ECONOMY: Subsidy Removal: A Governments Insensitivity Towards A Supportive People – By Adolphus Aletor

 

“The Federal Government should have consciously phased this over the last 6 years especially when they told Nigerians that subsidy does not exist. Bringing it up now at the twilight of their administration does not only amount to taking Nigerians for granted but is deceptive”

PEGASUS REPORTERS, LAGOS | DECEMBER 4, 2021

I recently watched a short video of Joyce Daniels, a Social Engineering practitioner giving a vivid description of Nigeria’s refinery that has been decrepit. She likened the moribund institutions to a broken down Peugeot 404! rusty, without engine and comatose, whose cost of repair far outweighs the benefit after repair. In her words, N10bn naira is spent to maintain it monthly and wonders what we are doing as a nation.

The incidence of fuel pricing, hike, shortage, importation and subsidy have characterized every administration in Nigeria and all of them have received their fair share of the challenge. The previous government have consistently maintained that for Nigerians to enjoy the constant supply of fuel over the years, the product needs to be subsidised. This has continued until the present administration (then an opposition) convinced Nigerians that there was nothing like subsidy and that it was a tool used by successive governments to impoverish the people. This information came as a relief and for want of quenching the subsidy related corruption, Nigerians embraced the government with open arms. Surprisingly and disappointingly, Nigerians recently woke up to the news where the International Monetary Fund gave an advisory that the Federal Government should do away with the payment of fuel subsidy. Many Nigerians have continued to seek explanations as to the existence of subsidy. Is there anything like subsidy?

The Hon Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, in compliance with the IMF advisory, announced the Federal Government’s intention to remove subsidies from petroleum products citing continuous borrowing and protection of the common man as reasons for the decision. In an attempt to apportion responsibility, she accused car owners of benefiting from the current price regime at the expense of the common man. She announced that the Federal Government spends between N100bn to N150bn monthly as a subsidy and that if this was to be removed and borne by the citizens, there would be enough revenue to share to States and borrowing by the Federal Government would reduce.

Official statistics reveal that Nigeria is one of the oil-producing countries that have the highest cost of oil production. For instance, while it costs an average of $8.38 to produce a barrel of crude oil in Saudi Arabia, it costs Iran and Iraq about $9.08 and $10.57 respectively. The Group Managing Director of the Nigerian National Petroleum Corporation, Mele Kyari confirmed that it costs Nigeria about $17 to produce a barrel of crude oil. Other sources put it at between $21-$30 per barrel. The Central Bank of Nigeria, CBN website shows that the Bonny light (the trading name of Nigeria’s crude) has sold for $65.62 per barrel this year. This leaves us with a gross profit margin of about 286% (using $17 as cost). A barrel contains approximately 159litres. About 45 per cent of a typical barrel of crude oil is refined into petrol. An additional 29 per cent is refined to diesel. The remaining oil is used to make plastics and other products. When refined, the landing cost of fuel, a component of crude is put at N264.65 while the Major Oil Marketers Association of Nigeria reports that diesel has a landing cost of N336.45. At an exchange rate of N411 to a dollar, it means that Nigeria buys refined petrol and diesel at $0.64 and $0.82 respectively per litre.

Nigeria has four refineries (two in Port Harcourt, Warri and Kaduna). For years, these refineries have refined zero products while incurring about N10bn to maintain it monthly. The total amount spent on importing fuel in the last 6months of 2021 is about N1.47trn. In 2019 it was N1.7trn it rose to N2.0trn in 2020. The total fuel consumption within the period averages 57m litres per day in March 2021. The daily subsidy is put at N5.5bn.

From the analysis above, the findings relating to Nigeria’s oil trading activities are worth noting;
1. Federal Government produces crude at $17pb and sells for $65.62pb giving rise to a 286% gross profit margin.

2. Since a barrel contains 159 litres, it means that about 118litres (45% petrol and 29% diesel) are petrol and diesel while 41 litres belong to others.

3. For refined products of petrol and diesel, Federal Government buys at a total sum of $1.46 (petrol is $0.64 while diesel is $0.82) per litre. These two components represent about 74% of crude.

4. Federal Government, therefore, spends approximately $172.28 importing refined crude for petrol and diesel. The 26% for other products has not been factored in. When extrapolated, it could amount to $232.81 representing what is used to import a refined barrel of crude oil.

5. Federal Government sells crude at $65.62 and imports the same barrel containing three components of Petrol, Diesel and others at $232.81 leaving a shortfall in Forex of $167.19. The grave implication of this is that, for every single barrel of crude sold, refined and imported, the Federal Government must source for Forex amounting to $167.19 to complete the purchase. Nigeria’s main source of foreign exchange is oil and in this case, the effective earning is $65.62 but has to seek extra foreign exchange to complete the cycle. This seems to explain our perennial insatiable appetite for foreign exchange.

While the effort of the Federal Government in responding to contemporary issues for the betterment of the citizens is commended, many believe that a more creative and innovative response devoid of extra burden on the people will be more impactful hence the following recommendations. Demolition of existing refineries: The 3 refineries gulp about N120bn annually. This is an avoidable cost and can be eliminated through a controlled demolition of the 3 refineries.

National Assembly Sacrificial Support: The National assembly represents the people. There is no better time than now, to be a true representative. With a 2022 annual budget of N134bn, they can set aside 50% to subsidise the cost of living for the people they represent. National Assembly NASS, members are composed of past governors, sitting members of multiple administration, contractors, businessmen, entrepreneurs and professionals. Most do not depend on NASS resources to touch lives and maintain their lifestyle.

State Government Contribution: The State government should contribute 10% of their monthly allocation to a subsidy account for the Federal Government to meet this need. This should not be deducted at source. It should be used to measure the love state governors have for their people.

A holistic review of policy impact by a think tank: With petrol currently selling at N165 per litre and landing cost at N268 per litre giving rise to about 63% increase, many fear that pump price of fuel may go as high as N350 should subsidy be removed. The effect of this on the price of goods and services coupled with the instability in foreign exchange is capable of crumbling the economy. The Federal Government should get the economic think tank to review the holistic impact through rigorous sensitivity and scenario analysis before taking any step so that in solving one problem a greater one is not created.

In conclusion and considering the support Federal Government has enjoyed so far, one would have expected them to address the issue of subsidy removal over the last 6 years. Many have proposed a phased implementation. This is hampered by the fluctuations in foreign exchange. The Federal Government should have consciously phased this over the last 6 years especially when they told Nigerians that subsidy does not exist. Bringing it up now at the twilight of their administration does not only amount to taking Nigerians for granted but is deceptive. At a time when Nigerians are already under the weight of many issues, this is the time when the Federal Government should consider for once, the plight of the masses!

Adolphus Aletor, FCA, MCIB, a banker and finance analyst, is the Managing Director/CEO, Rigo Microfinance Bank. He can be reached on WhatsApp on +2348033410380 or jiyere@yahoo.com

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