By Amechi Ogbonna
Although the Federal Government had April last year sounded the final death knell on a dubious subsidy regime that consumed over N10trillion between 2006 and 2019, a pristine debate on its harmful effect ensued again recently when the price Brent Crude crossed the $60 per barrel market at the international market.
Behind this fresh debate however is the potential of the current price surge to impact retail price of refined petroleum products across the country in line with free market forces.
As would be expected, Nigerians including those at the lowest rung of the economic ladder raised their voices against plans by the government for further increase in retail cost petrol with the organised labour leading the challenge.
The concern of those against free market determination of retail prices, centres around the fact that in a country with little or no power supply, no subsidised government mass transit system coupled with low minimum wage, most families would be spending more than half of their monthly earnings on transportation and fueling generators in the absence of a reliable power supply.
But while such fears appear quite genuine those at home with the economic benefits of downstream deregulation have since warned that continued payment of subsidy on petroleum products remains at the very heart of the crisis bedeviling the country today.
A thorough review of the issues at stake however shows that the benefits of subsidy removal far outweigh its associated pains given the regular flip flops in products pricing dynamics due to instability in international crude oil prices.
That perhaps also explains why the latest debate so easily resonated again with the International Monetary Fund (IMF), and other economy stakeholders when the price of Brent crude oil began surging higher in the international markets.
All through the debate, expert opinions have remained quite united on a policy which prior to its removal last year, was a thorn in the neck of successive governments of the country.
For one, the revelation that the Federal Government spent over N10. 413 trillion on fuel subsidy between 2006 and 2019, amid a consistently low revenue generation capacity over same period gives vent to the call on the government by stakeholders against the retention of a national drain pipe in the country’s public finance architecture.
Indeed, one major reason for the April 2020 removal of fuel subsidy, after the massive drop in the price of crude oil due to the coronavirus pandemic was government’s interest in the transformation of downstream sector of oil and gas industry.
Since then, the Buhari administration has made it crystal clear that it would no longer be paying for under-recovery or subsidy on petroleum products.
In the light of that development, the Petroleum Products Marketing Company (PPMC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC) also announced that petrol prices would henceforth be determined by market forces. It further explained that the new price regime along a cost-reflective trajectory would help it improve product availability and attract investments to the sector as marketers now have higher margins from the business.
It kicked off that campaign by crashing the retail price of crude from N145 per liter to N125 per liter, the Petroleum Product Pricing Regulatory Authority (PPPRA) has since then been giving monthly guidance on petrol prices through a price modulation method, which requires that when crude price goes up, petrol price would go up, and when it comes down, petrol price goes down in like manner.
So far, the policy has not gone down well with fuel marketers who expressed concern over government’s continuous meddlesomeness with pump price, which they argued should be determined by market forces.
Some stakeholders have also argued that such pricing model negates the principle of free market forces that take into account the basic economic fundamentals.
Interestingly, since the beginning of 2021, crude oil prices have continued on the upward swing 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 of doubt 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.
Economic gains of subsidy removal
As a key advocate of free market enterprise, the International Monetary Fund (IMF) has never relented in its call on the Nigerian government to end the fuel subsidy regime.
In its Article IV on Nigeria released recently, the Fund welcomed some reforms undertaken by the nation’s fiscal authority including the removal of fuel subsidy.
In lending its voice in support of the policy, the Lagos Chamber of Commerce and Industry (LCCI), warned that a reversal of the current reforms on subsidy of Premium Motor Spirit (PMS) would heighten the challenges facing the Nigerian economy.
It’s director general, Muda Yusuf, argued in a recent statement that the fiscal space to sustain the humongous, corruption-prone and opaque subsidy regime no longer exist in the country.
According to him, it is not in the best interest of the citizens, the economy, and future generations to encourage the perpetuation of corruption-ridden subsidy regime in the oil and gas industry.
Yusuf pointed out a Nigerian economy that is currently stumbling, after suffering a 6.1 percent contraction in the second quarter of last year should not be in any position to fund subsidy on petroleum products.
“The economy is yet to fully recover from the devasting shocks of the COVID-19 and the #EndSARS violence. As a result, it needs to be urgently pulled back from the brink through the adoption of appropriate policy reform measures,” he said.
The LCCI boss added that the capacity to fund critical economic and social infrastructures had waned considerably, citing the mounting public debt that has risen to N32trillion at the end of January 2021.
Also backing the removal of subsidy, Director-General, Nigerian Employers Consultative Association (NECA,)Mr Timothy Olawale, noted that the association had always argued that the Federal Government should allow market forces to determine fuel prices by scraping subsidy payment.
“As far as we are concerned, fuel subsidy is a conduit for corruption. It is a means of enriching certain individuals. Such money going into fuel subsidy should be channelled into productive sectors of the economy and not into consumption,” he said.
This was even as analysts at CSL Stockbrokers said 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 firm added
For his part, Chief Executive Officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane, said that 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, and the WalterSmith modular refinery in Imo State among others springing up across the country.
He further added that petrol subsidy removal would free revenues for the government to provide essential services and at the same time boost investments in the downstream sector
Also commenting on the gains of petroleum subsidy removal to Nigerians, Chairman of Fidelity Bank Plc and former Managing Director of the Asset Management Corporation of Nigeria (AMCON), Mr. Mustapha Chike-Obi, observed Nigeria can no longer afford the subsidies that it had been paying over the years.
He said such humongous subsidy payment had only benefited a few fuel importers most of who made claims and collected refund for products they never imported.
Other vocal voices against continued payment of subsidy on refined petroleum products is the Chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Mr. Adetunji Oyebanji, who believes that fuel subsidy removal would give operators the opportunity to recover their costs, and encourage investment in the downstream of industry and also boost jobs creation.
Another stakeholder in the sector and a key player in the independent marketing sub sector, Mr. John Agidigan, observed that under a deregulated environment, prices are expected to rise and fall in response to forces of demand and supply.
According to him, a deregulated regime would always ensure the availability of the product in the market at affordable price based on the supply.
He maintained that deregulation of the downstream sector was better than the past regime when Nigerians had to contend with extreme scarcity and its attendant challenges of spending days and long hours on 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 also responsible for the hike and can still ensure a reduction, depending on the demand and supply interface in the industry.
Already, the Federal Government had reiterated its commitment to ensuring that subsidy on petrol would be gone and never return again, stressing that the cost of petroleum products would henceforth be determined by the vagaries of the international crude oil market.
For Nigeria’s Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, incurring further costs on under-recovery has now been stopped permanently.
“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.
Also reinforcing the government’s position, Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, revealed that the Muhammadu Buhari administration was able to save over $400 million with the removal of fuel subsidy in 2020.
The NNPC boss said he does not expect a policy that had over the years drained the country’s scarce resources would be returned even when crude oil price was on the upswing
According to Kyari, the Federal Government would deploy the amount saved to the development of critical infrastructure in the country.
“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 that benefits mainly people who don’t need it” he said. With the product is still being sold for between the N162 and N165 per litre price band allowed by the PPPMC, Minister of State for Petroleum Resources Chief Timipre Sylva, has urged Nigerians to prepare to absorb the pains of an increase, since 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.
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.