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ANALYSIS:  Fear of Subsidy Grips Nigeria as Oil Heads for $140

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ANALYSIS:  Fear of Subsidy Grips Nigeria as Oil Heads for $140

The burden of subsidy payment on fuel consumed in Nigeria is about to further weigh heavier on the pocket of the federal government, thus exerting pressure on the economic survival of the country.

Since the country depends largely on import to deliver refined petroleum products to its over 200 million citizens despite being a leading oil producing country, Nigeria cannot at the moment benefit from further rally in the oil price in the global market.

Brent crude, the global benchmark, which as at Monday traded at $119 is now expected to top $140 dollars in the next few weeks, according to the latest update by Goldman Sachs Commodity analysts.

Whereas at the moment, Nigeria is disadvantageously positioned for gains of such oil boom even when its other co-members of the Organisation of Petroleum Exporting Countries and its allies (OPEC+) may be smiling all the way to the bank.

On the contrary, every dollar appreciated in the price of crude oil in the global market would be tantamount to rise in subsidy spending for the Nigerian government to make gasoline affordable for its citizens.

A Government in Dilemma

Nigeria has spent many years in dilemma as it struggles to establish a feasible fiscal approach to solving subsidy problem. Earlier this year, the federal government proposed to stop helping Nigerians pay partly and largely the price of every litre of refined petroleum they consume in form of subsidy.

Had the government implemented the plan, premium motor spirit (PMS) also known as petrol would be selling more than double its current price of N165/litre at approximately N340/litre by now and other refined petroleum products would have also skyrocketed.

Malam Mele Kyari, Group Managing Director and Chief Executive Officer of Nigerian National Petroleum Company Limited, had confirmed this when he said that the Buhari’s administration had to consider the ripple effects of subsidy removal such as inflationary pressure on the survival of an average Nigerian.

Consequently, the government in January this year suspended its plan to remove petroleum subsidy by extending the implementation deadline of the policy by another 18 months till June 2023.

How Much Does Subsidy Gulp?

According to the latest report by the National Bureau of Statistics (NBS), Nigeria incurred 45% additional cost as subsidy on its imported gasoline in the first quarter of 2022.

The country spent N1.51 trillion on the importation of premium motor spirit the Q1. This was 25.54 per cent of the total imports for the quarter, and an increase of 17.05 per cent when compared to the N1.29 trillion spent on importing fuel in Q1 2021.

The PMS import, as usual, tops the list of imported products for this quarter, according to Foreign Trade in Goods Statistics report of the NBS analysed by Business Metrics.

Meanwhile, figures obtained from the Nigerian National Petroleum Company Limited (NNPC) showed that the oil firm spent N210.38 billion, N219.78 billion, and N245.77 billion as subsidy on petrol in January, February, and March 2022 respectively.

This means that a total of N675.93 billion was spent on fuel subsidy in Q1 2022 which is 44.86 per cent of the amount spent on fuel import.

More scarily, the amount spent on fuel subsidy monthly rose from N60.39 billion in March 2021 to N245.77 billion in March 2022, indicating an increase of 306.97 per cent.

Subsidy Worsens fiscal deficit

Recall that the National Assembly had on April 14, 2022, passed amendments to the 2022 Appropriation Act and 2022 Fiscal Framework, which was later signed by President Muhammadu Buhari in June early this month.

The reviewed budget raised the deficit in the Federal Government’s budget by N965.42 billion, to N7.35 trillion; and subsidy on Premium Motor Spirit (petrol) by N442.72 billion, from N3.557 trillion to N4 trillion.

Warnings, Fears Ricochet

There have been warning notes from various quarters that should Nigeria maintain status quo on subsidy payment, it is only a matter of time before the economy is hit hard.

They said given the weak revenue generation ability of the Africa’s largest economy, subsidy is not sustainable.

Just two weeks ago, The International Monetary Fund (IMF), through its Resident Representative for Nigeria, Ari Aisen echoed this concern again when he said that from the upgraded N4 trillion deficits budgeted for subsidy in 2022, Nigeria could eventually end up spending up to N6 trillion in the year.

Earlier in the year, Fitch Ratings expressed similar concerned that higher oil prices would also boost the subsidy cost, denting the benefit of higher global oil prices to the budget.

“We forecast the 2022 general government fiscal deficit to remain broadly unchanged from 4.1 per cent of Gross Domestic Product in 2021. However, we estimate that $10 per barrel increase would narrow the fiscal deficit by 0.5 per cent of GDP,” it said in a report.

Many Hopes on Dangote Refinery

To put an end to the economically-detrimental subsidy burden in Nigeria, much hope is put on Dangote Refinery, a private refinery expected to commence full operation by the fourth quarter of this year.

Instead of importing refined fuel, the government is expected to start patronising Dangote refinery, thus reducing the landing cost of refined oil, while also helping the country to manage and improve its foreign exchange earnings.

Speaking on what the refinery could do to Nigeria’s foreign exchange earnings recently, the governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, said the federal government currently spent about 40%t of its dollar earnings on the importation of petroleum products, putting pressure on the local unit.

“By the time the Dangote Refinery begins operation, it would be a major FX saving source for Nigeria,” he said.

“Right now, the overall forex we spend on imported items, the importation of petroleum products consumes close to 30% (by the time you add diesel, aviation fuel, petrol and the rest of that).

“The Dangote Refinery has the capacity to produce 650,000 barrels per day. There is a domestic component that is about 455,000 barrels. Even if the 455,000 is what is sold to Dangote in naira alone, it is going to be major forex saving for Nigeria.

“If you look at the cost of freight alone, it is a major saving for Nigeria. That is because if we have to go to Europe or other parts of the world to bring in petroleum products where we pay heavily in freight and in stocking those products in the high sea before we offload them, Nigerians would benefit a lot from the Dangote Refinery.”

Last Line

In its efforts to rid the Nigerian economy of multiplying economic complications, government should prioritise local processing of petroleum to first cut down the suffocating subsidy cost and perhaps succeed in its eventual removal without Nigerians having to pay the heavy price.

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