By Obas Esiedesa
Experts have warned that unless the downstream sector of the petroleum industry is fully deregulated and libralised, Nigeria would pay almost N1 trillion as subsidy on premium motor spirit, petrol, this year,
In March 2020 when the Federal Government took advantage of very low crude oil price at the international market to announce full deregulation of the downstream sector of the petroleum industry, the challenge then was always going to be what would happen when crude oil price goes up.
Especially given that Nigeria imports all its petroleum product needs despite being a major crude oil exporting country.
Over the years, payment of subsidy on premium motor spirit, otherwise known as petrol, has cost the nation greatly, with trillions of Naira paid out to marketers for a product that more often than not finds its way into neigbouring countries due to huge price differentials.
Data from the Nigerian National Petroleum Corporation, NNPC, showed that the Federal Government spent N752 billion on petrol subsidy in 2019.
Last week, when oil price stood at $63.13 per barrel, subsidy on petrol grew to about N12 billion a week as the landing cost in the open market at over N180 per litre, based on the petrol pricing template of the Petroleum Products Pricing Regulatory Agency.
The product is currently being sold at N162 at many filling stations in Lagos, Abuja, and other cities, although some oil marketers in the outskirts sold at higher prices.
Ordinarily, for a country like Nigeria that is heavily dependent on revenues from oil, the price rally should be good news as it portends more money for the government to provide social amenities for the welfare of the citizens. But the cheery news of oil price rally is dampened by the rise in the pump price of petrol.
Price rise immenient, Labour opposes
During the launch of the Nigerian Upstream Cost Optimization Programme (NUCOP) two weeks ago, both the Minister of State for Petroleum Resources, Chief Timipre Sylva, and the Group Managing Director of NNPC, Mallam Mele Kyari, hinted at the prospect of a rise in the pump price of petrol in the country in line with the deregulation regime in operation in the downstream, following the rise in the price of crude oil.
Since then, the leadership of the organized labour has mounted its opposition to the move contending that pump price increase would impose more hardship on Nigerians who are already battling the effect of a sluggish economy.
Sylva had insisted that NNPC could not continue to bear burden of absorbing the cost of low petrol price at the pump since no provision was made for subsidy payment in the 2021 budget.
Queues may return
With increasing cost of maintaining the current pump price, NNPC worries that it may soon run out of resources to continue to bring in petrol in the nearest future, because Federal Government has no budget for subsidy.
A senior manager at the Corporation told Vanguard Public Finance that since 2004 when the Federal Government started the policy of selling the crude oil earmarked for local refining/consumption at international price, it created a situation where the landing price of petroleum products was higher than the regulated pump price of petroleum products in the country.
The source, who did not want to be named, explained that under the old system where crude oil earmarked for local refining/consumption was sold to the NNPC at a subsidized rate, the corporation was able to take care of price differential between landing cost and regulated pump price.
“With the new policy, a system of subsidy payment was introduced to take care of the price differential. But over time, the subsidy system became cumbersome and the Federal Government began to find it unwieldy and unsustainable”.
The source described opposing from labour as unsustainable if the country does not want to go back to the era of queues at the filling stations.
“With the current rise in the price of crude oil, it is inevitable that the price of petrol would go up in the local market. More so when there is no provision in the 2021 Appropriation Act for subsidy payment.
“The deregulation of the downstream is supposed to bring about some sort of liberalization of the sector which would make it possible for all petroleum products marketers to source their products from anywhere and sell at any price dictated by prevailing market forces.
“The competition arising from that would have helped to force pump prices down to the benefit of the citizens. But the scarcity of foreign exchange has made it difficult for the marketers to import products, thereby making NNPC the sole importer in keeping with its statutory role as marketer of last resort.
“With the agitation of labour to roll back the deregulation, NNPC is inadvertently being made the fall guy to absorb the cost of the price differential between landing cost and pump price. This would put NNPC in a very bad spot financially and eventually lead to a situation where it would be difficult to further import products. The obvious implication of that is fuel scarcity and the return of fuel queues”, the source added.
Speaking to Vanguard Public Finance in a telephone chat, Prof Adeola Adenikinju, Director, Centre for Petroleum Energy Economics and Law at the University of Ibadan, said scrapping petrol subsidy and libralising the downstream sector would significantly boost government revenue.
He explained that it would make more money available to government to invest in infrastructures in health, education and road sectors.
“We have had experience with subsidy for decades and now that we issue with revenue and struggling to finance government expenditure. If you look at the budget this year, over 45 percent of the budget is been financed through deficit.
“The government is going to borrow from domestic and external markets which on the one hand can be inflationary and on the other hand can displace foreign investment.
“One way by which we can actually reduce government deficit and allow government to have more revenue is by removing subsidy. This subsidy has been a problem. It has destroyed every negative impact of government fiscal account”.
He noted that besides impacting on government revenue, subsidy payment has also led to decay in the downstream sector’s infrastructure.
“It is having negative impact on infrastructure in the downstream. All our roads are dead, the depots are dead, we cannot maintain the pipelines and now as a country that should be exporting refined products, and we bear the shame of being the largest importer of petroleum products in Africa simply because subsidy has destroyed the whole place.
Adenikinju who is also a member Central Bank of Nigeria’s Monetary Policy Committee, MPC, said “government has to find a way to libralise the market. It is not just removing subsidy, it is liberalizing the market. How do you attract private sector to come in? How do you attract private investors, domestic or foreign to the sector? To do that, you have to open the market. One, the subsidy has to go. Two, you must allow all the players to have equal access to foreign exchange to bring in products once they meet quality specification and allow them to sell at the prices”.
He explained the major challenge government faces on the issue is how to win the confidence of Nigeria that would allow them to accept the policy.
“What government needs to do is how does it win back the confidence of the people because the problem I see is that Nigerians say look, the only thing we have in Nigeria, now you removed the subsidy and yet we are suffering and those in government are stealing the money and enjoying themselves and we don’t see any impact.
“So, how does government ensure that when subsidy is removed the proceeds are actually spent on things that will benefit the people, that will make life a lot easier. That will improve road infrastructures, education and health. It is that link that is not there. And until we are able to do that, it is difficult for people to support the government”, he added.
He however pointed that the benefits of subsidy is not evenly distributed because the rich, middle class and urban dwellers were the benefiting most from subsidy regime.
He noted that though the removal will be costly and painful, it was the right path to follow, adding that after sometime with the right investment the pains will reduce.
“We have done this for many years and we cannot continue with it”, he stated.
Also speaking, an economist at SPM Professionals, Mr. Paul Alaje, observed that removing subsidy on petrol makes a lot of economic sense because it is a huge burden on government revenue.
Alaje pointed out that before “Nigeria adopted partial deregulation subsidy was taking almost N1 trillion of our revenue at a time. So when government says it wants to remove subsidy, it makes economic sense”.
He cautioned however that subsidy removal may be inflationary as it may lead to higher cost of goods and services.
“The implication is that possible disposable in income will emaciate, second implication is cost of goods and services which are about 80 percent of all consumables will increase drastically almost at the same time”.
He argued that last year it was impossible to feel the development impact of subsidy removal because the income of government was drastically reduced due to very low oil price induced by Covid-19 pandemic.
He urged the government fix infrastructures like roads and others to caution the impact of subsidy removal on the people.