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Addressing Fuel Subsidy Removal

In this report, Nwakaego Ohaegbulam looks at the implications of the fuel subsidy removal by the Federal Government

Ignorance is a major problem that pervades every strata of society irrespective of one’s qualification or level of education. It is further fuelled by the fact that those who ‘know’ allow those who claim to know to spread lies to the majority who do not know thereby compounding the situation. Bringing this to bear on the current state of affairs in the nation especially as it concerns fuel subsidy in the 2015 budget, the average man would make bold to say that the subsidy has been removed from the incoming administration in its budget yet another would say in a louder voice that it has not been removed. Could these two sets of people both be right in their own thinking?

With the continued scarcity of petroleum and its products despite efforts by the Federal Government to assuage the independent marketers by paying N156 of the N256 billion owed them, the queues at fuel stations continue to increase instead of decreasing on a daily basis though the fuel stations that have the product sell at prices higher than the approved N87 pump price. Trust Nigerians to take advantage of the scarcity to sell fuel in kegs by the roadside at cut throat prices. For instance, a 25-litre keg of fuel which cost N2,500 at the pumps, is now sold for N5,000 by the black marketers. Reports are rife of fights at fuel stations involving people who came to buy fuel.

At one fuel station, it took the intervention of the army to douse the tension. Already many people are pointing accusing fingers at the present administration for its lackadaisical attitude towards improving the general living standards while a few blame the in-coming president for their plight. A large number of people are already attributing the scarcity to a rumour that the next administration had removed the subsidy from the 2015 budget a fact which the Co-ordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala has since debunked. Addressing newsmen in Abuja recently, the minister said “I want to clarify that there has been some misinformation that has gone around in the media about the fact that the National Assembly passed the 2015 budget w i t h o u t provision for fuel subsidy. It is not true.” A d d i n g that “it is important that you note that the National Assembly approved provisions of N100 billion for PMS (Petroleum Motor Spirit, otherwise called petrol) and N45.2 billion for kerosene subsidy. So, it is not true that they passed the budget without provision for subsidy.”

While admitting that the management of the economy following the crash in oil prices had been very tough   as a result of which the country experienced cash crunch though the Federal Government was focused on keeping the economy stable while adopting series of measures to keep the government running; Dr. Okonjo-Iweala said the Federal Government had already utilized more than half of the budgetary provisions for borrowing in the year part of which went to the payment of salaries to fund over heads.

It would be recalled that in January 2012, the federal government had taken a decision to eliminate the fuel subsidy which sparked mass protests and unrest across the country resulting in an increase in fuel price before it was finally pegged at N97. In 2011, Nigeria’s fuel subsidy cost the country an estimated $8billion and the price tag was expected to be even greater. The cost of the fuel subsidy has continued to grow exponentially.

This is partly due to the rising cost of fuel-which meant that the government had to spend even more to keep domestic prices low- and also due to Nigeria’s increasing population— which resulted in increased fuel consumption; together these pressures made the cost   of the fuel subsidy unsustainable.

Meanwhile, the Nigerian National Petroleum Corporation, NNPC had in April this year, while describing subsidy as the difference between expected open market fuel price and actual retail price consumers pay at petrol stations; made a strong case for the complete removal of the subsidy from the petroleum products pricing   template by the incoming government describing NNPC’s Group Coordinator, Corporate Strategy and Planning, Tim Okon said fuel subsidy was not sustainable in view of the fact that government was not in control of the factors that influence retail fuel price, particularly fluctuations of crude oil price at the international market.

According to him “Since government does not control crude oil price, its fluctuation often creates fiscal instability in the country, which negatively impact on Nigeria’s revenues. So, from the technical analysis made, it is obvious that subsidy is real, and it is something that should go, because it is not sustainable.”

Okon said fuel subsidy created distortion in government revenue distribution as a result of which there was round tripping and unnecessary carryover of expenditures in the yearly budget in a way that is difficult for government to control or sustain.

He added that over the years, government had not been able to state categorically the actual amount expended on fuel subsidy in the budget by the Federal Ministry of Finance, since the provision in any given year could either be lower or higher than the actual sum paid to marketers. When the price of crude oil fell to about $40 per barrel in the last quarter of 2014, Mr. Okon pointed out that subsidy was not paid by the government, as the landing cost of the petrol was almost equal to the open market value. What then is the implication of the subsidy removal one may ask? The expectation of the average Nigerian is that with the removal of the subsidy the new fuel pump price would be N40. This is yet to be confirmed by the powers that be.

In February, the Executive Secretary, Major Oil Marketers Association of Nigeria, MOMAN, Obafemi Olawore had also called for the removal of the subsidy and the introduction of full deregulation of the downstream sector to bring efficiency to the sector and put an end to the perennial fuel crisis. He blamed the perennial cycle of fuel scarcity on ‘discrepancies in subsidy payments’ and delay in the passage of the Petroleum Industry Bill by the National Assembly. If the subsidy is retained, it means that investment in the nation’s economy would be discouraged.

This as Nelipher Moyo and Vera Songwe put it in their article ‘Removal of fuel subsidies in Nigeria: An economic necessity and a political dilemma’ means that if the subsidy is not removed, the rich would disproportionately benefit from it. According to them, “With the government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy.

Nigeria’s poor rely primarily on public transportation as such their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles. Neighboring countries also benefit significantly from Nigeria’s fuel subsidy through smuggling.” Moyo and Songwe therefore called on government to implement a transparent system for redirecting and monitoring the use of funds from the fuel subsidy programme so that Nigerians can review and scrutinize the expenditure. This is because Nigerians want to know that the government has a credible plan for them. Suffice it to say that the removal of fuel subsidy would create the opportunity for the country to fully develop its refinery capacity and increase its potential revenue from the oil sector while creating jobs for its teeming number of unemployed youths.

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