History Made As President Bola Tinubu Ends 46-Year-old Subsidy Monster—Since 1977 when the military regime of Olusegun Obasanjo formalised the subsidy regime via the Price Control Act, the scheme, created as a cushion against rising oil prices, has become a financial vampire squandering government’s revenue under an opaque operational template.
Nigeria, the only member of the OPEC bloc without a functional refinery, has continued to bleed under scandalous subsidy payouts and efforts by successive civilian administrations to slay the hydra-headed monster has always been met with resistance from the citizens; many of whom consider it their major or only benefit from the Federal Government.
Just like in oil theft, the security agencies, political class and technocrats are reportedly neck-deep in the subsidy bazaar. They have allegedly created a flourishing criminal enterprise around the subsidy regime by smuggling subsidized petrol to neighbouring countries like Niger, Chad, Benin Republic, Cameroon and others where they sell it in dollars and make a kill in the process.
Analysts note that influential petrol smugglers are those ballooning the average daily petrol consumption in Nigeria to 66 million litres, a figure many have said is over-bloated. Sanusi Lamido Sanusi, a former CBN Governor, said the figure was unrealistic because a good portion of that volume is smuggled out.
In Benin Republic, Nigeria’s smuggled petrol, though considered as contraband, is called “kpayo” and consumers are already bracing for harder times following President Bola Tinubu’s decision to end the party.
President Goodluck Jonathan tried to bury the subsidy regime in 2012, but the opposition party, led by the incumbent president, Tinubu, and his predecessor, Muhammadu Buhari scuttled it via endless protests. They insisted that the Jonathan administration was trying to break a social contract with the people by yanking off the subsidy scheme which they claimed was non-existent.
Ex-President Buhari mounted the saddle as the 15th President in 2015 with a firm promise to demolish the subsidy empire of influential Nigerians, saying he did not believe in it.
He then appointed himself the substantive Minister of Petroleum Resources but all the promises were mere empty talks as he ended up becoming the highest spender on dubious subsidy payouts. Oil theft also reached unprecedented dimensions on his watch.
According to the latest oil and gas industry reports released by the Nigeria Extractive Industries Transparency Initiative (NEITI), petrol subsidy gulped N1.99 trillion from 2015 to 2020.
Also, reports released by the Nigerian National Petroleum Corporation (NNPC) to the Federation Accounts Allocation Committee (FAAC), showed that petrol subsidy cost N1.57 trillion in 2021 alone and another N1.27 trillion from January to May 2022. The government has a budget of N3 trillion to cover petrol subsidy costs from June 2022 to June 2023.
An aggregation of the entire expenditure showed that under former President Buhari, the government spent about N7.83 trillion on petrol subsidies, just as the refineries remained in comatose state despite billions of naira spent to bring them back to life. He also promised to build one refinery every year for four years which many described as presidential fantasies.
It did not end there, former President Buhari borrowed heavily to run the economy, including subsidy payments.
According to the Debt Management Office, DMO, the Buhari administration left a total public debt stock of about N77 trillion, when new borrowings and ways and means advances are factored into it. But President Buhari inherited a debt of $10.33 billion as at June 30, 2015.
But the Tinubu administration took off on a chaotic start with the president making what has become a controversial announcement on subsidy removal in his inaugural speech. It has set off a chain of events in Nigeria with the organized labour asking the new president to revert to status quo or risk precipitating a crisis he may not be able to contain.
Labour argued that a nation with no social safety nets should not hit its citizens where it hurts them most because prices of food, other goods and transportation will reach stratospheric heights with no set dates for a fall.
However, several analysts have called Labour’s bluff and hailed Tinubu for courageously removing petrol subsidy.
According to them, Tinubu’s action would ultimately save Nigeria from collapse because it seeks to treat an old infection that deformed the economy for decades.
While they reckon that the impact on consumers, especially low-income earners, would be severe in the short to medium term, they insist that the development remains a good omen for the country in the long run.
Experts insist that the total deregulation of the downstream sector will improve the efficient use of scarce resources, end the scarcity of petroleum products, and improve the sector as operations will be governed by market forces.
Yusuf Lawal Othman, the national president of the Nigerian Association of Road Transport Owners (NARTO), in a recent presentation in Lagos, said that deregulation will reduce economic waste and lighten social burdens caused by governmental control.
“It will further expand opportunities for economic growth in the competitive sector and help achieve a greater cost of effectiveness. Saving the cost of petroleum subsidies,” he said.
Also weighing in on the issue, Dr Ahmed Adamu, a petroleum economist, said that consumer losses are expected but not inevitable even if a future date of the subsidy removal was announced.
According to him, the final removal of petroleum subsidy in Nigeria remains a welcome development as market forces will dictate fuel prices.
He, however, noted that with the sudden increase in petrol price by more than 170 per cent due to the subsidy removal, the economy will shrink in the short run as productivity reduces.
“There will be less demand for petrol, and overall spending will decrease. Businesses will lay off staff to cope with the increasing cost of doing business, and general welfare will reduce.
“However, there will be new inventions as people start looking for alternatives. They will explore alternative transport systems or fuel or adjust their lifestyle. More business opportunities will emerge from this development. People will now begin to organize collaborative transportation means to share or reduce the cost of transportation per head.
