The fuel scarcity across the country has once again reopened the debate on the contentious and unresolved issue of subsidy on petroleum products. Economics of subsidy refers to money paid by government to keep prices of petroleum products below what they will otherwise be in a free, deregulated market system.
The latest controversy on subsidy apparently followed recent claims by the Petroleum Products Pricing Regulatory Agency (PPPRA) that subsidy to be paid by the Federal Government on each litre of petrol consumed in the country has increased to N45.21, up from N43.25 per litre.
With global oil prices in steep decline for almost a year now, daily subsidy on the product had since late December last year plunged to 90 kobo per litre. But, according to PPPRA, the Expected Open Market Price of petrol was put at N132.21 as at this month (May), up from N130.25 on April 28, 2015.
Therefore, based on estimated daily consumption figure of 40 million litres as given by the Pipelines and Products Marketing Company(PPMC), total subsidy cost on fuel alone as at May 1, 2015, amounted to N1.81bn at N45.21 per litre. With the exchange rate of the naira currently under severe downward pressure, government says it spent about N1, 29trn on fuel subsidies between 2012 and 2013, almost half of the national budget for last ye ar.
This is because, naira exchange rate depreciation has been the real driver of domestic fuel prices, and ultimately, subsidies. Recently, the Minister of Finance, Dr. Ngozi Okonjo-Iweala, said a total of N150bn was paid to oil marketers as subsidy claims, even though the marketers are claiming that government is owing them N200bn. Major and independent oil marketers constitute 67 percent of total fuel imports into the country. It is because very often, government and oil marketers are often at logger-heads over subsidy debt that the issue remains rather contentious and a bogey of sorts in the economy.
Government, on its part, has been stonewalling on either retaining fuel subsidy or removing it outright. It has become a touchy political issue as well that has polarised the country down the middle, with organised labour in the vanguard of those opposed to its complete removal. Those calling for the removal of subsidy insist that its discontinuance will attract investors to the downstream sub-sector of the oil industry. While this issue is not likely to end anytime soon, our view is that government should first address critical issues in the oil sector and review comprehensively the entire subsidy scheme that has made it a revolving door of monumental corruption.
First and foremost, government should urgently reactivate the four major refineries in the country, make them come on stream again as well as build new ones. It is rather sad, if not tragic, that the largest oil producer in Africa and the sixth largest in the world, remains a major importer of refined petroleum products with no genuine, concrete effort to stop the trend. Worse still, the much-touted deregulation of the downstream petroleum sector has not become a reality. In fact, while deregulation seems the right way to go, government has not shown the political will to ensure its implementation more than two decades it made deregulation a major economic tool of liberalisation of the economy. Neither has privatisation of the refineries gone beyond the paperwork. The truth is that if our refineries become functional, jobs will be created, while these middlemen who are feeding fat on subsidies will be minimised if not eliminated completely. Clearly, inefficiency and corruption are some of the factors why the refineries are not working.
But, critically, the management of the entire subsidy scheme needs to be looked into as it has become an unmitigated scam. For instance, in 2013, about ten oil marketers were docked before a Federal High Court for a N2.7bn subsidy fraud. N1.5bn was for fuel products that were never supplied. Also, the forensic audit into the NNPC by Pricewaterhouse Coopers(PwC) revealed that the subsidy scheme is a scam as many oil marketers were reported to have received multiple payments. A total of 128 companies were engaged in fuel importation in the old regime, thus providing an opportunity for the abuse of the system.
Statistics from government show that since 2012, the country has lost on the average, N971bn yearly to fuel subsidy. It is, therefore, imperative for a thorough probe into the subsidy scheme. All the same, removal of subsidy when our refineries are not functional might lead to unpleasant consequences. As long as the refineries remain comatose, subsidy will remain an unending national issue. Government should think through this and be mindful of the plight of the vast majority of the people that may be hard hit if subsidy is stopped.
