Nigeria’s fuel subsidy payment has been on the increase in recent times. This has led to outrage by stakeholders who believe the huge amount budgeted for subsidy annually should be channelled to infrastructural development.
In simple terms, subsidy or under-recovery is the under-priced sales of premium motor spirit (PMS), better known as petrol.
In 2021, President Buhari signed the Petroleum Industry Bill amidst commendation from stakeholders. The Act is expected to bring full deregulation of the sector. However, the minister of finance, budget and national planning, Mrs. Zainab Ahmed, announced its suspension due to the economic headwinds the country is currently facing.
However, the huge subsidy payment is taking a toll on Nigeria’s revenue. For instance, between 2018 and 2022, the federal government budgeted N3.75trn, according to data obtained from the Budget Office.
Also, at the 2022 World bank/IMF meetings, World Bank president, David Malpass, stated that the government needs to review its subsidy strategy as it is becoming too expensive to sustain.
Breakdown of subsidy increase
It has been estimated that the federal government has spent a total of N10.413trn on fuel subsidies between 2006 and 2019.
A breakdown of subsidy payment according to data from the Nigerian National Petroleum Company Ltd shows that subsidy payments grew by 349.42 per cent from N350bn in 2019 to N1.573trn in 2021.
The increase is cheaply driven by the prices of petroleum products in the international market as well as the consistent devaluation of the local currency.
Why the increase?
The major reason for the rise in subsidy payment can be attributed to the fact that Nigeria imports petroleum products as none of its refineries have the capacity to refine. This is further worsened with the weak local naira which has now moved from N198 to $1 in 2015 to N570 to $1 in 2022.
Recall that the recent war between Russia and Ukraine has skyrocketed the prices of petroleum products as the price in the international market now hovers between $105 to $110 per barrel.
In the same vein, the coming of the implementation of the Petroleum Industry Act (2021) that prescribes a free market for the downstream sector of the petroleum industry has been suspended, which many experts warn about implications which could discourage investments in the sector.
According to data published by the defunct Petroleum Products Pricing Regulatory Agency PPPRA, the Federal Government paid a total of N2,105.92trn in 2011, an increase of N1,437.84trn from the 2010 payment.
It also noted that in 2012, N1.35trn was paid as a subsidy, the highest within the period under review.
“A total of N 1, 316trn in 2013, N1,217trn in 2014 and N653.51bn in 2015 was paid as subsidy claims,” it added.
It noted that the NNPC since 2016, had been the sole importer of the product to the country.
FX, petrol smuggling contribute to high subsidy prices – Expert
Executive Secretary of Major Oil Marketers Association of Nigeria (MOMAN), Mr Clement Isong, attributed the rise in the international price of crude oil, foreign exchange rate and high rate of petrol smuggling across Nigeria’s borders as the major contributing factors to the rising subsidy prices being witnessed in the country.
According to him: “The first is the international cost of crude oil and the derivative products like Premium Motor Spirit (petrol) has gone up significantly as a result of the Russian war in Ukraine. So, the price of crude itself, and the price of petrol, diesel and all products that come from petroleum have gone higher than they normally would be because of the war and the sanctions imposed on Russia, which is a major exporter of crude.
“Secondly, the rate of foreign exchange is exceedingly high right now. That is to say, the exchange rate for the Naira is at its highest level. I’m not talking of the black market which is even higher, I’m talking about the Central Bank of Nigeria rate which is N411-N414 to the dollar. It is higher than it has ever been historically.
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