Business
Despite subsidy removal, FG to pay N1.7trn in 2023
Adebayo Obajemu
Although in his inaugural speech on May 29th, 2023, President Bola Tinubu surprised Nigerians by abruptly announcing the removal of subsidy on petroleum products, government has continued to pay subsidy. In June the government paid overvN186 billion as subsidy, even after announcing its removal.
The announcement came against 2023 budget, which had made provision for the fuel subsidy till June.
President Tinubu had said funds for subsidies will be funnelled to other things, like public infrastructure, education, health care and jobs.
“We commend the decision of the outgoing administration in phasing out the petrol subsidy regime, which has increasingly favoured the rich more than the poor. Subsidy can no longer justify its ever-increasing costs in the wake of drying resources.
“We shall, instead, re-channel the funds into better investment in public infrastructure, education, health care and jobs that will materially improve the lives of millions,” he said.
Recall that the successive governments have for decades, subsidised fuel and fixed retail prices of petroleum products. The payment, according to the authorities and analysts, has, however, put intense pressure on the nation’s fiscal position and negatively impacted the government’s ability to fund developmental projects across the nation.
With hardship the removal of subsidy imposed on Nigerians, recent developments in the oil and gas market, especially the ever increasing landing cost of per litre of petrol which has shot up above the current pump price in addition to the government’s decision to set aside market forces in adjusting petrol prices, implies a tacit, but discrete return of minimal subsidy to the system.
Data suggests that the landing cost of petrol has shot up to N651.75/per litre, a figure far higher than the N617 per litre the Nigerian National Petroleum Company Limited (NNPC) had pegged the product.
Business Hallmark learnt that this unwholesome thrust of rising prices has put Tinubu under serious pressure to reassess his decision to remove subsidy on petrol. In view of this development, analysts are of the opinion that the Tinubu administration may in the next four months – September to December – spend about N1.68tn as subsidy on Premium Motor Spirit, popularly known as petrol.
According to some petroleum dealers spoken to by Business Hallmark, the pump price of petrol should be between N890 to N900/litre based on the fall of the naira against the U.S dollar and the surge in the price of crude in the international market, which is closed today he at $98 per barrel.
In spite of rising crude oil prices,and other developments in the sector, Petrol is still selling at between N598 and N617/litre depending on the location of purchase. This has given rise to widely held suspicion that the commodity is being subsidised by the Federal Government.
Although the government and the NNPCL are yet to officially admit to the perceived reintroduction of subsidy on petrol, the federal government reportedly paid N169.4 billion as subsidy in August to keep the pump price at N620 per litre.
According to a report by a news daily ( not Business Hallmark), a document by the Federal Account Allocation Committee (FAAC), reviewed on Wednesday, September 20, showed that in August 2023, the Nigerian Liquefied Natural Gas (NLNG) paid $275m as dividends to Nigeria via NNPC Limited. NNPC Limited used $220m (N169.4 billion at N770/$) out of the $275m to pay for the PMS subsidy. Then NNPC held back $55m.
This disclosure by FAAC is the strongest indication that the subsidy is back and NNPC is now taking NLNG dividends to pay the subsidy, according to the report.
Many spoken to by this medium agree, saying nothing supports this than the current price stagnation despite the worsening exchange rate and international crude price crossing $95 a barrel. The revelation by FAAC indicates that the subsidy is back and NNPC is now taking NLNG dividends to pay the subsidy.
The NNPCL is the sole importer of PMS. Other marketers stopped PMS imports due to their inability to access foreign exchange. Dealers in the downstream oil sector explained that the cost of crude oil and the exchange rate of the naira-dollar accounted for over 80 per cent of the cost of PMS.
At the beginning of the year oil perched at about $82/barrel, plummeted to $70/barrel in June, but traded above $94/barrel in the past week.
As at last Wednesday, the naira continued its downward slide after exchanging to the dollar at N980 on the parallel market. A week earlier, the naira was exchanged to the dollar at 950/$.
