The Minister of State for Petroleum, Ibe Kachikwu, noted at an in-house LPG workshop in April 2018, that the proliferation of illegal petrol stations and tank farms, in close proximity to Nigeria’s ECOWAS neighbours, is primarily responsible for pushing fuel subsidy expenditure beyond N1, 400bn, i.e. almost 20 percent of the N7.298Tn 2017 budget.

NNPC’s GMD, Maikanti Baru, recently consulted with the Comptroller General of the Customs’ Service, to fight the menace of fuel smuggling, as National consumption had risen from N35m to 60m litres/day, with serious concern that the volume may increase to 80m litres (over N2800bn, or 40 percent) of the N8Tn 2018 Federal budget, if fuel smugglers, capitalized on the 50 percent cheaper price in Nigeria. 

Instructively, if crude oil price unexpectedly exceeds $80/barrel, while fuel price remains regulated at N145/litre, sadly, the Naira rate will, as usual, ironically, further depreciate and push subsidy spending well beyond N3000bn annually. 
The above title was first published in January 2014. Please read on.

“Bernard Otti, NNPC’s Group Finance Director, explained, at a press conference, in Abuja on January 11, 2014, that, out of the contentious net balance of $10.8bn oil revenue which CBN Governor, Lamido Sanusi, alleged was not accounted for “a total sum of $8.49bn was spent on subsidy claims, while $1.22bn was spent on management and repairs of petroleum pipelines; $0.72bn was incurred on products and crude oil losses, while another $0.37bn was expended on holding the country's strategic product reserves”.

The inference of the $8.49bn (about N1.4tn) that NNPC confirmed it legitimately retained as fuel subsidy, between January 2012 and July 2013 will be examined hereafter!  Incidentally, the National Assembly had approved “an additional sum of N161.6bn to augment the initial N881bn voted for subsidy in 2012; thus, total fuel subsidy approved for 2012 was reported to be about N1.05tn (i.e. more than 20 per cent of the total budgeted expenditure of N4.7tn) for that year.”

Despite the oppressive subsidy outlay, Reginald Stanley, the Executive Secretary of the Petroleum Pricing & Regulatory Agency (PPRA), elatedly observed, however, in media reports, that the N1.05tn consolidated subsidy appropriation in 2012 was a major improvement on the highly controversial total subsidy of N2.09tn in 2011!  

The PPRA Secretary, cautioned that the 2012 subsidy outlay of N1.05tn did not include subsidy on kerosene; consequently, total subsidy would actually exceed N1.05tn, if kerosene claims were also captured!  However, the recent confirmation by the Financial Director, Bernard Otti, that NNPC, internally, also additionally, absorbed $8.9bn (N1.4tn; or N75bn monthly) without overt legislative approval, may suggest that the total actual  subsidy expenditure  for 2012 could possibly be closer to N3trillion, especially, when subsidy claims for kerosene are also captured.  Ultimately, total subsidy outlay may, outrageously be the, equivalent of over 60 percent of the total federal budget of N4.7tn in 2012!  Consequently, if, well over N3tn is possibly frittered on subsidy, in addition to interest and service charges of about N600bn paid on Central Bank’s, largely unproductive borrowings are also captured, this would imply that the equivalent of, over 75 percent of total budgeted spending were simply applied to intangible and unproductive objects in 2012, even when total actual infrastructural expenditure, including allocations for health and education, was inappropriately below N1.3tn.

It is therefore, worrisome that, in 2012 subsidy payments may have exceeded the seemingly outrageous 2011 value of N2.09tn! Incidentally, fuel subsidy projections were not overtly captured in the actual text of the 2013 budget; nonetheless, there is nothing to subject that total subsidy expenditure for 2012 actually fell below the N3tn, allegedly, expended in previous years!  It is distressing, also, that fuel subsidy outlay for 2014 will not be any different; consequently, consolidated subsidy values, plus Federal government and CBN’s projected debt service charges of about N600bn, may actually exceed N3.6tn, in sharp contrast to the relatively paltry projected total capital expenditure of N1.5tn in the approved N4.6tn budget in 2014!

