As Ghost of Fuel Subsidy Removal Lurks Around

The benefits of the fuel subsidy removal far outweighs the pains associated with the expected rise in petrol pump price due to the upswing in crude oil price, writes Obinna Chima

The rising cost of Brent crude oil and its attendant implication on petrol price in the country appears to have resuscitated the age-long debate over fuel subsidy removal in Nigeria.
Once more, there has been divergent views about this policy which until it was phased out last year, was a thorn in the flesh of successive governments in the country.

For instance, the federal government had disclosed that the nation spent N10. 413 trillion on fuel subsidy between 2006 and 2019, even as the country consistently grappled with low revenue generation over same period.
But the federal government last April bowed to long-standing pressure to restructure the downstream segment of the Nigerian oil industry through the removal of fuel subsidy, following the significant drop in the price of crude oil last year, due to the coronavirus. The government had said it would no longer be paying for under-recovery or subsidy on petrol.

Owing to that, the Petroleum Products Marketing Company (PPMC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC) had announced that petrol prices would henceforth be determined by market forces. It had explained that the new price regime with its cost-reflective nature was expected to help to improve product availability and attract investments to the sector as marketers now have increased margin.

Since then, the Petroleum Product Pricing Regulatory Authority (PPPRA) has been giving monthly guidance on petrol prices through price modulation method, meaning that when crude price goes up, petrol price would go up, and when it comes down, petrol price would follow suit.

However, the policy did not go down well with the marketers expressing concerns over the government’s continuous meddlesomeness with petrol pump price, which they believed should be allowed to float. They had argued that such model was not in tandem with the principle of market forces that takes into account, the basic market fundamentals.
So far, in 2021, crude oil prices have continued to surge largely on the back of production cuts from the Organisation of Petroleum Exporting Countries (OPEC) and its allies.

Although, the recent revision in global oil demand by the IEA casts some shadow on the sustainability of this trend, the current position implies increasing landing cost of Premium Motor Spirit (PMS), a report by CSL Stockbrokers Limited revealed.

Benefits of Fuel Subsidy Removal
The International Monetary Fund (IMF) that had over the years been vocal about the need for the country to end the fuel subsidy regime, in its recently Article IV on Nigeria released last week, welcomed notable reforms undertaken in the fiscal sector, including removal of the fuel subsidy.

Also, analysts at CSL Stockbrokers reiterate that the removal of the subsidy on petrol remains a critical free-market reform.
“In our view, and we believe it is beneficial to the finances of the government and the overall economy,” the Lagos-based firm added.
To the Chief Executive Officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane, the removal of subsidy would boost investments in the downstream sector of the oil and gas industry.

Rewane said subsidy removal would encourage investments in private refineries such as the Dangote Refinery, the BUA Refinery, among others springing up in the country presently.
According to him, petrol subsidy would free revenues for the government to provide essential services and at the same time boost investments in the downstream sector.

“Investments will increase. It will boost investments in private refineries such as Dangote Refinery, while those who will buy our dilapidated refineries will also come,” he added.
The Chairman of Fidelity Bank Plc and former Managing Director of the Asset Management Corporation of Nigeria (AMCON), Mr. Mustapha Chike-Obi, Nigeria can no longer afford the subsidies that it had been paying,

Also, the Chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Mr. Adetunji Oyebanji, said fuel subsidy removal would give operators the opportunity to recover their costs, adding that it would in the long run, encourage investment and create jobs.
A stakeholder in the sector and an independent marketer, Mr. John Agidigan, had that under a deregulated environment, prices are expected to rise and fall in response to the volatility of demand and supply.

According to him, the new deregulated regime would always ensure the availability of the product in the market at affordable price based on the supply, adding that this regime was better than what obtained in the past when Nigerians had to contend with extreme scarcity and its attendant challenges such as long queues at fuel stations.
Another stakeholder in the downstream sector, Aggrey Koleijo, stated that same market forces that brought about price reduction not long ago were still same factors responsible for the hike and can still ensure a reduction, depending on the demand and supply activities within the industry.

However, the federal government had reiterated its position that subsidy on petrol has gone and would never return, maintaining that the cost of petroleum products would henceforth be determined by the vagaries of the international crude oil market.
The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, had stressed that incurring further costs on under-recovery has now been stopped permanently.

