Monthly Fuel Subsidy Now Double Annual Basic Education Budget
“The reported monthly average spend of over N102.5 billion (US$250 million) on fuel subsidies is higher than N70 billion (US$171 million) budgeted for the provision of Universal Basic Education (UBEC) in the 2021 budget, as well as the N45.19 billion (US$110million) allocated for immunisation”.
Ask anyone in the Nigerian government, they will tell you Nigeria has a revenue problem. Only recently, Nigeria’s Minister of Finance, Zainab Ahmed also reiterated this comment at the Nigeria’s 2021 Eurobond conference call with international investors. What this comment by the minister and other policy makers mean is that the Nigeria’s revenue is insufficient to meet its spending plan. This is a problem finance ministers and governments have faced for the last three decades.
One then wonders why the Nigerian government is then not efficiently managing its scare revenue and is spending at least 45% of its oil revenues on fuel subsidy. This is at the expense of spending on healthcare and education which by improving the country’s human capital would not only drive economic growth but contribute to reducing widespread security challenges. The government now spends around over N102.5 billion (US$250 million) on fuel subsidy each month, an amount greater than the N70 billion 2021 budget for Universal Basic Education (UBEC).
So far this year, we estimate that Nigeria’s total subsidy spend has amounted to around N900 billion (US$2.2 billion) after spending around N546.65 billion (US$1.3tn) between February and July. Between 2006 and 2018, an audit of government oil agencies revealed that total expenditure on oil subsidies reached around N10 trillion (US25 billion).
This amount could have funded the construction of about 1.5 million community health centres, built and equipped 2,400 units of 1,000-bed hospitals, and even added 500,000 new housing units to Nigeria’s housing stock. Alternatively, government could have used the amount to fund the acquisition of 27,000MW of solar-powered electricity to the national grid.
How did we get here?
Fuel subsidies were introduced in Nigeria in 1974 because the government wanted to protect consumers from high price of fuel resulting from the Arab-Israeli War. Essentially, fuel was sold to Nigerians at prices far below its landing costs into Nigeria, with government paying for the difference. Several attempts at reforming this subsidy system largely have failed.
Attempts to remove the subsidy have failed for two reasons. One, Nigerian governments have lacked the political credibility and the will to cancel the subsidy. Because of highly visible corruption within their own ranks, Nigerian governments have lacked the moral stance to ask the citizens for the sacrifice an increase in fuel subsidy entails. They hence easily carve in to opposition from labour unions and opportunistic opposition parties. Secondly, the oil subsidy system has created a robust network of powerful beneficiaries in and outside Nigeria’s state oil bureaucracy who pull strings to retain it.
Also Read: FG to Labour: N120bn Monthly Petrol Subsidy Unbearable
Nonetheless, economic evidence points to the fact that Nigeria subsidy programme often favour well-off Nigerians (who can buy the fuel at the actual market price) over the poor who only purchase smaller quantities of fuel. This means that Nigeria’s subsidy system only further entrenches inequality and a distorted distribution of government’s scarce resources.
An aborted deregulation
After the glut in the international crude oil supplies in early 2020 and the consequent fall in crude oil prices, Nigeria’s NNPC (Nigerian National Petroleum Corporation), which is the sole importer of refined petroleum into Nigeria in March 2020 announced a new PMS retail price of N125/litre (versus previous approved price of N145/litre) at its retail fuel stations. Later, the PPPRA (Petroleum Products Pricing Regulatory Agency), a department within the NNPC which fixes and monitor prices of petroleum products, equally announced a new PMS price of N125.
The rationale for this move was that based on the pricing template of the NNPC and the PPPRA, PMS Expected Open Market Price (EOMP) had fallen below the approved pump price cap of N145/litre. Earlier, crude oil prices had touched a five year low of US$19/b. The PPPRA also disclosed that going forward it would review the PMS pricing template on a monthly basis and set (and announce) a new price based on market conditions. This move was interpreted by the market as an attempt at deregulating Nigeria’s PMS industry. However, the role of the PPPRA as a price fixer stirred concerns.
Over the next few months, the PPPRA advised on PMS prices, notching the price higher in line with the global trend in crude prices and freight costs to Nigeria. However, the impact of naira devaluation and a sustained rally in crude oil prices (going above US$80/b) pushed the landing cost of PMS to around N278/litre by end of September. With labour unions vehemently disagreeing to attempts at harmonising retail pump price with the landing costs, the government opted for a safe retail price of NGN162.5/litre and a return of the subsidy regime. This has been the case since December 2020.
Also Read: Unlike Nigeria, Kenya Agrees Thoroughgoing Reforms with IMF
Monthly subsidy cost could reach N139bn in 2022
Last month, Mr. Mele Kyari, the Group Managing Director of the NNPC disclosed that it pays between NGN100 to NGN120bn (around US$270m) monthly to keep the pump price of petrol at N162/litre while remaining the sole importer of the product. Estimates by the Minister of Finance, Zainab Ahmed puts this at around N150 billion (US$366 million) monthly. At the government’s monthly FAAC (Federation Account Allocation Committee (FAAC)) meeting in September, the NNPC revealed that it incurred a total subsidy spending of N175.32 billion (US$427 million) on subsidy in July.
However, a more revealing data is that daily average consumption of PMS has risen to 102 million with the NNPC attributing the huge jump (from around 50 million) to subsidies and smuggling. Comparable data from the DPR (Department of Petroleum Resources) put the average daily consumption at around 38 million. What this shows is that due to fuel subsidies and smuggling, Nigeria’s spending on PMS importation has almost tripled!
Recently, analysts at Goldman Sachs published a research note that revealed that its internal models suggest that crude oil prices could reach US$90 by year-end. If this scenario materialises and Nigeria’s subsidy regime remains in place, alongside sustained naira devaluation, one can estimate that PMS landing cost could rise to N343/litre and that the monthly subsidy bill could average N139billion (US$339million). This indicates an annual subsidy bill of N1.74trilllion, far ahead of the NNPC estimates of N900billio for 2022.
Despite PIA and Huge Cost, Oil Subsidy May Stay till 2023
With a poverty rate of around 40% or 83 million people (NBS data), government policy needs to focus on initiatives that lift people out of poverty by raising actual spending on education. The reported monthly average spend of over N102.5 billion (US$250 million) on fuel subsidies is also higher the N45.19 billion (US$110million) allocated for immunisation in the 2021 budget.
Nigeria’s new Petroleum Industry Act (PIA) signed by President Buhari in August allows for the full deregulation of the downstream oil & gas sector. To implement this new law, the president has set up a committee which will work over 12 months to actualise the provisions of the law. Nonetheless, the NNPC has already budgeted around N900 billion (US$2.2billion) for oil subsidies in the 2022 draft budget of the agency, after it was not budgeted for in 2021 budget. This shows that despite the PIA, subsidies may likely remain in Nigeria, at least until after the tenure of the current president.