Business
High oil price deepens subsidy crisis
OPEC Secretary-General Barkindo, Oil Minister Ibe Kachikwu and NNPC GMD Maikanti Baru
…It is very disturbing – Senate, LCCI
By UCHE CHRIS
Nigeria’s economy may be bleeding blood through the rising subsidy or under-recovery payment which has surpassed N2trillion per annum. Recent figures released by the Petroleum Products Price Regulatory Agency, PPPRA, indicate that landing cost of products has reached N205 per litre, while the pump price remains at N145 per litre, creating a price differential or subsidy of N60 per litre.
Nigeria consumes about 40 million litres of petroleum products daily or 777000 barrels, which puts subsidy amounts at over N2 trillion. The government had on resumption of power pledged to stop payment of subsidy by not budgeting for it but has continued the payment of money to major marketers who import products for domestic consumption.
A fortnight ago, the Major Oil Marketers Association of Nigeria, MOMAN, raised the alarm over rising subsidy on fuel and demanded the full deregulation of the sector to save the nation unnecessary wastage of huge resources. They also demanded for the payment of outstanding arrears of N186 billion
This level of subsidy payment, the highest in the history of the nation, also attracted the attention of the senate last week which alleged the discovery of a $3.8 billion slush fund account operated by NNPC for the purpose of subsidy payment without legislative oversight. The upper chambered wondered where government was getting the fund to continue paying the subsidy which has risen to about N2 trillion per annum without appropriation.
The time of high oil prices is usually a dollar windfall for most oil producing countries but Nigeria appears to be an exception. Nigeria seems to be losing the gains of increases in the international crude oil prices with the Federal Government subsidy on fuel rising to N2.4 billion daily in May and ‘under recovery’ of N49.86 billion between January and March 2018.
Latest figures for July indicate that the ‘under recovery’ rate has reached N3 billion per day, raising fresh fears that the gains from the high oil price may again be wasted. Nigeria has wasted several oil price windfalls in the past.
‘Under-recovery’ in downstream petroleum marketing parlance is when the expected open market price of PMS – which includes the cost of importation and distribution of the commodity, such as marketers’ margins, landing cost and freight cost — is below the approved official retail price at the pump.
Unlike in March, this year, when the price of crude oil hovered at $66 per barrel, it had traded between $80 and $85 per barrel since July, due to coming sanctions on Iran and diplomatic row and heightened tension between Saudi Arabia and Turkey, thus pushing up landing cost of the refined products’ imports.
The PPPRA had stated that without the government subsidy, the price of petrol could have been as high as N205 per litre in the domestic market. According to PPPRA, the price of the commodity appreciated by 8.47 per cent from N189 per litre recorded on April 25, 2018 to N200 per litre as at May 16, 2018, posting a price recovery differential or subsidy of N55 per litre.
However, this problem is further compounded by smuggling, which keeps domestic consumption high. In Ogun state and other border communities the situation is worsened as NNPC is now forced to subsidize the product for neighboring countries. Group Managing Director of the NNPC, Dr Maikanti Baru who led top management team of the corporation to visit Comptroller-General of Nigeria Customs Service, Col. Hameed Ali (rtd), recently, had blamed the increase in fuel consumption on massive smuggling of petroleum products to neighbouring countries.
Baru had also raised an alarm on the proliferation of fuel stations in communities with international land and coastal borders across the country, insisting that the development had energized unprecedented cross-border smuggling of petrol to neighbouring countries, making it difficult to sanitise the fuel supply and distribution matrix in the country.
Providing a detailed presentation of the findings, the NNPC boss had noted that 16 states, having among them 61 local government areas with border communities, account for 2,201 registered fuel stations. He had said:
“NNPC is concerned that continued cross-border smuggling of petrol will deny Nigerians the benefit of the Federal Government’s benevolence of keeping a fix retail price of N145 per litre, despite the increase in PMS open market price above N200 per litre.”
However, the Senate on Tuesday resolved to set up an ad hoc committee to investigate $3.5bn Subsidy Recovery Fund allegedly created by the Nigerian National Petroleum Corporation and solely managed by its Group Managing Director and the Executive Director, Finance.
The decision followed a Point of Order raised by the Senate Minority Leader, Sen. Abiodun Olujimi, at plenary. She expressed concerns about the existence of such fund and the mode of its management.
