In the wake of the steady decline in crude oil prices in recent months, Nigerians anticipated the good news of a drop in pump price of petrol. Sadly, however, last week’s announcement of a new price of N87/litre quickly deflated the high public expectation for a price well below the existing, previously subsidized N97/litre. 

The recurrent concern was that since crude oil prices fell by over 50 percent, there should also be a reduction of similar magnitude in the local price of petrol. Notwithstanding the public’s discontent, government has insisted that the new pump price still includes a subsidy of about N2.84/litre.

Farouk Ahmed, the PPPRA Executive Secretary reported that “based on the landing cost of N74.35/litre of PMS, on Friday, January 16th, 2015, the addition of a distribution margin of N15.4/litre would translate to a pump price of N89.84/litre.” Thus, according to Ahmed, the Government would still be subsidizing the new petrol price by N2.84/litre.

Surprisingly, however, despite public perception of the subsidy scheme as a racket, popular sentiment, however, is that it is harsh and insensitive to reduce the existing N50 subsidy on petrol price to just N2.84/litre in one go.

Nevertheless, with estimated daily consumption of over 40 million litres, the calculated subsidy of N2.84/litre will increase treasury leakages by over N400bn, which is just over 10 percent of projected revenue in the 2015 budget. Nonetheless, the reduction in subsidy values may bring some joy to those critics who felt uncomfortable with subsidy payments estimated at over N1tn annually. It is worth noting, however, that subsidy will be completely eliminated if crude prices fall much more below the benchmark of $42.65/barrel on which the new price of N87/litre was reportedly calculated.

Thus, in a macabre twist of fortune, the erstwhile fiercely resisted abolition of petrol subsidy may have unexpectedly quietly sneaked in without a whimper of protest, because of lower crude prices which, ironically, have the oppressive impact of cruelly reducing Nigeria’s export income by over $20bn in one year. So, although subsidy payments may fall from over N1tn ($6bn) to about N400bn ($2bn), the process that makes this possible would also regrettably reduce crude export income by over $20bn i.e over 50 percent of annual budgeted revenue. 

Curiously, total elimination of subsidy would also eliminate erstwhile SURE-P savings and inadvertently also jeopardize any real possibility of rapid infrastructural enhancement as the already meager capital vote of about N690bn in the 2015 Appropriation Bill includes a SURE-P provision of about N290bn. Consequently, the net paltry capital expenditure of about N400bn would barely exceed 10 percent of the consolidated budget income which may be just over N4tn in 2015.

Sadly, therefore, over 90 percent of projected federally collected revenue in 2015 will be dedicated to plain consumption, despite the clear need for constant dedication of over 50 percent of total annual spending to infrastructural enhancement and human capacity building. 

Thus, the horrendous slide in crude prices has not only deprived us of our ‘customary’ bountiful revenue source but it has regrettably also grossly distorted our national expenditure framework in a manner that will restrain and stunt the possibility of sustained rapid growth in social welfare. Nonetheless, critics of a subsidized prize regime, may argue that even when liberal SURE-P provisions were supplemented with modest annual capital allocations, Nigerians were not better off; consequently, such critics may consider the absence of SURE-P provisions and a reduction of the capital budget as a welcome opportunity which will reduce the perceived wide leakages and impunity usually associated with the implementation of most capital budgets. 

Nevertheless, anyone who believes that we have seen the end of the “controversial” subsidy scheme must be living in cuckoo land!

In the first place, while further reduction in crude prices may actually eliminate fuel subsidy, there is still a possibility that crude prices may rebound modestly and stabilize above $50/barrel. Expectedly, however, any increase above the $43/barrel benchmark would drive landed cost well above N74.35/litre to propel pump price above the current rate of N87/litre. In this event, the question would then be, whether or not Nigerians would be sympathetic enough to tamely accept fuel prices above the former N97/litre? 

Conversely, if crude prices fall below $43/barrel, then, of course, Nigerians must be ready for more asphyxiating belt tightening as even subsidy free fuel prices will not make more funds available for the capital budget to support urgent infrastructural enhancement; furthermore,  the promise that subsidy elimination would encourage competitive prices and better services may not also be credible in the light of the sluggish response of marketers to appropriately reduce diesel price (which is already deregulated) in line with the sharp decline in crude prices. As at the time of writing, diesel continues to sell for between N130-N140/litre inspite of popular expectation of a price below N100/litre as being more equitable.
Similarly, with the 50 percent drop in crude oil prices, the price of kerosene should also not exceed N100/litre without subsidy, nonetheless government, inexplicably insists on maintaining a grossly subsidized price of N50/litre even though kerosene is not available for less than N120/litre in most parts of the country. One may be excused for wondering who the beneficiaries of kerosene subsidy really are; however, advocates of complete deregulation to forestall market distortions may therefore see the retention of N2.84/litre subsidy on petrol as a political gimmick to win votes in next month’s general elections. 

In the light of dwindling revenue and severe austerity, one may also argue that a more responsible fiscal response would have been to retain the existing price of N97/litre and save over N7/litre instead of spending N2.84/litre on controversial fuel subsidy payments in 2015. The simple fiscal discipline of maintaining fuel price at the existing price of N97 could yield well over $5bn from the 40 million litres of fuel consumed daily. Regrettably, the alternative source of revenue to fund a projected 2015 fiscal deficit of over $6bn would be a resort to increased borrowing despite the oppressive cost attached to our sovereign debts.

Incidentally, the current petrol price of N87/litre is equivalent to about US$0.50 and is consequently cheaper than petrol prices in Ghana - US$0.92, South Africa – US$0.95, USA - US$0.62, and UK - US$1.64/litre respectively; indeed it is not uncommon that oil producing nations such as the UK and the US still recognize the bounteous revenue potential of petrol tax in their fiscal strategies, regrettably, this is a lesson that is proving difficult for us to also adopt. 

Instructively, if the Naira further depreciates below the present N171=$1 reportedly applicable exchange rate, this will of course instigate fuel prices to quickly rise above N87/litre to make price deregulation a challenge.

Conversely, however, a stronger Naira exchange rate will bring down fuel prices much below the N87/litre so that government can earn over US$12bn annually from a sales tax of about 20 percent on petrol/price. Indeed, the stronger the Naira the lower also will fuel prices be to make deregulation sustainable.

Surprisingly, a stronger Naira can still be made possible once CBN stops instigating excess liquidity by substituting fresh Naira values for distributable dollar revenue.