Furthermore, with naira exchange rate currently under severe downward pressure, subsidy claims alone, may ultimately exceed N3tn in 2014.  Instructively, naira exchange rate depreciation has, historically, been the real driver of domestic fuel prices and ultimately rising subsidy values!  A simple example will demonstrate this reality; “if international FOB market price of PMS is, for example, $1, then by extension, with $1=N160 in 2013, this would be equivalent to N160/litre (plus about 10 percent for freight and port charges)!  On the other hand, if the naira exchange rate falls to N200=$1, while official pump price remains at N97, this would imply that the naira subsidy component must increase!

“Conversely, if naira exchange rate strengthens to N80=$1, for example, this implies that Petrol would similarly sell at N80/litre plus freight and clearing charges; i.e. well below the existing official price of N97/litre.  Consequently, government can rise about N10/litre as sales tax, rather than a subsidy expenditure of over N40/litre as is currently the case!”  Regrettably, no increase in the number of functional refineries will change this reality! (See “The Avoidable Oppressive Burden of Fuel Subsidy” (www.betternaijanow.com) 

Consequently, our economic management team may have inadvertently boxed itself into a dilemma, as we seem incapable of reducing the price of PMS and kerosene consumption, despite the very heavy leakages from massive cross border smuggling.  Meanwhile, government, has understandably, shied away from another confrontation with the masses, particularly after it survived the charged and volatile social tension, of January 2012 pro-subsidy strike!  Worse still, the unyielding burden of systemic cash created by CBN's substitution of fresh naira supply for dollar revenue will always guarantee that naira exchange rate will remain challenged, so that petrol prices will, therefore, never fall to erode the related erstwhile subsidy values!

Thus, we may not require a soothsayer to correctly predict, as I have consistently maintained, that inclusive economic growth, with rapidly enhanced social infrastructure will remain clearly unattainable, so long as rising debt service charges and fuel subsidy payments continue to account for the lion’s share of budgeted annual expenditure!  

We must therefore, be forewarned that, unless we “kill” fuel subsidy expenditure, unrestrained fuel subsidy payments may ultimately “kill” us!  The choice, therefore is, should Nigerians endure abject poverty despite increasing wealth accumulation for our serial economic predators or are we ready to resolutely demand that only policies that would bring about salutary mass social welfare are pursued?  Are we ready to embrace such change with the adoption of a monetary payments strategy that will induce a stronger naira exchange rate below N97/$1 i.e. the rate of exchange that would presently, totally eliminate subsidy payments, as per the example explained above?  

Indeed, a progressive upward evolution of the naira exchange rate to around N80/$1, will expectedly, not only eliminate fuel subsidy, but will also enable government, just as in the UK and elsewhere, to earn a minimum sales tax of about 10 percent per litre; i.e. minimum revenue of over N350m/day, in place of N40/litre subsidy for the 35million litres of fuel, allegedly consumed and smuggled from Nigeria daily!

Consequently, in view of the increasingly suicidal impact of fuel subsidy payments on our economic growth and social welfare, no well-meaning Nigerian can sincerely stand on the sideline, especially if President Jonathan and the legislature remain, unfortunately, lethargic about such reform; particularly more so, when there is a  real possibility that our present oil revenue inflow can induce a stronger naira rate to actually precipitate much lower fuel prices, devoid of any subsidy component, if dollar income from crude oil sales, is infused into the domestic economy via dollar certificates/warrants, rather than the current poisonous system of creating fresh naira supplies as allocations for distributable dollar revenue every month!”

“Seriously, no successful economic transformation can occur without first saving the naira!”

Post-script April 2018: Notably, reserves have presently risen beyond $45bn, inexplicably, exchange rate remains static between N305-360 = $1.