits and reports have identified widespread corruption and fraud in the administration of the petrol subsidy, and official petrol imports have substantially exceeded actual consumption. Attempts by the government to crackdown on fraud and delay payment of the subsidy have commonly met with severe petrol shortages in the country that also impose high economic and welfare costs on Nigerians.

“The $35billion cost of the petrol subsidy during 2010–2014 was a primary reason why Nigeria was unable to accumulate a fiscal reserve in the excess crude account that could have protected the country from the recent oil price shock”.

 

IMF’s managing director, Christine Lagarde, had also warned that subsidy spending was infringing on other critical areas of capital development, hence the need for the government to refocus. The IMF chief said it was the monetary institution’s general principle to discourage fossil fuel subsidy because of its consequences on other areas of life and development.

According to her, as far as Nigeria is concerned, with the low revenue mobilisation that exists in the country; in terms of tax to gross domestic product (GDP), Nigeria is amongst the lowest. “A real effort has to be done in order to maintain a good public finance situation for the country and in order to direct investment towards health, education, and infrastructural development.”

Highlighting some of the negative impacts of fuel subsidy, Lagarde said: “If you look at our numbers from 2015, it is no less than about $5.2 trillion that are spent on fuel subsidies and the consequences thereof. And the Fiscal Affairs Department has actually identified how much would have been saved fiscally but also in terms of human life, if there had been the right price on carbon emission as of 2015. Numbers are quite staggering.

Read Also: More pain for Nigeria as petrol subsidy consumes N608bn

“If that was to happen, then there would be more public spending available to build hospitals, to build roads, to build schools, and to support education and health for the people”.

Despite the right noises coming from the NNPC and the Nigerian government about the removal of subsidies on petroleum products, the wasteful practice would later return and could now easily gulp N3 trillion by year-end at its current run rate.

The Federal Government has abandoned its pledge to jettison the practice and even went ahead to budget N900 billion for subsidies in its 2022 budget.

This time, however, by continuing with the subsidy, the government isn’t only reneging on a promise made but also breaking a law it enacted- the Petroleum Industry Act (PIA).

 

The PIA removed price control in section 205 of the law. The provisions of S205 (1) explicitly states that “Subject to the provisions of this Section, from the effective date, wholesale and retail prices of petroleum products shall be based on unrestricted free-market pricing conditions.”

By insisting on apportioning a colossal 900 billion NGN to subsidise petroleum products in 2022, the Federal Government and the NNPC have clearly, yet deliberately chosen to breach the provisions of the law of the land.

Shakede Dimowo, managing partner at Dimowo & Co LC, called the federal government’s decision “a grave compliance problem”. The Nigerian government and the NNPC, he said, “by insisting on going ahead with the decision to subsidise petroleum products despite the clear provisions stated in section 205(1), have chosen not to comply with the law. It is a breach of the law”.

Tony Arinze-Anu, an Abuja-based lawyer agrees that the continuation of subsidies by the federal government is at variance with the provisions of the act. “My understanding of sub-section 1 is that anybody can bring in petroleum products and set his or her price”. He added that what is equally worrisome, “is sub-section 8 and 9 of section 317 of the Act”.

While S317(8) makes a call for backward integration policy in the downstream sector to encourage local investments, S317(9) posits that “licence to import any product shortfalls may be assigned to companies with active local refining licences or proven track records of international crude oil and petroleum products trading”.

Tony Arinze-Anu finds the provisions of S317 in conflict with that of S205(1), as according to him, “you cannot in one breadth allow for competition and free-market interplay and on the other hand determine by exclusion who can import or not import petroleum products. What happens to the free market?”

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