Ending Petrol Subsidy, Price Capping, a Brave Way out

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The federal government has finally decided to take on the scandalous long fraught petroleum product subsidisation by doing away with price modulation. A courageous decision no doubt. It has, however, been late in coming. Nosa James-Igbinadolor reports

After years of indecision and political cowardice by varied Nigerian administrations, the Buhari government has finally decided to be brave and take the only rational way out of the pricing quandary that has dogged the Nigerian petroleum industry since the 1970s.

On Thursday, the federal government proceeded with the full deregulation of the downstream petroleum sector with the removal of the existing cap on petrol price, urging marketers to import and sell the product, according to the dynamics of the forces of demand and supply, thus allowing petrol marketers to import the product and sell at prevailing market prices, without the usual price band set by the concerned regulatory agency.

The Petroleum Products Pricing Regulatory Agency (PPPRA), the organisation tasked with the pricing policy of petroleum products noted that henceforth prices would be fully determined by market forces with the agency only continuing to monitor trends in the crude oil market and advise the Nigerian National Petroleum Corporation (NNPC) and oil marketers accordingly.

The Executive Secretary of the agency, Abdulkadir Saidu, noted that, “In exercise of the powers conferred on it by Section 7 and 24 of the Petroleum Products Pricing Regulatory Agency (Establishment) Act. No. 8 of 2003, and all other powers enabling it in that behalf, the Petroleum Product Pricing Regulatory Agency, with the approval of the President hereby states the following:

“Market-based pricing regime for premium motor spirit (PMS) using the pricing template of the Petroleum Products Pricing Regulatory Agency:

“The price cap per litre in respect of Premium Motor Spirit (PMS) is removed from the commencement of these regulations.

“From the commencement of these regulations, a market-based pricing regime for Premium Motor Spirit (PMS) shall take effect. The agency shall monitor market trends and advise the NNPC and oil marketing companies on the monthly guiding market-based price.”

Even though Nigeria is a major oil producer, it imports 91 per cent of its daily petrol needs, leaving local prices exposed to shocks from exchange rate fluctuations.

Making the right economic decision in Nigeria is never easy. It might be easy anywhere else, but not in Nigeria. In a country where public policy decisions are deliberately skewed and subjected to base political machinations, the decision of the federal government to bow to simple economic logic and voices of reason to finally do away with the subsidisation of petroleum products allows for among others, freeing billions of dollars hitherto spent on subsidising these products to be spent on critical infrastructure needs.

BudgIT, a civic organisation, in a report said the “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.

Former Central Bank Governor and deposed Emir of Kano, Muhammadu Sanusi II had in 2019 urged the Nigerian government to scrap fuel and electricity tariff subsidies in order to stabilise the economy. He noted, “In 2011, when I was CBN governor, Nigeria made $16billion from petroleum sales, and we spent $8billion importing petroleum and spent another $8.2billion subsidising the product… and I asked, is this sustainable?

“The country is bankrupt and we are heading to bankruptcy. What happens is that the Federal Government do pay petroleum subsidy, pays electricity tariff subsidy, and if there is a rise in interest rates, the federal government pays. What is more life-threatening than the subsidy that we have to sacrifice education, health sector and infrastructure for us to have cheap petroleum?

“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,” he added.

IMF’s Managing Director, Mrs. Christine Lagarde, early last year 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 subsidies 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.

“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.

“Now, how this is done is the more complicated path because there has to be a social protection safety net that is in place so that the most exposed in the population do not take the brunt of those removal of subsidies principle. So that is our position.”

Between 2010 and 2014, Nigeria spent a total of N6 trillion ($35 billion 2015 figure) to subsidise petroleum products. According to the World Bank, fuel 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 fuel subsidy, and official petrol imports have substantially exceeded actual consumption. Attempts by the government to crack down on fraud and delay payment of the subsidy have commonly met with severe fuel shortages in the country that also impose high economic and welfare costs on Nigerians.

“The $35billion cost of the fuel 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. Fuel subsidy obligations are expected to reach 18 per cent of all government oil revenues in 2015, and, if the current regulated prices are maintained, this is projected to increase to more than 30 per cent by 2018.”

In 2019, over N780 billion was spent as subsidy, surpassing the N305 billion provision in the 2019 budget. The federal government made a N450 billion provision for fuel subsidy in the 2020 budget.

Product price capping and subsidisation have been very bad for the economy. As noted by the bank, most of the petrol volumes Nigeria spent money to subsidise are inflated as daily consumption rose to 54 million litres per day (ml/d) from 40ml/d in 2017, ostensibly due partly to out-smuggling. Thus, the bank noted, “the calculations for the fuel subsidy are based on heavily inflated fuel consumption estimates, with the fiscally severely constrained Nigerian government effectively subsidising neighbouring countries’ petrol consumption as some of the fuel is informally re-exported through the porous borders.”

PPPRA had disclosed that Nigeria’s daily consumption increased by two million litres to 56 million litres in 2019. This was a 22 per cent surge over 2017 daily consumption of 46 million litres. This increase, according to the report, was largely not in line with “our consumption pattern during the time.”

“There has been a drastic decline in the importation of new cars over the period due to high import duties and levies. Similarly, the increased traction of diesel engine vehicles and other modes of transportation such as air, water and rail, also do not support the supposed rapid growth in daily fuel consumption”, the agency noted

What has likely spurred the decision by the government to jettison the highly corrupt subsidisation programme can be traced to two major factors. The crash in oil prices and the attendant massive reduction of revenue inflow into government coffers has left the Nigerian government with little money to keep the fraudulent subsidisation programme going. The global oil industry has been struggling with both tumbling demand and in-fighting among producers about reducing output.

The Excess Crude Account (ECA), which was created to among others, provide the country some fiscal buffer against external shocks, has virtually been depleted by the government.

In March this year the federal government announced its decision to reduce the N10.59 trillion 2020 budget by N1.5 trillion. As part of the measures to reduce expenditures, it also deregulated the petrol pricing, directing the PPPRA to modulate pricing in accordance with prevailing market dynamics.

In addition, with the Dangote refinery expected to come on stream in H1 2021, the continuing subsidisation and its attendant price cap is a threat to the capacity of the refinery to provide Nigeria with its petroleum product needs. When the refinery eventually becomes operational, it is expected to be able to process 650,000 barrels of crude oil per day into refined petroleum products. This will help Nigeria become an oil refining country and oil exporter as the country’s refineries are in a dilapidated state. The capacity of the Dangote Refinery would eliminate fuel import from other regions into the country.

While the decision of the Nigerian government has been welcomed across board, Choji Pwol, an economist and petroleum industry analyst, argued for the strengthening of the PPPRA to curb market excesses. He warned that, “The marketers have trade associations that already protect their interests. I don’t see that changing. There may be a few dissidents, but there will most likely be a cartelisation.”