Fuel Subsidy: A Far Too Enduring Legacy

November 24, 2021/CSL Research

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Recently, the Nigerian Petroleum Industry Act (PIA) was enacted. The act provides for the complete deregulation of the downstream sector – a provision which should ordinarily imply an end to the subsidy regime in Nigeria. Contrary to the provisions of the act however, the Federal Government of Nigeria has continued to subsidize the pump price of premium motor spirit in the country. In the most recent development for the sector, the Minister of Finance, Budget, and National Planning, yesterday noted that the FG will end its subsidy regime by July 2022. Mrs. Zainab Ahmed added that the federal government would in turn create a social intervention programme for the about thirty (30) to Forty (40) million people in the country who are currently below the poverty threshold.

According to the World Bank, there is an urgent need for the FG to end the subsidy regime and pursue aggressive reforms that could contribute more to growth. Overtime, the Nigerian economy, the largest in Africa, has been subsidizing the price of PMS. Since the emergence of Covid-19, however, it has become clear that such interventions are not sustainable. Especially, given that the Nigerian Fiscal Economy has been walking a tight rope in the past decade due to the constrained capacity to generate enough revenue. The advent of Covid-19, however, threw up significant frailties in the economy, as government revenue plunged significantly due to a dip in global energy demand.

The recovery in global crude-oil prices has once again brought the subsidy conversation to the forefront. So far, in 2021, crude oil prices have continued to rise, implying an increase in the landing cost of PMS. In 2020, a steep decline in global crude prices triggered by the pandemic completely wiped out the subsidy via significantly lower landing costs, paving the way for a reduction in the pump price of petrol in mid-March and paved the way for talks of deregulation. The PPPRA announced a reduction in ex-depot price to N113/litre and the official pump price to N125/litre. Between June and November 2020, the petrol price was revised four times, rising from N121.50-N123.50 per litre in June to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September, and N165-N170 in November. Undoubtedly, an attempt to revise the price to suit current realities will be strongly resisted by the populace who have been hard hit by two recessions and a pandemic in the last five years amidst rising food and utility costs. As of September 2021, the Nigerian government has spent about N864 billion in subsidy payment.

The deregulation of the downstream oil sector remains a politically sensitive discourse. Deregulating the downstream sector, which would at times of rising international price of crude-oil involve raising the pump price of petrol, constitutes a challenge for a country where the subsidy on petrol prices is seen as the only source of social security. Thus, we opine that the July 2022 commencement date for the plan might not come to fruition. For one, 2022 is a pre-election year and the government may be forced to retain the subsidy to avoid any clash with the populace. Again, in our view, the plan to provide monthly grant of N5,000 might not provide the needed cushion by the time the effect of the removal reflects on the overall consumer wallet. Also, it appears almost impossible to effectively execute given Nigeria’s poor population data

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