Petroleum product Marketers and Depot Owners Associations, gave the Government, a 7 day ultimatum from December 1st 2018, to redeem their long overdue balance for over N800bn for fuel, already sold at the Government regulated price of N145/litre.   

The N800bn, was reportedly consolidated from the difference between government’s regulated price and the actual open market price of petrol, sans subsidy; the marketers are also demanding compensation for exchange rate differentials and relief from the extended burden of interest on their bank loans.  Instructively, the open market price for fuel in our ECOWAS neighbour Countries is, presently around $1/ litre, i.e. between N305 - N360 per litre; this is in place of Nigeria’s much cheaper regulated price of N145/ litre, which has expectedly, encouraged large scale cross border smuggling of  petrol imports to neighbor nations in the Republics of Benin, Togo, Cameroun, Niger and Chad, so that these countries’ economies have, invariably, become significant beneficiaries of Nigeria’s oppressive and distortional  petrol subsidy.

Consequently, the NNPC management is alarmed  that  Nigeria may be consuming between 50-60million litres of petrol daily, in place of the more modest  30-40 million litres /day consumption before the Naira was devalued from N190/$ to the present N305 or N360/$ in 2017; incidentally the NNPC/ CBN management, have inexplicably, never been categorical on the applicable exchange rate for our fuel imports.

Nonetheless, Petrol marketers have now, threatened to cut back on their operations, with mass lay-off of staff, if government does not quickly meet its obligations and save their Companies from shylock creditor banks, which continue to calculate, disenabling double digit interest rates on their overdue loans. 

However, Nigerians must be concerned that the seeming impasse between the marketers, government and the banks, will not once again, trigger the severe challenges they endured, in unending fuel queues between December 2017 and January 2018. 

Nevertheless, the NNPC, which has, since become sole importer of petrol, has assured Nigerians of adequate local stock to sustain regular supply. Notably, however, even such excess stock may be of little use, without adequate operational distribution channels. Ironically, the hundreds of billions of Naira already spent on overhauling our refineries, have regrettably, still not brought significant relief from almost total fuel importation. 

The above title “The Oppressive Folly of Fuel Subsidy” was first published in May 2015; a summary of that article follows hereafter. Please read on. 

“The data released by responsible Agencies of government on fuel subsidy outlay, have overtime, regrettably remained divergent, such that, it has become a challenge to obtain definitive estimates. Nevertheless, the Finance Minister, Dr. Ngozi Okonjo-Iweala recently explained that the inconsistent figures often quoted were unavoidable because subsidy payment is a continuous, rolling process, therefore, “relevant government agencies, in the chain, can only provide specific data relating to approved claims which have passed through them at any point in time.”

“The above notwithstanding, subsidy payments, presently add up to over N500bn, or an average of about 10 percent of each Federal budget since 2011. Incidentally, despite the obvious, severe social deprivations caused by our dismal infrastructural deficit, critical sectors such as Education and Health, were never so favoured.”

“In fact, according to the Co-ordinating Minister, it is not unusual for subsidy allocations to be omitted from annual appropriation bills; nevertheless such subsidy claims are settled ultimately with the knowledge of the Finance Ministry, without recourse to Legislative approval as constitutionally required.”

“This tradition of impunity has obviously been stepped up, with possibly, over N200bn additional commitment recklessly incurred, as penalty for bank interest on delayed payments and exchange rate differentials on a ‘core’ subsidy bill of N40bn, as reported by Thomas Olawore, the Executive Secretary of the Major Petroleum Marketers. (See the report of Daily Subsidy on PMS rises to N1.7bn in Punch newspaper edition of 30thApril 2015).”

“Ultimately, the oppressive folly of government’s subsidy strategy may become embarrassingly glaring when we become constrained to obtain higher priced loans to fund our debilitating subsidy habit.”

“Conversely, however, if subsidy is abolished with the prevailing crude oil price and Naira exchange rate, fuel price will rapidly shoot up to about N150/litre, and ultimately drive the rate of inflation closer to ten percent. Consequently, unless all wages and salaries rise by ten percent annually, income earners may lose 50 percent of the purchasing value of their Naira incomes every five years; Thus, the existing minimum wage of N18000/month, may well become less than N9,000 since it was established in 2011.”

“Furthermore, consumer demand will contract if inflation spirals, and this will create adverse consequences for employers of labour who will become compelled to scale down on their workforce; clearly, this will only worsen the already socially disturbing rate of unemployment.”

“However, the incoming administration may predictably seek a truce as usual with Organised Labour to share the burden of subsidy, by raising the current fuel price of N87 to about N120/litre instead of the subsidy free actual market price of about N150/litre.”  

“Regrettably, however, this arrangement will collapse, once crude oil prices rise above the current $60/barrel and, or the Naira exchange rate rises above N197/$, because such price movements will push deregulated petrol price well beyond N150/litre  and create a wider  margin of subsidy than the N30/litre earlier projected.”

“Furthermore, if pressure on dollar demand increases because of CBN’s rapidly depleting reserves, Naira exchange rate would simultaneously climb closer to or above the current black market rate of N220=$. In such event, fuel price will invariably rise and related subsidy values will also increase to precipitate the usual train of inadequate funding, delayed payments, fuel scarcity, extended queues at petrol stations and the usual dislocation to economic and social life, until a brokered resolution between government and Labour, once again, sets in motion another cycle of folly, with another agreement for the accommodation of partial subsidy in fuel pricing!”

“Sadly, it is not generally known that almost 50 percent of our forex earnings are currently repatriated abroad as payment for Nigeria’s fuel imports.”

“Conversely, however a huge reduction in such external payments, may be possible, if more refineries are built or if at least existing government’s refineries become fully operational. However, even if all refineries operate at optimal capacity, the ex-refinery cost of fuel will not be significantly different (by about 5 percent for freight cost) from the f.o.b. prices invoiced by overseas suppliers unless we chose to also subsidise crude oil supplied to local refineries.”

“Thus, whether crude oil prices rise significantly or Naira exchange rate further depreciates, fuel pump price will faithfully spiral uncomfortably to make the accommodation of subsidy inevitable. Besides, until price regulation is abolished, investors will continue to stay away from establishing new domestic refineries because of the challenges of the subsidy scheme. However, savvy investors, such as Dangote, who establish new refineries, would hedge their investments by selling their products strictly in dollars ex-refinery gate to marketers who would still need to source the required forex for their purchases; consequently, the forex outlay for fuel will still remain substantial even if new private refineries are established.”

“Conversely, however, owners of domestic refineries would readily price their fuel in Naira, if Naira re-establishes a reputation as a safe store of value, rather than a currency that is perennially beleaguered and remains on life support. 
Instructively, Naira exchange rate will continue its slide and make abolition of subsidy a challenge, so long as our domestic money market remains eternally flush with ever-surplus Naira, which is deliberately created  by CBN to chase the rationed dollars regularly auctioned by the same Apex Bank!”

Postscript December 2018: It is Déjà vu, once again, on the fuel subsidy dilemma! When, I dare ask will this national folly cease?