Tax exemption keeps Nigeria’s petrol price lower than African peers

An analysis of the petrol prices in Africa indicates that at the current rate of N617 per litre, the only difference between petrol prices in Nigeria and its neigbhouring countries is the absence of taxes on the product.

Currently, Nigeria does not charge taxes for petrol. There is no import duty on the product after it is shipped into the country and Value Added Tax is not charged on the commodity when it is sold at the pump.

The price simply represents the landing cost of the product, with the cost of crude oil and exchange rate being the key variables determining price movements. Therefore, to sell at any price lower than currently posted by the Nigerian National Petroleum Company Limited (NNPCL) and other marketers will imply returning to a subsidy regime.

A comparison of the petrol prices across Africa using N772/$1, the exchange rate at the investors and exporters window where dollars are accessed, petrol will sell for N872 in Ghana, N858 in Benin, N925 in Togo and N967 in Cameroon.

This is why oil marketers under the aegis of the Major Oil Marketers Association of Nigeria (MOMAN) restate that the current pump price of petrol accurately reflects current economic realities in a liberalised market.

How NNPCL arrived at N600/litre

On Wednesday, Nigerians groaned across filling stations as NNPCL sold petrol for N565 in Lagos, while some other stations sold higher. Prior to the increase, they sold at N484 to N488. In Lagos, NNPCL sold the product for Read also: Households in pains as petrol prices jump

“The international price of crude oil and the exchange rate constitute the largest components of the cost build-up for Premium Motor Spirit (PMS), accounting for over 80 percent,” Olumide Adeosun, chair of MOMAN told journalists on Wednesday.

“The remaining 20 percent includes statutory dues, distribution costs, and margins,” Adeosun said.

An exclusive petroleum pricing template seen by BusinessDay showed the latest cost of bringing a litre of petrol to Nigeria’s shores based on 38KT vessel, which includes the cost of the product, freight, insurance, govt charges, and storage, stood at N529, using an exchange rate of N825/$.

Once the petrol arrives in Lagos, the price increases to N589 due to additional costs such as depot throughout (N8), local transport (N6), station margins (N20), and Nigerian Midstream and Downstream Petroleum Regulatory Authority (N5).

Adeosun said Nigeria’s move to float the naira was one of the major reasons why petrol prices have risen to over N600 per litre.

“As of today, the liquid exchange rate is close to N825 to the dollar. This devaluation adds N100 to the cost of importing a single litre of PMS into the country. Consequently, an increase in the pump prices of petrol should be expected,” Adeosun said.

BusinessDay had earlier reported that the eventual exchange rate would determine petrol prices at the pump as Nigeria’s lack of refining capacity means it imports all the petroleum products it uses locally.

“Deregulation promises a transparent and level playing field where cost-reflective prices are evident at fuel stations,” Adeosun added.

Adeosun noted that market liberalisation and the commitment to a level playing field should enhance operators’ efficiency, enabling them to offer competitive pricing choices to the public.

“Some operators have successfully imported PMS into the country, marking the first practical step towards a liberalised market. However, the major challenges still lie in accessing foreign exchange for imports and ensuring a level playing field regarding pump prices,” Adeosun said.

He added, “If marketers are undertaking the financial risk of importing petrol, measures must be in place, in line with the Petroleum Industry Act, to ensure that no one player has an unfair advantage.”

To cushion the effects of new economic realities, MOMAN urged the federal government to engage in the timely, transparent, and visible provision of subsidised transportation to cushion the harsh impacts of subsidy removal.

“The gains from subsidy removal should be invested in the promised palliatives, including subsidized transportation, as well as social investment programs for healthcare, education, and infrastructure development (such as roads, railways, and power),” Adeosun said.

The subsidy, introduced in the 1970s, had kept fuel prices cheap for decades but had become increasingly expensive, costing the government $10 billion last year.

“Subsidy” became a national buzzword in 2012 when the then-President Goodluck Jonathan announced its removal. Petrol prices increased from N65 to N140 per litre and triggered almost two weeks of protests, known as ‘Occupy Nigeria’, causing the government to reverse the decision.

Since ending the subsidy this year, 56 private firms have been licensed to import petrol, and 10 of them are due to start deliveries in the third quarter. The NNPCL had previously been the sole importer of petrol using crude swap contracts.

“Out of these 10, three of them have already landed cargoes, … and others are also indicating interest to import in August and September,” Farouk Ahmed, head of the NMDPRA, said on Monday.

Nigeria imports almost all its refined fuel due to inadequate refining capacity and neglect of existing refineries.

In June, the average daily petrol consumption fell to 48.43 million litres (13 million gallons), down from a daily average of 66.9 million litres in January through May before the subsidy was removed, according to figures from the NMDPRA.

Many analysts and experts, including those of the World Bank, have repeatedly warned the Nigerian government to remove costly petrol subsidies that haemorrhaged government expenditure.

President Bola Tinubu, on day one, said the subsidy was gone, sending the market into a tailspin as prices more than doubled overnight. Since then, many Nigerians have been demanding palliatives and government programmes to cushion the impact.

However, there are concerns that unless properly managed, Nigeria could substitute fuel subsidy with other costly programmes that would have little impact on the people.

With petrol subsidy removed, marketers are being forced to compete on cutting costs and improving efficiency in their operation as demand for petrol declines following the 15 percent hike in prices.