According to her, “Specifically, in relation to the extractive industry, we took the opportunity to remove fuel subsidy that has been a significant drain on our resources and on the economy.
“This we have been able to do by adopting a price modulation mechanism and the government has removed fuel subsidy provision from its revised 2020 budget and also from the Medium Term Economic Framework (MTEF) for 2021-2023. We don’t have plans to incur any expenditure on fuel subsidy.

“What that means is that the price of refined products (petrol) will be determined by the global price of crude oil, so the price will keep changing according to how the global market operates.”
The Minister of State for Petroleum, Mr. Timipre Sylva, said Nigeria was no longer in the business of fixing fuel prices, adding that global oil price crash had made removing the subsidies inevitable.

“It is about the survival of our country. There are certain things that the country can ill-afford at this time,” he said.
In his contribution, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, had disclosed that the federal government was able to save over $400 million following the removal of its fuel subsidy policy in 2020.

The NNPC boss said he does not expect that the policy which had over the years drained the country’s scarce resources would be returned even when crude oil price rebounds.
According to Kyari, the federal government would deploy the amount saved to the development of critical infrastructure in the country.

He explained: “As you aware, the Minister of State for Petroleum resources has made policy statement based on presidential directives on the issue of fuel subsidy. Also, the PPPRA has issued guidelines on the process for monitoring the pricing of petroleum products in the domestic market going forward.

“My personal view is that subsidy should be removed, and the funds deployed to areas of the economy particularly road infrastructure and education that need funds. Fuel subsidy is a misallocation of resources and it benefits mainly people who don’t need it; the rich.

“What we need is investment that upgrades the general good of the society and provide access and opportunity for social mobility for the poor. I do not foresee the return of subsidy when oil price rebounds. Just by removing subsidy in the 2020 budget, the nation is able to save over $400 million. The savings would be better deployed to education or upgrade of the critical infrastructure in the country.”

According to Kyari, ensuring energy security is one of the cardinal agenda of the President Buhari administration.
Furthermore, he said closely related to energy security was the rehabilitation and expansion of the local refining capacity.
He said the NNPC has continued to support initiatives towards the actualisation of zero import of refined products by 2024, adding that the corporation has adopted a three-pronged strategy. This includes – revamp, restructure and encourage.

Short-term Pain
But following the rising price of crude oil which hit a 13-month high of $63 per barrel this week, Nigerians have been advised to prepare their minds for a higher regime of the pump price of petrol.
Sylva said a high cost of petrol will be inevitable and urged Nigerians to be ready to bear the pains of the impending new price regime, due to rising crude oil price.
Sylva, noted that while government revenue has improved following the rise in crude oil price, the gains cannot be frittered on subsidy payment.

According to the pricing template of the Petroleum Products Pricing Regulatory Agency (PPPRA), the landing cost of petrol is over N179 per litre, while the expected Open Market Price (OMP) is about N202 per litre.
However, the product is still being sold for between the N162 and N165 per litre price band.

However, Sylva urged Nigerians to prepare for the pains of the increase, saying that it cannot all be pleasure always.
He said: “Since we are optimising everything, NNPC needs to also think about the optimisation of product cost because as we all know, oil prices are where they are today, $60.

“As desirable as this is, this has serious consequences as well on product prices. So, we want to take the pleasure and we should as a country be ready to take the pain. Today the NNPC is taking a big hit from this. We all know that there is no provision in the budget for subsidy.

“So, somewhere down the line, I believe that the NNPC cannot continue to take this blow. There is no way because there is no provision for it. As a country, let us take the benefits of the higher crude oil prices and I hope we will also be ready to take a little pain on the side of higher product prices.”
Indeed, the federal government must ensure that it does not bow to pressure to reintroduce the policy which was a major avenue of fiscal leakage in the past.

Fuel subsidy savings could be utilised in the provision of essential social needs such as access to free education, quality healthcare services, especially at a time when the health sector is under serious strain, infrastructure development, boost the country’s Sovereign Wealth Fund, among others.
These, would be crucial to the improvement of living standard and the quality of life of the average Nigerian.

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