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Petroleum Subsidy Removal: The Short-Run Costs, Long-Run Payoffs and in-betweens

August 2, 2022

Iniobong Usen

Monthly, the 36 States of the Federation assemble in Abuja to collect their “share”, i.e. FAAC, of the “national cake”. In recent times, however, the new Chairman of the Nigerian Governors Forum, “Petroleum Subsidy”, takes the largest share of the national cake”, leaving crumbs for the remaining 36 States to share. In fact, it not only leaves crumbs for the states, but the federal government also has no respite from this new order that has seen the shrinking of its piece of the cake. So we can safely say that “Petroleum Subsidy” has assumed a life of its own and operates in a dual capacity as the Convener and the Chairman Nigerian Governors Forum.

Now let’s dig a bit deeper. It will cost Nigeria, Africa’s second-largest producer of crude oil, an estimated N4 trillion naira to subsidise the price of petrol in 2022. To examine the magnitude of Nigeria’s subsidy cost, we need to put this cost in a proper context. The cumulative budget size of the 36 States of the Federation for 2022 is N9.65 trillion. The total revenue realised in 2020 by the Nigerian National Petroleum Corporation (NNPC) Group, including all its subsidiaries, is N4.6 trillion. Similarly, the federal government generated N3.9 trillion as revenue in 2020. 

Petroleum Subsidy isn’t a bad government policy; however, when a policy begins to fail and negates its intended objectives, it requires a critical assessment. This is important because the futures of government, security, health, education and development depend on it. Whatever the final decision the assessment will lead to will determine the fate and corporate existence of the nation referred to as Nigeria in no small measure.

Historical Context of Nigeria’s subsidy program

Petroleum subsidy was introduced in Nigeria when the energy crises in the 1970s drove the price of crude oil per barrel from $3 to $12. Sustenance of the petroleum subsidy program has come at a huge cost to the Nigerian State. Nigeria’s petroleum subsidy cost has risen by 1,452% from N257.36 billion in 2006 to N4 trillion in 2022. According to the Petroleum Products Pricing Regulatory Agency (PPPRA), it costs Nigeria a cumulative sum of N8.94 trillion to subsidise petrol between 2006 and 2015. Nigeria’s 2022 petroleum subsidy budget is more than half what it cost the country to subsidise the product for 10 years.

In recent times, Nigeria’s petroleum subsidy program has crowded out spending on physical infrastructure and needed investments in critical social sectors like health, education, water, sanitation and health (WASH) and social protection. In a study conducted by BudgIT, it was revealed that only 2 states, Lagos and Rivers, were able to meet their operating expenses with revenues generated internally in 2020: The 34 other states had to significantly rely on federal transfers (which is made up primarily of oil revenue) and Value Added Tax (VAT) to implement their budgets. In the first quarter of 2022, the NNPC made zero remittance to federation accounts on subsidy payments, leading to a notable reduction in revenue available to be shared by different tiers of government. 

Why has Nigeria’s petroleum subsidy program failed?

The burden of petroleum subsidy has continued to weigh down heavily on the Nigerian state owing to the highly volatile price of crude oil (with the attendant exchange rate differentials-driven challenges) and because, over time, Nigeria has refused to improve its capacity to refine crude oil locally. Nigeria currently has 4 refineries—two in Port Harcourt, one in Warri and one in Kaduna—with a combined installed capacity to refine 445,000 barrels of crude oil per day. Nonetheless, the four refineries continue to incur annual operational costs without refining a single barrel of crude oil daily. The four refineries still incurred a cumulative loss of N486.54 billion between 2016 and 2020. In the same vein, licences issued to more than twenty investors to engage in modular refining have not yielded the desired results due to pricing regulations and pipeline vandalism. 

Smuggling of PMS has been a significant driver of the increase in Nigeria’s petroleum subsidy cost. It is estimated that at least 15.6 million litres of PMS per day are smuggled across Nigeria’s borders to its neighbouring countries. A major incentive exists for the smuggling of PMS across Nigeria’s borders due to the significant price disparity of PMS between Nigeria and its neighbours. While PMS currently sells for 165/litre in Nigeria, it sells for between N577/litre and N660/litre in the countries bordering Nigeria. Nigeria’s reported daily consumption of PMS has grown astronomically in the last 7 years with very little empirical evidence to back it up. Nigeria’s average daily consumption has increased from 20.52 million litres in 2015 to 40.74 million litres in 2020 and 50.49 million litres in 2021. In the first 3 months of 2022, the country recorded an average daily consumption of  64.14 million litres. Even though it will cost Nigeria roughly N11 billion daily to fund subsidy in 2022, very little has been done to establish an intelligence-driven accountability mechanism to track the “apparent distribution” of PMS across the federation and stem the smuggling of the product across Nigeria’s borders.

What will it cost Nigeria to remove the petroleum subsidy in the short run?