According to her, the Federal Government had to cancel subsidy that was usually provided for in the nation’s annual budgets since 1999, “only to turn round to set up a fund that was never appropriated for by the National Assembly.
“My point of order focuses on $3.5bn earmarked as subsidy recovery fund by the NNPC. Since 1999, there has always been a budget for fuel subsidy but this has been jettisoned by the current government, which leaves this administration in a very dire straits.
“What is happening now is that there is a fund named as subsidy recovery fund being managed by only two individuals of the NNPC; that is the Group Managing Director and the Executive Director, Finance.
“This fund is too huge for two people to manage. It is too huge to manage without appropriation or recourse to any known law of the land. Mr. President, during your remarks after the passage of the 2018 Budget, you mentioned that there should be a budget for subsidy that should be brought before the National Assembly.
“That has not been done. It is therefore, obvious that the $3.5bn is slush fund, which will just be managed by two individuals, and that is not correct,” Olujimi said.
“They should also explain what has happened to the fund that has been used so far and the new terminology now being used under recovery rather than subsidy.
But Mr. Ndu Ughamadu, Group GM Public Affairs, said the corporation initiated the move to raise a revolving fund of $1.05 billion s, not $3.8 billion, since the corporation was, and is still the sole importer and supplier of products in the country. The NNPC denied claims that it has in its custody 3.5 billion dollars Subsidy fund.
He explained that at the hit of the shortage of products supply at the close of last year, the National Assembly asked the NNPC to do everything possible to stem the hiccups. He noted ever since, the fund had been domiciled in the Central Bank of Nigeria, adding that at no time was it in the custody of the NNPC.
Ughamadu said the fund, called the National Fuel Support Fund, had been jointly managed by the NNPC, the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance. Other managers include the Petroleum Products Pricing Regulatory Agency (PPPRA), Office of the Accountant General of the Federation (OGF), the Department of Petroleum Resources (DPR) and the Petroleum Equalization Fund (PEF).
He further clarified that NNPC did not independently spend a dime of the fund which he said was to ensure stability in the petroleum products supply in the country. He added that the corporation was fully aware that it was only the National Assembly that has the statutory responsibility to appropriate on petroleum subsidy matters.
However, the explanation fail short of the answers being sought which is how to resolve the problem of subsidy since the government refused officially to pay subsidy. Experts and stakeholders are concerned that the future of the country was being squandered by this wrong-headed policy, based on obsolete economic logic and welfare politics.
Mr. Moses Ojo, Head, Research and Business Development, PanAfrican Capital Holdings, believes that the country is wasting away its scarce resources and regret it in future.
“As the prices of crude oil rise in the world market the nation’s oil subsidy is increasing as well. The impact of this is that, the huge amount of fund that is being used for subsidy can be directed into infrastructural development if the sector has been deregulated.
“However, deregulation will also come with its challenges which are increase in the prices of goods and services, because increase in the price of refined products will have multiplier effects on the prices of goods and services in the country.
“Therefore, the prices of crude oil are rising in the international market the level of subsidy will also continue to expand,” he said.
Dr. Muda Yusuf, Director-General, Lagos Chamber of Commerce and Industry, agrees, noting that this is the time to take action.
“It is a very disturbing situation. And this is the consequence of our failure to reform the oil and gas sector over so many years. It is also a consequence of the failure to pass the Petroleum Industry Bill. It is the consequence of not doing the right thing. The economy is paying direly for failing to reform. There is no alternative to deregulating the petroleum industry. It is not alternative; it is only a matter of what time we will do it.
Dr. Boniface Chizea, Managing Consultant, BIC Consultancy Service, says that delay may be eventually very dangerous.
“Subsidy is a veritable misallocation of resources. You are under recovering the cost of providing a service. It is patently injurious when it has not been appropriated. It becomes a damaging leakage on the economy. In an open transparent economy where all income streams are duly accounted for, it is impossible to have this sort of experience.
“But it is common knowledge that operations at the oil sector are opaque. When you have this sort of window misallocation and misapplication of resources is the order of the day. The competitiveness of an economy as is common knowledge is undermined when corruption is rife. Therefore it is not good for the growth and development of the economy”, he said.
