• Thursday, December 07, 2023
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Three-year anniversary of subsidy strikes revisits need to eliminate subsidy

Removing fuel subsidies: Costs, benefits, and next steps

With the plunging price of oil and the resultant thinning out of the subsidy margin, Nigeria’s economic managers may have found the perfect alibi on this controversial issue of fuel subsidy writes Akin-Olusoji AKINYELE

Three years after the notable January 2012 strikes over the attempt by the Federal Government to fully remove the oil price subsidy, Nigeria’s economic managers are faced with a queer scenario where the oil subsidy margin seems to be self-effacing.

In 2012, the pump price of petrol was eventually pegged at N97 per litre, compared to an estimated open market price (without subsidy) of N141 per litre and international crude oil prices north of US$100 per barrel at the time.

Unprecedented subsidy payments of N1.4 trillion in 2011 alone, was one of the reasons for the government’s 2012 announcement, the Federal Ministry of Finance reports on its website.

Given attempts to transparently verify and thereby reduce the subsidy claims afterwards, payments to independent oil markets amounted to about N2.5 trillion in 2012, N1.3 trillion in 2013, and N502 billion (out of a N971 billion approved budget figure) so far in 2014.

“This is a burden too heavy to bear” Senator Adamu Aliero, Chairman of the National Conference Committee on Public Finance and Revenue is quoted to have said, referring to the subsidy bills while defending his committee’s recommendation for the total removal in June 2014.

Today, crude oil prices have plunged below US$50 per barrel and as a result, the estimated open market price of the refined product in Nigeria has dropped to N97.90, according to the latest pricing template from the Petroleum Products Pricing Regulatory Authority (PPPRA). The implied subsidy margin has therefore shrunk significantly to N0.90 per litre versus N44.00 previously.

Read also: FG slashes 2015 fuel subsidy by 90 per cent following oil price slide

Even at a N0.90 subsidy margin, the total subsidy bill in 2015 could cost an estimated N200 billion, going by the explanations of the Director-General of the Budget Office of the Federation, Dr. Bright Okogu during a public presentation of the analysis of the 2015 budget earlier in December 2014.

These estimates could easily swell by more than threefold to about N669 billion, if the outstanding subsidy amount in the 2014 approved budget sum (i.e., N469 billion) suddenly becomes due.

This is a huge cost to the nation and is coming at a time when, according to the IMF, “Nigeria, like other oil-exporting countries, is facing a sharp fall in the price of oil (a primary source of foreign exchange and fiscal revenue) and increased risk aversion by international investors, who remain uncertain about the future of oil prices.”

Moreover, it would appear that the actual subsidy beneficiaries are no longer the teeming mass of Nigerians who require petrol for daily fuelling, from cars to power generators.

Despite the subsidized pump price of N97 per litre, 57 percent of Nigerians still bought petrol above N97 per litre between January and March 2013, according to a 2013 survey conducted by Nigerian polling and research organization NOI Polls, and reported by BusinessDay. By the first quarter of 2014, BusinessDay gathered from a similar NOI Polls survey that the tally had risen to 78 percent of Nigerians who purchased petrol above N97.

With the outlook for oil prices hovering around $50 per barrel in 2015 and the resultant thinning out of the subsidy margin, Nigeria’s economic managers may have found the perfect alibi on this controversial issue – especially considering the implications for votes in the forthcoming general elections in February, if they deliberately pulled the subsidy plug.