23

Mar

IS THE ABOLITION OF FUEL SUBSIDY IMMINENT? 04052015

2015-05-04

IS THE ABOLITION OF FUEL SUBSIDY IMMINENT?
BY HENRY BOYO

Media reports, suggested, lately that the 2015 Appropriation Bill, which was seemingly rushed through the National Assembly, in April, did not make any provision for subsidy on petrol and kerosene. Nonetheless, the anxiety of labour and other beneficiaries of the subsidy scheme may have been doused by Senate Committee Chairman on Finance, Senator Ahmed Makarfi’s subsequent statement that, contrary to such reports, the National Assembly had infact approved N100bn as subsidy for Premium Motor Spirit (petrol) while N43bn was approved for kerosene for the 2015 fiscal year.
Curiously, the federal government, had in contrast, budgeted about N970bn for fuel subsidy in 2013, while only N515bn was released to oil marketers according to a report titled “Senate approved N143bn for fuel subsidy” in the Punch edition of 1/5/2015. Furthermore, according to the same report, “the same amount was also budgeted for the 2014 fiscal year, with only N414bn so far paid.

Thus, with the above historical data on subsidy provision and payments, critics may see the approved meager sum of N143bn as a booby trap for the incoming administration, since there is no guarantee that oil price will further plummet below $50/barrel or that demand would fall below the projected daily average of 40m litres.
Besides, available data from the Petroleum Product Pricing and Regulatory Agency, (PPPRA ), indicate that petrol subsidy has risen to N43.25/litre, up from N2.84 as at January 2015. Thus, an estimated daily subsidy of N1.7bn with current oil price above $60/barrel and Naira exchange of N197/$1, will amount to over N620bn this year. This figure may not include projected subsidy payments for kerosene. So, why then did the National Assembly approve subsidy payments that are barely 25 percent of the historical annual average. 

However, Senator Markarfi assured Nigerians that the ‘paltry’ provision should not stop the initiation of a supplementary Appropriation Bill by Buhari’s incoming administration to cover any difference above the appropriated N143bn.
Indeed, if crude oil prices stabilise around the current $60-$65/barrel, the related subsidy could exceed N500bn, and the projected deficit of almost N1Tn in the 2015 budget may rise beyond N1.5Tn or constitute almost 33 percent of total budgeted expenditure of N4.49Tn! Instructively, with interest rates presently between 10-16 percent for government loans, it may cost close to N200bn just to service the accumulated debt, which has been compounded by the unbudgeted increased expenditures on subsidy; consequently, the debt service charge of just below N1Tn initially embedded in the 2015 budget may actually rise above N1.2Tn. 

However, these service charges must be distinguished from the N600bn interest payments that CBN would similarly incur in the process of mopping unceasing surplus liquidity from the money market. Ultimately, consolidated domestic debt service charges alone, may sadly, exceed 30 percent of the paltry 2015 budget of N4.49Tn.

Regrettably, delayed payment of verified subsidy claims, may inadvertently also further bloat the already oppressive service charges on loans obtained to finance the 2015 budget deficit as well as other earlier government debts. The imminent federal and state elections, at that time, may have forced government to accede to pressure to pay the demanded balance of N256.2bn, which oil marketers claimed included core subsidy value as well as interest on their delayed payments and exchange rate differentials. 

Incidentally, the marketers, have since confirmed that N40bn was the actual core subsidy value outstanding for part of 2014 and other fuel deliveries under Batch A & B in 2015; nonetheless, according to the marketers, the balance on the related foreign exchange differentials and the accrued interest on the outstanding invoices would be reduced to N215bn after the maturity of government’s N100bn sovereign debt note by the 30th of April. Thus, if Nigerians were already apprehensive about the oppressive and clearly unsustainable incidence of subsidy values, then they must be surely perplexed that payments, which were delayed because of lack of funds, are now compounded by an additional sum of N215bn penalty for interest on delayed payments and exchange rate differentials. Surely, if this is not a scam, it is certainly a reckless fiscal strategy which is totally in denial of an imminent national debt trap.

Clearly, the heavy penalty of N175bn was avoidable if the CBN and the Finance Ministry consulted to ensure that the core subsidy value of just N40bn was paid before the precipitate devaluation of the Naira earlier this year. Alternatively, payment of the core subsidy of N40bn could have been funded easily with a short term facility from local banks, that is, in the event that the CBN refuses to dip into the huge idle stock of Naira which it acquires with exceedingly high interest rates whenever the Apex Bank engages in its open market liquidity mop up to checkmate inflation.
In her response, the finance Minister, Dr. Okonjo-Iweala, confirmed last week that the sum of N56bn will additionally be paid to offset interest differentials; according to Okonjo-Iweala, “after these payments, a subsidy balance of N98bn already certified by PPPRA would be left as the amount owed to the marketers”.

Clearly, if the subsidy regime subsists with the present culture of extended delays in settlement, the outstanding sum of N98bn will invariably also attract additional interest charges for delayed payments as well as exchange rate differentials; consequently, consolidated subsidy payments will exceed expectations and budget provisions, particularly if the Naira exchange rate also continues to slide.  

Furthermore, if in addition to Naira depreciation, crude prices unexpectedly climb above the current $60-65/barrel range, the amount of fuel subsidy payable for the rest of 2015 will similarly increase; similarly, if marketers’ invoices are again not promptly settled, the attendant unbudgeted penalty for delayed payments and exchange rate differentials will also increase. Ultimately, if good sense, fails to prevail, close to 40 percent of total budgeted expenditure in 2015 may become dedicated to fuel subsidy payments! Incidentally, if government is incapable of reducing its bloated recurrent expenditure, the barely N400bn paltry allocation for capital and human capacity expenditure in 2015 may become further deflated below 5 percent of total budget expenditure of N4.49bn.

It is therefore clear that in order to eliminate subsidy payments without stress, we may need to, ironically, pray that crude oil prices (our main source of revenue) will fall well below $50/barrel, while the Naira exchange rate will not suffer further depreciation to instigate rising fuel prices, which will make subsidy removal a major challenge.
Clearly, organized labour has already taken a firm position to reject any attempt to remove subsidy and they have instead called on the government to revamp existing refineries and build new ones, so that fuel will be readily available at lower prices. It is curious that the same people, who clearly recognize the huge waste and corruption associated with public utilities, would still demand for the entrenchment of such government parastatals.

Nevertheless, the abolition of price imposition in the fuel business would clearly attract a host of investors into private domestic refining, but this would not sufficiently reduce prices to ultimately eliminate subsidy. Conversely, fuel prices will, steadily fall below the subsidized price if the Naira appreciates; an increasingly stronger Naira will progressively induce cheaper fuel prices domestically and ultimately eliminate subsidy. The Naira will become stronger when the CBN stops substituting Naira allocations for dollar denominated revenue.

SAVE THE NAIRA, SAVE NIGERIA!!