There is no gainsaying that the removal of petroleum subsidy will significantly impact the lives of Nigerians, 83 million of whom live in extreme poverty. The removal of petroleum subsidy will, in the short-run, certainly have a multi-dimensional socio-economic impact on the lives and livelihoods of Nigerians. With an estimated population of over a 200 million people and a paltry power generation of about 4,000 megawatts, Nigeria’s per capita energy consumption of 144kWh is below the sub-Saharan average of 180kWh and the Europe average of 6,500 kWh. Most Nigerians have to rely on petroleum-powered generators due to poor access to electricity from the national grid to compensate for the energy gap. Similarly, micro, small and medium-scale enterprises have to rely on petroleum-powered generators to run their operations, resulting in a significant part of their operational cost being allocated to energy.

Furthermore, the primary source of transportation for the majority of the populace, the bulk of whom are poor, is petroleum-powered vehicles. There is a correlation between the pump price of petrol and the price of essential commodities in the marketplace. An increase in the price of petrol often results in a corresponding rise in the price of basic commodities in the market. The World Bank has projected that the removal of subsidy will prompt an increase in Nigeria’s inflation by 3 basis points (3%). The removal subsidy will certainly, in the short-run, result in an increase in the price of goods and services, reduce the purchasing power of Nigerians, and push more Nigerians further below the poverty line. However, the current petroleum subsidy regime is unsustainable and will compromise Nigeria’s fiscal sustainability in the short, medium and long term, cripple service delivery and, in the long run, push many more Nigerians below the poverty line. 

Wider Trust Deficit

The “jury’s verdict” on Nigeria’s petroleum subsidy program is that it needs to end. However, the general perception is that savings from subsidy removal will not be utilised for pro-poor programs and improved service delivery. So the real questions are: “why should the average Nigerian pay more for a litre of petrol if the resultant extra revenue accrues to the government will not be used for causes that improve his/her life? Will subsidy removal create fiscal space for improved spending in critical social sectors like health, education, and WASH? Or Will it create fiscal space for more plundering of Nigeria’s commonwealth? These are crucial questions that beg for cogent answers.

Expenditure patterns by the federal and subnational governments show that the country has historically not efficiently and effectively used the windfall of oil revenues to bridge Nigeria’s huge infrastructure deficit, improving universal health coverage and access to quality education and electricity WASH and improving other human capital development indicators. For emphasis, at the subnational level, state’s have prioritized spending on religious pilgrimages, airports, international worship and conference centres, and many other capital-intensive white elephant projects over investments in education, health, social protection, agriculture and (WASH). At the federal level, the country’s annual budget seems to reflect the interests of the political elites and bureaucrats rather than the developmental aspirations/objectives of the country articulated in the National Development Plan. There are massive loopholes for corruption and expenditure inefficiency with the situating of projects in the budgets of MDAs that have neither the mandate nor the capacity to implement such projects and the inclusion of projects that should be the clear mandate of the subnational governments.

Many believe corruption is the major bane of Nigeria’s weak revenue mobilization profile. According to the House of Representatives, Nigeria lost $7 billion to subsidy fraud perpetrated by some oil marketers and their enablers within the civil service. Many of those indicted are yet to be brought to book. The Inability of the government to hold people accountable and establish strong deterrents for the commission of crime has encouraged more people to commit at alarming rates. 

Conclusion and Recommendations

Considering the current cost of petroleum subsidy to Nigeria, its removal is an imminent reality; nevertheless, a couple of things need to be in place for the removal of subsidy to gain public acceptance. 

The government recently deployed $1.5 billion to rehabilitate the Port Harcourt Refinery. Nigerians want to get value for money and see their refineries work, but this must be accompanied by transparent, accountable and verifiable government operations that are carried out with enough time for Civil Society to respond accordingly. 

Secondly, through their budgets, the government projects and programs need to be geared towards pro-poor causes and reflect the aspirations of Nigerians. These projects must be conceptualized, implemented, completed and continuously evaluated with citizens’ input. Every stage must involve the input of citizen groups to provide the much-needed legitimacy that the government seems to be sorely lacking.

Thirdly, the attitude of the political class and bureaucrats do not suggest to the average man that the country is broke and going through a revenue crisis. A case in point is the immediate past junior Education Minister and the Labour Minister purchasing presidential nomination forms for N100 million naira when Nigeria’s tertiary education system has been shut down for 5 months. Though this would involve a systemic evaluation of the norms of what is acceptable behaviour by politicians and bureaucrats, one thing is sure; citizens’ buy-in and trust in the government’s decision to remove petrol subsidies must be met with real behaviour change. In this way, the citizens-the government’s primary constituents would provide the much-needed support for the transition away from the subsidy. In closing, it is essential to state that the government at both the federal and subnational levels and political elites cannot carry on with “Business as Usual” and expect Nigerians to accept “Business Unusual” policies. 

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