Nigeria has incurred an estimated petrol subsidy of N2.1 trillion in the first six months of this year, according to the national oil company, which is struggling to generate enough oil revenue to cover the soaring cost of subsidising the product.
The World Bank had said in its latest Nigeria Development Update report that “due to the petrol subsidy and low oil production, Nigeria faces a potential fiscal time bomb.”
The Federal Government, which had initially budgeted to spend N443 billion on petrol subsidy between January and June, got the approval of the National Assembly in April to subsidise the product to the tune of N4 trillion this year.
New data from the Nigerian National Petroleum Company’s (NNPC) presentation to the Federal Accounts Allocation Committee (FAAC) show that the state-owned oil company continues to be handicapped in meeting its remittance obligations on account of subsidy burden.
The NNPC paid N327.06 billion as subsidy in May, representing a 20.4 percent increase from the previous month and the highest on record this year.
A further breakdown of the subsidy spend shows that the oil firm paid N210.38 billion, N219.78 billion, N245.77 billion, and N271.59 billion as subsidy on petrol in January, February, March and April, respectively.
In addition, the report indicates that the NNPC has informed FAAC that it would deduct N845 billion from June proceeds due for sharing at the July FAAC meeting.
Experts say the country is heading for a massive fiscal crisis as subsidies are no longer sustainable.
“It is now generally fiscal rascality to continue to pay subsidy,” said Ayodele Oni,” Ayodele Oni, partner, energy practice group at Bloomfield LP.
Oni said that even though the poverty and suffering in the land will increase if it is removed, an integrated approach to substantially improve the power sector and provide excellent transportation alternatives will be the best way to cushion the impact.
As crude oil prices soar on the back of Russia’s war with Ukraine and underinvestment in new exploration projects due to climate concerns, countries like Nigeria who subsidise petrol are seeing huge revenue erosion as gains made in higher oil prices are wiped off by soaring price of refined products.
The prices of refined petroleum products are soaring all over the world. In the US, petrol prices have reached $5 per gallon (N2,075) and over N500 per litre in Ghana. Diesel prices in Nigeria mirror global averages, rising to over N800 from around N300 in January.
Pedro Omontuemhen, partner at PwC Nigeria, said the debate about liberalising petroleum products pricing should be an important discussion in the ongoing political activity climate.
“The real issue is the political decision – whether to liberalise the price or not. That is the biggest issue our politicians are not talking about,” he said.
Omontuemhen said the country must be willing to pay the market price and fix its refinery to solve its subsidy problem.
President Muhammadu Buhari, in a recent interview with Bloomberg, defended the subsidy, saying other countries are now sold to the idea of providing subsidies.
Last year, Nigeria spent half of its N2.81 trillion tax collections in the first nine months subsidising petrol.
The International Monetary Fund (IMF) warned last month that fuel subsidies could gulp as much as N6 trillion before year end.
Already, Nigeria has received $3.4 billion in Special Drawing Rights and an equal amount in addition as loan from the IMF, bringing the total loan since 2020 to $6.8 billion.
NNPC’s inability to make remittances to the Federation means that the country is not only paying subsidies with today’s oil income, it is borrowing against future earnings to meet up petrol subsidies obligation.
According to the NNPC, the value shortfall on the importation of petrol recovered from May 2022 proceeds is N327.06 billion while the outstanding balance carried forward is N617 billion.
“The estimated value shortfall of N845.15 billion (consisting of arrears of N617 billion plus an estimated May 2022 value shortfall of N227.7 billion) is to be recovered from June 2022 proceed due for sharing at the July 2022 FAAC meeting,” it said.
