Posted by News Express | 26 January 2022 | 421 times
AMID a cacophony of other national crises, the perennial problem of fuel subsidy remains firmly in the public space. Though the government has deferred its earlier threat to end the subsidy from this month till June, and labour unions called off a protest planned for January 27, the subsidy issue will continue to trouble the country. The Nigerian government should stop the endless crisis by working towards the only sensible solution: self-sufficiency in petroleum refining.
The Federal Government sought Monday to douse the tension by reaffirming that the subsidy had been deferred and could be for much longer. Shortly after, labour unions called off their planned nationwide rallies, but vowed to resist any future increase in petrol pump price.
As all stakeholders now agree, any increase in pump prices will worsen the country’s precarious economy. Already, it is beset with an inflation rate of over 15 percent that the World Bank forecasts to rise to one of the highest globally, youth unemployment of 53 percent, debt servicing gulping 90 percent of all revenue, and persistent revenue shortfall. The government is in a quandary, largely of its own making and gross incompetence: it can stop the subsidy and face possible economic collapse and social unrest; or it can continue to spend scarce (mostly borrowed) funds subsidising a refined product the raw material of which the country has in abundance. Ending the national shame is long overdue. Nigeria must refine locally and end the irrational dependence on imported fuel.
For the avoidance of doubt, the petrol subsidy problem arises because Nigeria, despite having the capacity to produce 2.5 million barrels of crude oil per day, and 37 billion barrels in reserves, the world’s 10th largest, freakishly depends almost 100 percent on imports for refined petroleum products. This national idiocy results in the country spending much more than it earns from crude importing refined petroleum products. According to the Organisation of Petroleum Exporting Countries, Nigeria exported $27.73 billion worth of hydrocarbons in 2020, while the value of refined petroleum products imports was $71.28 billion, a deficit of $43.5 billion. This is beyond bizarre. The National Bureau of Statistics said the country spent N2.52 trillion importing petrol in the first nine months of 2021, up from N2.2 trillion in the corresponding period of 2020.
To protect the consumer from the high prices arising from high landing costs and exchange rate volatility, the government has been subsidising pump head prices of petrol, having stopped subsidies on kerosene and diesel.
To universal agreement, that cost of the subsidy is unsustainable. At about N2 trillion annually currently, says the government, resources are drawn away from roads, healthcare, education, and other social services. The World Bank estimates that Nigeria spends about $4.5 billion on petrol subsidy, representing about 2.0 per cent of its GDP.
The problem is intractable, made so by the wrong choices of successive governments, including the incumbent regime of the President, Major-General Muhammadu Buhari (retd.). Higher crude oil price should ordinarily be cheering as it translates to higher revenues for the country. Alas, it also translates to higher landing costs of imports. This is worsened by the persistent degrading of the naira against other currencies, meaning that much more naira is constantly required to purchase forex for imports. This means ever more money spent on subsidy and endless increases in pump prices.
While there is unanimity on the heavy burden of the subsidy, rancour, and confusion reign over the solution. Albert Einstein’s witty take that, “insanity is doing the same thing over and over and expecting different results” sums up the Nigerian government’s response to the quagmire. Since the late 1980s, it has been “removing subsidy” multiple times, yet prices have moved from N2 per litre to N162-N165 per litre. Mele Kyari, the group managing director, Nigerian National Petroleum Company, projects N340 per litre in June after the next “removal.”
This is fanciful. Truth is pump prices will likely continue to rise much higher. The government has no control over the price of crude, which averaged over $80 per barrel last week. Official exchange rate as of Monday at N415.53 contrasts with the parallel market rate of N575 to $1. When the NNPC withdraws from its quirky role as sole importer, marketers will have to contend with both fluctuating oil prices, and exchange rate volatility and forex scarcity. A former head of the federal Budget Office, Bode Agusto, projects the unofficial rate, a more accurate barometer, to reach N620 to $1 in 2022.
Government compounds this fatuity by holding on to its four state-owned refineries that process no products but endlessly receive cash for phantom turnaround maintenance.
There can therefore be no end to higher prices and hence, the compelling need for subsidy to cushion their effects as long as the country depends on imports. The only rational solution as The PUNCH has consistently canvassed and many stakeholders are now realising, is full or near-full self-sufficiency in domestic refining that will end the dependence on imports.
Achieving this is not rocket science. First, go for the low hanging fruits; privatise the four moribund state-owned refineries that combined, have a name-plate capacity to refine 445,000 barrels of crude per day. Next, offer special incentives to licensees, including waivers, tax holidays and funding support, to build and roll out plants quickly to foster competition. The good news from the Dangote Group that it will commence production at its 650,000 barrels per day Lekki refinery by September is tempered by the fear of replacing a state monopoly with a private one.
Instead of selling the refineries to reputable global players, the government tenaciously retains them. It has sourced another $1.5 billion to “rehabilitate” the twin Port Harcourt refineries. Such rehabs, alleged the House of Representatives, had cost the country over $25 billion over the years with no tangible result. The Trade Union Congress, and lately, many economists urge the government to shelve the removal until it fixes existing refineries, and new ones come on stream, and effectively police the borders to curb rampant smuggling.
The subsidy crisis can only be solved by facilitating private sector-led domestic refining. The government should stop wasting taxpayers’ money and immediately privatise the four refineries, it cannot run them profitably. Government should restrict itself to regulation. Under a robust liberalised framework, reputable operators should be attracted to partner with domestic investors to set up refineries and transform Nigeria to a refining and export hub in West, Central and Southern Africa. Of the five top Asia-Pacific refining countries, three – South Korea, Japan, and Singapore – are not major oil producers. South Korea produces only 108,419bpd, Japan 123,525bpd, and Singapore a mere 20,170bpd. However, respectively, they refine 3.35 million bpd, 3.34 million bpd, and 1.51 million bpd, according to NS Energy.
To overturn the crippling subsidy regime, privatise immediately, allow Dangote and others to be up and running, then subsidies in their present debilitating form will become unnecessary. Anything less will only worsen the economy, deepen poverty, provoke more joblessness, and further violently destabilise the country.
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