• Tougher days ahead as governors pull subsidy plug
• Poverty, inflation to worsen in coming months
Tougher times are here and any pretension to the contrary has been ripped to shreds with Wednesday’s resolution of the governors giving full backing to complete deregulation of the downstream sector of the petroleum industry, which in effect may jerk the pump price of petrol to N385 per litre.
The masses will face more challenging times in the coming months as government closes in on resolving the lingering downstream market deregulation crisis.
Attempts to remove subsidy on the Premium Motor Spirit (PMS) had severally been stalled with the government and organised labour locked in endless negotiation.
But on Wednesday night, the cash-starved governors recommended the immediate removal of petrol subsidy and proposed an over 130 per cent pump price increase, from N162 per litre to between N380 and N408.5.
Stakeholders have raised questions on how the governors arrived at their decisions, adding that the move implies price-fixing, which is against the principle of deregulation. They are also worried about the impact of such development on the country’s inflation and the purchasing power of Nigerians already affected by the growing devaluation of the naira.
They insisted that the recommended pump price was coming at a time the masses needed more support. They also described the price range as outrageous and lacking in justification.
Others, however, stressed that the move could bring some level of uniform pricing in the West African bloc and stop the smuggling of fuel to neighbouring countries. The Guardian had reported that over 33 million litres, translating to over N70 billion monthly are being smuggled out of the country.
In March 2020, the Minister of State for Petroleum Resources, Timipre Sylva, announced the deregulation of the downstream sector to commence removal of subsidy but the labour unions locked horns with the government using the argument of rising inflation and impact on electricity tariff and pump price of petrol.
In March, Petroleum Products Pricing Regulatory Agency (PPPRA) had released a pricing template showing that the retail pump price should range from N209.61 to N212.61 per litre. The template was pegged on an average oil price of $62.22 per barrel for February and an exchange rate of N403.80 to a dollar.
Also in March, the Group Managing Director, Nigerian National Petroleum Corporation (NNPC), Mele Kyari, said the actual price of petrol should be between N211 and N234 per litre, given the exchange rate and crude oil price.
At the time of this report, crude oil hovered around $66.38 per barrel and the exchange rate on the Central Bank of Nigeria’s (CBN) special window stood at N408 to a dollar. The indexes, therefore, brought retail pump price in the country to a higher band of about N250 per litre, which is inclusive of extant charges, like bridging fund, wholesalers’ margin, marine transport average, administration charge, transport allowance and retailers’ margin.
Should the price move to N380 per litre, the governors would have succeeded in adding N130 on every litre of petrol. Given that the country’s average actual consumption stands at about 60 million litre daily, the governors would have taxed consumers to the tune of N234 billion monthly.
Recall that the NNPC had last month announced that it had no funds to contribute to the Federation Accounts Allocation Committee (FAAC) in May, given a huge subsidy (about N120 billion), which is being paid monthly to keep petrol price at N162 per litre.
In the absence of Internally Generated Revenue (IGR) and wrong formalities for resource control, almost all the states in the country rely on the ‘national cake’ from the Federal Government. Should the states succeed in passing their inability to generate revenue to the masses, the additional petrol tax would have almost doubled the FAAC monthly contribution to the states and local government.
Of the N601.110 billion FAAC that was shared in November 2020, the 36 state governments and the Federal Capital Territory (FCT) received N171.167 billion while the local councils received N126.789 billion.
Raising a red flag, the Head of Retail Investments, Chapel Hill Denham, Ebo Ayodeji, warned that the unavoidable increase in the prices of PMS and electricity would ultimately worsen the inflation rate and the level of poverty.
Prof. Akpan Ekpo, an economist, also expressed worry that a higher pump price would worsen the already high Nigeria’s misery index, which would escalate social upheavals. He suggested that the declining revenues leave the government with no options than to pull the fuel subsidy plug.
The Guardian had reported that the federal and state governments are currently battling a serious liquidity crisis with some finding it difficult to pay existing debts just as fresh borrowing sources are becoming scantier. The country’s total public debts as of last December stood at N32.9 trillion.
Speaking with The Guardian, Godwin Owoh, another professor of economics, pointed out the governors’ recommended price was as faulty as the NNPC-estimated landing cost, as the process of computation was not transparent.
While many have suggested that the governors’ recommendation was motivated by the urgent need to increase public revenues, he said it was faulty to leave the price of essential and extremely inelastic commodities completely to the dictate of market forces.
Even though he admitted that the government’s lean revenue cannot continue to accommodate fuel subsidy, he said the solution to the country’s challenge was “not in getting more revenues” but blocking the historical leakages.
“What is the point in getting more revenue when it will end up in the pockets of politicians? We must block the corruption avenues and make governance more transparent,” he said.
The Chairman of the International Energy Services Limited (IESL), Dr. Diran Fawibe, also noted that the price suggested by the governors is unrealistic, adding, “the governors can’t be dictating a particular price, what they should do is to give support to the NNPC to achieve a deregulated sector.”
According to him, if the price is increased it will not amount to deregulation but price fixing to end subsidy, suggesting further that the governors may be doing that because of the effects of subsidy on government revenue.
While calling for the need to locally refine crude oil, Fawibe said deregulation of the downstream sector requires other features than the pump price of petrol.
“What the government is currently paying as subsidy is not sustainable in the long term. This fact is staring the governors in the face, that is why they are now talking about the price of petroleum products. But they should have come out much earlier to give support to the federal government in removing subsidies,” Fawibe said.
He noted that the governors would have engaged labour unions and civil society organisations to be reasonable on the matter, adding that people must not use a particular product to hold the economy by the horn by paying the outrageous amount.
A former lead at the Facility for Oil Sector Transparency and Reform (FOSTER), Henry Adigun, did not see sense in the governors’ plan, adding that the development will lead to inflation.
He noted that while the governors were thinking of introducing taxes on the product, the variance remained very elusive. President of the Nigerian Association for Energy Economists (NAEE), Prof. Yinka Omorogbe, said the governors have no business in fixing the pump price of the product. She equally questioned the rationale for the suggested price if the landing cost hovers around N250 per litre.
Omorogbe said: “I think we need more information and that the government needs to be fully transparent in this matter. The present opaque situation should not be replaced by another type of opacity. What will be the composition of the new price?”
An energy expert, Michael Faniran, said: “The Governors’ Forum can only support deregulation and removal of subsidy, they should not be suggesting any price to be paid by consumers.”
According to him, deregulation goes beyond the removal of government subsidies and requires the creation of a competitive market environment, which will guarantee the supply of products at commercially efficient prices to customers.
Faniran noted also that deregulation should not be about fixing product prices but ensuring transparency of the components of the prices that consumers pay at the pump.
“Pump prices should be dictated by market forces but with the protection of consumers by the necessary agencies of government. The prices should be allowed to move based on the dynamics across the value chain,” the expert said