“There will be efficiency of demand and reduced wastages, and unnecessary trips will be reduced. There will be fewer cars on the road and reduced carbon emissions. The NNPC Limited remittance to the government will increase because the cost of the subsidy is being removed. This enables the government to do more development projects and borrow less,” he explained.
He added that petrol prices will fluctuate periodically as crude oil prices and dollar exchange rates change.
“NNPC Limited and other importers will post their prices whenever there is a change in the variables that affect the cost of their fuel. These could be the distance from which the fuel is imported, its quality, or variation in profit margins. NNPC Limited’s posted prices will be the benchmark for the petrol market because it is a fairer and stronger player.
“Prices will be coming down in the event of lower crude oil prices. However, there could be collusion by the importers to stick to a higher price even at a low crude oil price. But, higher prices attract more supply, and less demand, leading to excess supply, which brings prices down.
“When the Dangote refinery starts operation, the petroleum products importers will then buy from the local refiner, thereby saving the extra costs of distance transportation costs and foreign inflation from the source country. They will be able to reduce their posted prices then.
“The marketers will get Dangote’s fuel at least N30 less than the imported fuel per liter. They will enjoy Dangote’s economy of scale (producing more at cheaper costs) and local production. This cost-saving could be higher due to cheap labour in Nigeria. However, this does not remove the possibility of some marketers sourcing the product cheaper elsewhere.
“Marketers that buy from the Dangote refinery will sell first. And if they can meet the local consumption, those that import expensive fuel will be pushed out of the market.
“Even though the approach by President Tinubu needed to be more systematic, it has minimized the chances of prolonged speculative buying by retailers in the event of scheduling the removal on a designated future date,” he added.
Adamu further said that the Dangote refinery will reduce Nigeria’s import bill because today, imported petroleum products are the biggest bill in Nigeria’s import basket.
“So, the Dangote refinery will reduce the supply of Naira, leading to its appreciation. It will positively affect Nigeria’s balance of payment due to the exports of petroleum products by the refinery.
“Other countries will also bring their crude oil for refining in Nigeria and pay in dollars, thereby growing the impact of the oil sector on GDP. However, Dangote will buy Nigeria’s crude oil in dollars, sell the refined petrol in Naira only to Nigerians, and exchange any desired quantity of the Naira receipts for Dollars at the CBN”, he added.
Also speaking on the burning issue, a seasoned oil and gas governance expert, Mr Henry Adigun, said that subsidy payment does not actually benefit the masses, but the rich if well analysed.
He also noted that Buhari’s failure to resolve the petrol subsidy issues in eight years worsened the situation.
He noted that the Buhari administration wove politics and emotion around the issue, which ultimately pushed the country into a deeper debt pit.
“The first thing is you cannot properly manage what you do not understand. Most times our politicians talk from emotion and lack of fact. At times they do not take professional advice and would let you know how long they have been in government.
“The man (Buhari) didn’t believe there was a subsidy and they all assumed it was corruption, but when they came in and it stared them in the face then they learned and when they learned they now had to make harsh decisions. Buhari made one in 2016 when he raised (pump price) from N87 to N145, but he didn’t sustain it. That point in time was the time to allow it to go once and for all, but he capped it.
“By capping it and not providing enough foreign exchange for other importers, but allowing only NNPC to become the sole importer of the product in the country, they made the situation worse. That led to the problem they are having now.
“What they have done in the last eight years is to make it worse for the country, make it worse for the incoming administration. They have ballooned the cost and the volume. They failed because they never understood the problem and they made it political”, he explained.
Nigeria’s bloated cost of governance has also raised concerns among people who feel that government must adjust its spending as leaner resources are available for over 200 million people.
Already, the Group Chief Executive Officer of the Nigerian National Petroleum Company Limited (NNPCL), Mr Mele Kyari, has offered reasons his management could not wait for the June 30 sunset date for the subsidy regime before releasing a new pricing template for petrol.
He noted that last Wednesday’s sudden decision to adjust upwards the pump price of petrol was informed by the urgent need to unshackle NNPCL from the burdensome subsidy payouts, which have stifled its fiscal operations.
According to him, “There was a provision for N6 trillion in the 2022 Budget, and N3.7 trillion in 2023.
“Since that provision was made for subsidy, not a single naira was paid to NNPC to fund the payment. The NNPC had to fall back on the cash flow from its operations to fund the subsidy provision in the budget, to continue to supply petroleum products in the country. It is becoming a daunting task, making it almost impossible for NNPC to continue to discharge its fiscal functions.
“The law says the government will write a cheque for the NNPC at the end of every month for the supply of petroleum products to the country. But that has not happened. We have held back our fiscal obligations for 2022 and half of 2023. There is nothing we can do. But there is still an outstanding of N2.8 trillion the government has to pay NNPC.
“There is a provision for subsidy up to June 2023 in the Appropriation Act, but there is no cash backing, and therefore no money to fund it. Because it is not funded does not mean that NNPC has to wait until it is done, as the consumers of petroleum products do not expect that the supply of petrol should wait”, Kyari said during an interview on Arise Television.
In the new pricing template, the price of petrol in Lagos shot up from N184/litre to N488, representing a 165 per cent hike, while in Borno, it increased from N199 to N557, representing a margin difference of 179 per cent. In Abuja, the price at NNPC mega stations widened by 176 per cent from N194 to N537.
