Nigeria, credited to be Africa’s most populous nation and natural resource hub, is also a net consumer of energy. But financing the energy needs of over 200 million people simultaneously does not come in any cheap way.
According to the Department of Petroleum Resources, Premium Motor Spirit (PMS) or petrol, a significant energy source widely used in Nigeria by households and business firms, is estimated to see a daily national demand of 38.2 million litres (DPR). This is a February 2020 estimate.
Achieving a success story on the way to full deregulation of Nigeria’s energy sector will necessitate a smooth, people-centred subsidy removal programme similar to Iran’s experience.
Nigeria and the subsidy rigmarole
Maintaining a reasonably stable supply of PMS in the country has been at a huge national cost to the government, and it is feared that the subsidy support may soon end in the coming months. For decades, Nigeria has applied fuel subsidies to ease the price pressure on final consumers by playing the beast of burden to the nation’s credit.
By 2011, the Nigerian authorities had serviced the nation in subsidy payments to the tune of $8.4 billion, equivalent to 4.1 per cent of GDP and $6.88 billion more than the nationally allocated sum as contained in the appropriation bill.
That same year 2011, just before President Goodluck Jonathan tried to halt the subsidy programme, global crude oil prices peaked at a 5-year all-time high, with an average open market price of $0.87 per litre. Subsidy expenses per litre of PMS were at $0.46, costing the government over $13 billion in 2011 alone.
Something had to be done to ease this fiscal bloat.
In January 2012, the government attempted to terminate the 30-year-old subsidy regime to allow for a freely deregulated energy sector, but Nigerians could not have it; a two-week massive protest ensued. The government had to reverse its intentions partially.
In May 2016, the pump price of petrol jumped from N87 per litre to N145 per litre. This sudden price change signalled the commencement of a full deregulation era, but this was not the case.
The free fall in the value of the naira and the peaked price of crude oil in the international market widened the gap between the landing cost and the market value of petrol; the government had no choice but to close the gap through subsidy intervention.
By September 2020, the Minister of State for Petroleum Resources, Timipre Sylva, announced the government’s intention to halt the regulation of petroleum pricing in the country. He noted that it was time to allow market forces and crude oil prices to determine pump prices.
However, it is noticed that the landing cost of PMS relative to the market price of fuel continues to diverge, and the difference is still being financed. This observation shows that the subsidy programme is still in play, different from what the Minister of State for Petroleum Resources initially proclaimed.
As of early March 2021, the landing cost of PMS is reported to be N190 per litre, while the market price falls between N165 and N170 per litre. However, the Nigerian National Petroleum Corporation (NNPC) managing director, Mele Kyari, has warned that the 2021 budget has no provision for fuel subsidy.
In contrast with Kyari’s announcement, further reports have emerged, stating the government’s unpreparedness to cancel the subsidy programme. According to reports, the federal government plans to spend N720 billion on petroleum subsidies for the next six months.
“…specifically, President Buhari has asked the Nigeria National Petroleum Corporation (NNPC) to suspend any idea on subsidy removal for five to six months so that a plan that does not harm ordinary Nigerians is evolved if the deregulation must go on” a government source disclosed.
However, a contrasting statement made by the finance minister, Zinab Ahmed, in January 2021 on this issue throws more confusion into the air about the government’s actual stance on deregulation.
“We are not bringing back fuel subsidies. We didn’t make a provision for fuel subsidy in the budget. The impact of what was done was reducing some of the cost components that were within the template. And also related to it, on matters of electricity subsidies, no provisions have been made for subsidy for fuel and no provisions have been made for subsidy for electricity,” finance minister, Zainab Ahmed disclosed.
As of now, it is unclear what the government wants to do about the subsidy programme. Some experts believe that removing subsidies will further hurt the nation, especially since the country is still trying to recover from the after-effects of covid-19 and high inflation and unemployment rates combined.
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