Resolving Nigeria’s petroleum product subsidy conundrum

Centre For Petroleum Information

Like a recurring rash, the issue would not go away. Not even a change of government would make it go. After a respite, no sooner was Dr Emmanuel Kachikwu confirmed the Minister of State for Petroleum, did the queues at fuel stations return and grow longer. The petroleum product marketers have been undeterred by threats.

There appears to be as many proponents as opponents of the removal of petroleum product subsidy. To be certain the amounts in question are staggering: $2.0bn a year. There is a supplementary budget for 2016 for subsidy of the equivalent of $2.9bn. For a haemorrhaging economy, that is a lot. The Nigerian government has inherited a classic Catch-22 situation: whichever way it is handled, there is a problem.

To put it in historical perspective, when petrol pump price was in January 2012 raised from N65/litre to NgnN141/litre – triggering nationwide protest – crude oil per barrel price, as measured by Brent, was $111. A concessionary NgnN97/litre was granted, which lasted till January 2015 when it was revised down to NgnN87/litre.

Analysts believe that, but for the current structure of the PPPRA template used as the basis for computing ‘subsidy,’ Nigerians, like the rest of the world, ought to be paying some 25 per cent less than the current NgnN87/litre pump price currently charged. The template needs updating, if not audit, in line with current market realities.

The argument has always been that Nigeria should fix its refineries so that it does not need to sell crude to buy petroleum products. However, prolonged deferred-turnaround maintenance TAM) has ensured that bringing them to more than Dr. Kachikwu’s targeted 60 per cent would prove costly. The product produced from expensively maintained refineries may or may not prove competitive against imported products.

The PPPRA price-template at the end of November puts the C&F value of imported petroleum at NgnN70.52/litre. Consider that, it is at exchange rate of NgnN200 to a US dollar. The chances are that further devaluation, imminent in 2016, would make this number even higher. That is not helpful from a sullen consumer perspective.

The governor of the Central Bank of Nigeria (CBN), Godwin Emiefiele said “Nigeria lost N256bn in October 2015 alone.”

That is a stupendous sum to lose to sliding oil price. The more Nigeria loses the higher the subsidy it pays out as the naira weakens against international currencies. So, there is no end to the vicious cycle.

Petroleum product subsidy will remain a mirage: The nearer you get to it, the farther it becomes. As the nation gets poorer, the size of the conundrum increases. For fairness, a more crude-oil price reflective pump price is what is required. The principles driving ‘subsidy’ need to be reviewed. Nigeria must not reinvent the wheel. Follow the principles of leading countries. For example, include a percentage as fuel tax in the template, which helps government revenue than enrich importers.

The compromise might be to make a strong case for a ‘phased subsidy’ after a review of the principles and templates on which the existing subsidy regime is hinged. Flawed aspects must be corrected.

Honestly, there cannot be a better time for subsidy phase-out or removal than when crude oil prices are at a relatively low level. The proportion of subsidy payments in relation to the size of the budget is unhealthy and clearly unsustainable. The authorities should see the ongoing trends as opportunities and resolve the subsidy conundrum in favour of Nigeria’s teeming long-suffering consumers.

The above piece was first published by Centre for Petroleum Information (CPI) journal in its current edition and is hereby reproduced by permission as part of the ongoing debate on fuel subsidy