Petroleum subsidy is harmful to the economy
Fuel subsidy, an issue which has been dominating national debate for decades, came under focus last week following a claim by the Nigerian National Petroleum Corporation (NNPC) that its projected monthly remittance to the federal accounts allocation committee (FAAC) for May will be zero. In a letter to the accountant-general of the federation, the NNPC says it can no longer bear the burden of underpriced sales of premium motor spirit (PMS), better known as petrol, to consumers in the country. According to NNPC, the PMS cost for the month of March 2021 was N184 per litre against the subsisting ex-coastal price of N128 per litre, “which has remained constant notwithstanding the changes in the macroeconomic variables affecting petroleum products pricing”.
With the jump in the price of crude resulting in higher prices for refined products, we saw this situation coming. Since the government did not make provisions for subsidy in its latest budget, the logical thing to do would have been to find an economic solution which full deregulation offers. That was not done, leading to pertinent questions: Why are there no clear efforts in this direction? Why is the so-called deregulation tempered by price fixing which is antithetical to what the NNPC has been preaching?
As we have argued several times on this page, fuel subsidy is detrimental to national economy. The negative implications include diversion of investment from other potentially more needful government departments, reduction of fuel consumption efficiency by industry and domestic consumers, encouraging rent-seeking by limiting the capital flow available to new energy infrastructure projects, and the fact that subsidies are difficult to target accurately.
Using Nigeria as a case study, the Global Energy Architecture Performance Index (EAPI) Report once noted that with expenses on subsidy put at about 30 per cent of total federal government expenditure and four per cent of national income, it is economically inefficient. The irony of this situation, as the report clearly observed, is that Nigeria, currently an oil exporter, reimports refined crude products, and by implication creating value and employment externally, while shouldering the burden of the cost of its fuel subsidy. It also observed that as a prerequisite for all sectors of an economy, energy cost is critical because price volatility and supply interruptions could destabilise economies, while reliable energy, on the other hand, promotes economic and social development.
Unlike before when subsidy expenditures were budgeted and approved by the National Assembly, NNPC has come up with a nebulous ‘cost under recovery’ to spend unbudgeted funds to subsidise fuel imports, raising serious questions about transparency and accountability in the process. In response to this huge amount of money being deducted by the NNPC as a first-line charge from the federation account, the National Economic Council (NEC), comprising the 36 state governors, two years ago proposed taking over the responsibility for subsidising petroleum products in their states. Following several aborted FAAC meetings, the governors had held a meeting with NNPC over what they described as a consistent short-change of what should accrue to them from the federation account. That lingering issue is yet to be resolved.
Given that most of the states are so broke that they cannot even pay the salaries of workers, their focus had in recent times shifted to the subsidy regime. But as we have also argued several times, it will be unhelpful to bundle the removal of petroleum subsidy with the payment of salaries to workers. Petroleum subsidy, we believe, should be removed because it is inefficient, it is oiling corruption, and it is robbing society of vital resources that could be invested in hospitals, schools, roads and other critical areas that directly stimulate economic activities.
