Although the price of the benchmark crude, Brent, is touching the $80.00 mark and projected to hit the $100.00 mark in the month of October, based on NATIONAL ECONOMY’s analysis, the development is not particularly good news for Nigeria.
This is because an increase in oil prices will imply an increase in the price of petrol, which may either mean a further upward adjustment in petrol prices or an incurrence of higher cost of subsidy. The federal government has of date opted for the subsidy regime. Hence, the burden of subsidy on the federal government has progressed arithmetically in tandem with the rise in the price of crude oil on the market.
This is a necessary evil. According to an economist of the Department of Economics, Lagos Business School and member of the Board of Economists, NATIONAL ECONOMY, Dr. Bongo Adi, the federal government finds itself in a place where it has to take the social situation of the country into consideration. He said removing subsidy at this time of economic hardship would be tantamount to putting fuel in fire. Consequently, according to Adi, the increase in the price of crude will have no significant positive impact on the economy.
Also speaking with NATIONAL ECONOMY on the issue, the chief executive officer of Anthill Concepts Limited, and member of the Board of Economists of NATIONAL ECONOMY said fuel is treated as a social service in Nigeria, hence also like a banana peel, which makes the government treat the issue of subsidy cautiously.
He said considering the fact that the transportation system in the country is not in the best state, retaining subsidies would keep the social peace. He concurred that the country would not benefit optimally from rising prices of crude due to increasing bills of subsidy, coupled with the burden imposed by smugglers of the product to neighbouring countries.
As of date, the federal government has spent N905 billion on fuel subsidy for the 2021 fiscal year, having exited the subsidy regime in 2020, during the height of the COVID-19 crisis when the price of crude oil on the international market fell below $19.00.
With the rising cost of crude oil and almost 100 percent importation of finished petroleum products, the cost of subsidy on the federal government is projected to exceed N1.5 trillion before the end of the fiscal year, even though that amount was not budgeted for in the 2021 fiscal budget.
The importation of petroleum products takes 40 percent of Nigeria’s foreign exchange. Although the Nigerian National Petroleum Corporation (NNPC) said recently that Nigeria consumes 103 million liters of premium motor spirit daily, analysts say Nigeria’s actual consumption is less than 40 million, which means Nigeria’s current subsidy regime feeds by more than half of her resources to neighbouring economies.
Hence, the more revenue Nigeria gets from increased prices of crude oil the more the federal government’s expenditure will be devoted to paying subsidies for neighbouring countries, which is no good news from higher crude prices.
The signing of the Petroleum industry Bill into an Act has not made any difference as the law makes provision for at least one year transition period.
Contrary to expectations that the signing of the Petroleum Industry Act (PIA) would automatically commence the deregulation of the downstream sector, especially the removal of subsidy, the federal government said the retail price of premium motor spirit will remain at N162 per litre until a feasible framework is developed.
Analysts say with the current landing cost of PMS the removal of subsidy will lead to an upward review of petrol retail price rising to at least N400 a litre.
The group general manager in charge of Public Affairs Division of the Nigerian National Petroleum Corporation (NNPC), Garba Deen Muhammad, confirmed that fuel subsidy would remain, pending the outcome of the current negotiations with labour unions in the country.
He said there would be chaos in the country if the subsidy was removed now. “The government is discussing with labour to find a lasting solution to the concern,” he said.