However, on the FMDQ at the Investor & Exporter forex window, the naira appreciated slightly after closing at N770.71/$ on Wednesday from N776.76/$ on Tuesday. The continuing forex crisis and the recent rise in crude price, according to oil marketers, have resulted in virtual impossibility for petrol price to still remain at N617/litre. They insisted the government had quietly reintroduced fuel subsidy.
“I told you earlier that there is no way that the government will sustain the price of petrol at N617/litre without paying subsidy on it, going by the continued fall of the naira,” the National Public Relations Officer, Independent Petroleum Marketers Association of Nigeria, Chief Chinedu Ukadike, told a news daily.
He added, “The dollar is almost N990 at the parallel market currently, and you can see the effect of this on the pump price of diesel. Diesel is close to N1,000/litre, so the retail price of PMS should be around N890 to N900/litre.
“Therefore, it is better the government assists the masses by paying subsidy. From our records, in the United States, the super product or petrol is sold around $3.9, which is close to about N3,000/litre.
“The premium product is sold at about $2.89, which is over N2,000/litre. And if you check in other African countries you will find out that the product is being sold at between N1,200 and N1,500. But going by the forex rate in Nigeria, it should be around N900/litre.”
It was gathered that the subsidised ex-depot price of petrol as sold by NNPCL, was between N585 and N600 depending on area of purchase.
Two weeks ago, Nigerians and civil society organizations criticised a new push by marketers to increase a litre cost of petrol at the pump from N617 to N720 on the argument that naira has continued to slide against the dollar. Therefore, the current pump price has become unsustainable. The pushback by the people may have thawed the tension.
Marketers have said time and again that the Tinubu administration is living an illusion, in utter denial of the challenge it is currently facing in respect of the subsidy issue and the near daily depreciation of the naira against the dollar.
They are of the view that companies will not spend its resources to import products, and then turn around to sell it below the landing price.
The high cost of petrol importation, together with labour threatening to embark on strike without notice if the government approved another price increase, the government is in a dilemma, but the president, last week announced that his administration was not contemplating any increase in the price of the product.
The announcement was a glaring signal that the Tinubu government might have effectively jettisoned the market forces, which NNPC had said would be the determining factor in the pricing of petrol following the removal of subsidy on the product on May 29.
Last week, Special Adviser to the President on Media and Publicity, Ajuri Ngelale, at State House Press conference, Abuja, after meeting with the president on the issues, said
the president assured Nigerians that there would be, “no increase in prices at this time and that Mr. President is convinced based on information before him that we can maintain current pricing without reversing our deregulation policy by swiftly cleaning up existing inefficiencies within the midstream and downstream petroleum sector.”
On its part, NNPC wrote on its Twitter/X Handle: “Dear esteemed customers, we at NNPC Retail value your patronage, and we do not have the intention to increase our PMS pump prices as widely speculated.
“Please buy the best quality products at the most affordable prices at our NNPC retail stations nationwide.”
But Nigeria’s volatile foreign exchange market continued to worsen the effect of the recent petrol subsidy removal by the federal government on the citizenry, with prices expected to rise markedly in the coming weeks.
As the exchange rate continues to depreciate, the governors are getting more naira cash, which they are using mount pressure on the forex market.
In his reaction to the president’s assurances that there won’t be further petrol price increase at the moment, Chief Executive of Cowry Assets Limited, Mr. Johnson Chukwu, told a news daily that what the statement implies is that, “subsidy is coming back. It simply means that the market forces that are supposed to be deciding the prices of petrol have been suspended.”
Chukwu explained on a national television, “If we are suspending market forces, that means that the pains we have gone through to eliminate subsidy has actually been for nothing. I think what the government needs to do is to address the reasons why we are seeing such jump in petrol prices, which is actually the issue of exchange rate.
“You cannot allow two variables to move at the same time. The appropriate thing would have been if the government was able to handle exchange rate, then we would be dealing with global market movement in the prices of petroleum products, and then we would have been dealing with marginal increment and marginal decrease in the price of petrol.”
Commenting on the matter, an analyst, Dr. Olufemi Omoyele, said, “The government must come out clean on subsidy. We know it is not possible to be running full deregulation at the current price of petrol. If they are reintroducing subtle subsidy it should tell Nigerians.”