Media reports, lately, suggested that the approval for the 2015 Appropriation Bill, which was seemingly rushed through the National Assembly, in the last week of April, did not contain any provision for the payment of the usual subsidy on petrol and kerosene.
Nonetheless, the anxiety of labour and the other advocates and beneficiaries of the subsidy scheme may have been doused by the Senate Committee Chairman on Finance, Senator Ahmed Makarfi’s subsequent statement that, contrary to such reports, the National Assembly had infact approved the sum of N100bn as subsidy for Premium Motor Spirit (petrol) while N43bn was approved for kerosene for the 2015 fiscal year.
Nonetheless, the federal government, had in contrast, budgeted about N970bn for fuel subsidy in 2013, while only N515 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 nothing to suggest that the price of crude will further plummet below $50/barrel or that demand would fall below the projected daily average of 40m litres.
In addition, available Petroleum Product Pricing and Regulatory Agency, (PPPRA ) data, indicate that subsidy on petrol has soared to N43.25/litre, up from N2.84 as at January 2015. Thus, an estimated daily subsidy of N1.7bn with current crude price and Naira exchange of N197/$1, will amount to over N620bn this year. It is not clear if this figure also includes projected subsidy payments for kerosene. So, why then did the National Assembly approve barely 25% of the historical annual average subsidy payments.
However, Senator Markarfi assured Nigerians that the ‘paltry’ subsidy provision should not stop the initiation of a supplementary Appropriation Bill by Buhari’s incoming administration to cover any difference above the N143bn already approved by the National Assembly. Indeed, if crude prices stabilise around the current $60-$65/barrel, the subsidy shortfall could be well over N500bn, and the projected deficit of almost N1Tn in the 2015 budget may rise beyond N1.5Tn or constitute almost 33% of total budgeted expenditure of N4.49Tn!
Instructively, with interest charges presently between 10-16% for government loans, it may cost well over N200bn just to service those debts, which were primarily induced by expenditures on fuel subsidy, consequently such additional expenditure will compound the almost N1Tn debt service charge initially embedded in the 2015 budget.
However, these service charges must be distinguished from the N600bn interest payment that CBN would similarly incur in the process of mopping up unceasing surplus liquidity from the money market. Ultimately, consolidated domestic debt service charges alone, sadly, may well exceed 30% of the paltry 2015 budget.
Regrettably, delayed payments of verified subsidy claims, may inadvertently also further bloat the already oppressive service charges on loans obtained to finance the 2015 budget deficit and other earlier government debts. Curiously, the imminent federal and state elections, may have forced government to accede to pressure from marketers to pay the demanded balance of N256.2bn, which they claimed included core subsidy as well as interest on 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 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 come 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 huge 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 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.
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 Dr. 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 delays in settlement, the still 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 its current 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; worse still, the attendant unbudgeted penalty for delayed payments and exchange rate differentials will also increase.
Ultimately, if good sense, fails to prevail, close to 40% of total budgeted expenditure in 2015 may become dedicated to fuel subsidy payments! Incidentally, if government appears incapable of also reducing its bloated recurrent expenditure budgets, the paltry barely N400bn allocation for capital and human capacity expenditure in 2015 may become further deflated below 5% of the total 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 which instigates rising fuel prices, to 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.
Nonetheless, the abolition of price imposition would clearly attract a host of investors into private domestic refining, but this would not necessarily reduce prices to ultimately eliminate subsidy. Instructively, however, fuel prices will conversely steadily fall if the Naira appreciates, as a stronger Naira will translate down the line to progressively induce cheaper fuel prices domestically and ultimately eliminate subsidy.
SAVE THE NAIRA, SAVE NIGERIA!!
– See more at: http://www.vanguardngr.com/2015/05/is-the-abolition-of-fuel-subsidy-imminent/#sthash.ax9x1GyK.dpuf
I think its time we removed this so called fuel subsidy. The organised labour should know that the fuel subsidy brings forth corruption (both in government and by marketers}, hurts the economy and enrich few individuals who are products of a corrupt system. I sincerely believe that with time when the savings would have been ploughed back to maintain our refineries and private sector encouraged to build more refineries, prices of petroleum products may even become cheaper.