The Nigerian National Petroleum Company Limited may deduct over N1tn in the next six months from the Federation Accounts Allocation Committee, following the decision of the Federal Government to continue subsidizing Premium Motor Spirit, popularly called petrol.
Figures obtained from the oil firm on its subsidy deductions in 2021 indicated that the amount deducted monthly from FAAC by the NNPC was higher during the periods of higher crude oil prices.
This was also confirmed by economists, who explained that the higher the international price of crude oil, the higher the amount to be deducted by the NNPC from FAAC.
They also stated that the volume of petrol consumed in a particular month was contributory to the amount being spent as subsidy, but insisted that the major factor was the global crude oil price.
As the sole importer of PMS and supplier of last resort, the NNPC ensures adequate supply of refined petroleum products by importing the commodities.
PMS is not deregulated by the Federal Government, as the price is sold at between N162 and N165/litre at filling stations, far lower than the actual cost of the commodity.
In June 2021, the Group Managing Director, NNPC, Mele Kyari, had stated that petrol price should be more than N280/litre, while the commodity had been subsidised and sold at N162/litre since last year.
The subsidy spent on each litre of petrol consumed in Nigeria is therefore recovered by NNPC through its monthly deductions from its remittances to FAAC.
An analysis of the monthly FAAC deductions in 2021, captured by the NNPC as under-recovery of PMS/value shortfall, for instance, showed that the oil company deducted N25.37bn from FAAC in February 2021 when the average price of Brent crude was $62.28/barrel.
But in June of the same year when the price of Brent climbed to $73.16, the national oil firm reported that it spent N164.33bn on subsidy in that month.
Notably, between June and November 2021, a period of six months, the oil firm deducted N888.13bn from FAAC being subsidy spent on petrol imports. This comes to about N148bn monthly on the average.
The average cost of Brent crude during the six-month period, according to figures obtained from Statistica, a global statistical firm, was put at $76.4/barrel.
However, the price of Brent has been on the rise since this year, following efforts by the Organisation of Petroleum Exporting Countries and its partners to boost the cost of the commodity.
The price on Tuesday, for instance, was $88.01/barrel as at 8.10pm Nigerian time, a development that meant that the NNPC would spend more on subsidy this month and subsequent months should oil price remain high globally.
According to experts, if the oil price remains above $80/barrel, the national oil company may be incurring about N170bn monthly on the average as subsidy payments. This will amount to about N1,020,000 in six months.
The NNPC has been the sole importer of petrol into Nigeria, as other marketers stopped importing the commodity due to their inability to effectively access the United States dollar.
“Of course, the NNPC will spend more on subsidy this year because crude oil price has been increasing and the higher the price of crude, the higher the amount to be spent on subsidy,” the Chief Executive Officer, Centre for the Promotion of Private Enterprise, an economic think tank. Dr. Muda Yusuf, said.
He added, “In fact, about N2.5tn might be spent on subsidy this year, meaning that about half of that amount could be spent in six months and this means hard times for states because the funds will be deducted from FAAC as usual.”
Yusuf described the reversal of subsidy removal by the government as a policy somersault that was not good for the oil sector.
He said, “This is another instance of policy somersault. It also reflects the absence of political will to reform the oil and gas sector. This has been a struggle over the past few decades. Perhaps there are entrenched and powerful interests working against the Petroleum Industry Act.
“These forces have succeeded in upturning a major economic reform programme. It is a sad development. This would further aggravate the political and policy risk of investing in Nigeria.
He added, “The oil and gas sector is one sector that has been starved of investment for several decades because of policy and regulatory issues. Regrettably, at a time when we thought we had turned the corner, we are now faced with the stark reality of a complete suspension of a major instrument of reform.
“It is certainly not good for our perception by investors as an investment destination. It will affect our country risk rating. It also implies that the implementation of the Act will not commence in the life of the present administration.
“It is difficult to predict what the succeeding administration will do. Meanwhile, attracting investment into the oil and gas space will be extremely difficult going forward.”
Listing other drawbacks of the suspension of the plan to remove fuel subsidy, he stated, “The petroleum products smugglers, beneficiaries of the fiscal leakages in the fuel subsidy ecosystem and their collaborators will continue to smile to the banks for the next one and half years.
“Some states would struggle to pay salaries, especially states that are heavily dependent on federal allocation. Some may have to lay off some of their work force. Many will struggle to meet their financial obligations as sub-nationals.
“Macroeconomic risks would become elevated as fiscal deficit and borrowing significantly surpasses projections in the 2022 budget. The CBN may have to continue to cover financing gaps through ways and means. This of course has serious inflationary implications. The macroeconomic outcomes would adversely impact on the exchange rate, leading to further depreciation of the currency.”
Corroborating this view, private sector stakeholders under the umbrella of the Nigerian Economic Summit Group say the subsidy being paid by the government for Premium Motor Spirit, commonly known as fuel, is not sustainable.
The group spoke at the launch of the NESG 2022 Macro Economic Outlook report on Tuesday in Abuja titled, “The last Mile: Reforms towards significant improvement in national economic outcomes.”
The report highlights reforms that will sustain the recovery of the economy and ensure improved social inclusion.
The Chief Executive Officer, NESG, Laoye Jaiyeola, commended the government for passing the Petroleum Industry Act but stressed the need for collaboration with critical stakeholders in the oil and gas sector to ensure implementation.
He noted that the proposed fuel subsidy removal as stipulated in the PIA would have significant impacts on the economic outlook for 2022.
Jaiyeola said the continued implementation of the fuel subsidy was not sustainable as it was introduced as a short-term palliative.
“When the fuel subsidy was introduced it was supposed to be a short-term palliative, but is has gone beyond intended purposes.
“The truth of the matter is that this nation can’t afford a continuation of this subsidy, because of the implications. Nigeria has a revenue challenge and how we use our revenue matters a lot,” he said.
On his part, the Chairman of the NESG, Asue Ighodalo, disclosed that as at November 2021, 91 million Nigerians were living below the poverty line.
He said, “The World Bank estimates that an additional one million people were pushed into poverty in Nigeria between June and November 2021, resulting in a total of about eight million people being relinquished to poverty in 2021 and bringing our nation’s poverty headcount to about 91 million.
With campaigns for the 2023 general elections beginning to manifest, the NESG boss predicted that there would be increased spending during the year as a result of the forthcoming election.
This he said, could lead to tightening of monetary policies by the government, relegate focus on the economy and result in stagnation of recovery.