Explained: How the payment of fuel subsidies affects Nigeria’s economy

NOTNigeria’s fuel subsidy payment has increased in recent times. This has caused outrage among stakeholders who believe that the huge amount budgeted each year for subsidies should be channeled into infrastructure development.

Simply put, the subsidy or under-recovery is the dumped sales of premium automotive gasoline (PMS), better known as gasoline.

In 2021, President Buhari signed the Petroleum Industry Bill into law amid praise from stakeholders. The law is expected to lead to complete deregulation of the sector. However, the Minister of Finance, Budget and National Planning, Ms. Zainab Ahmed, announced her suspension due to the economic headwinds the country is currently facing.

However, the huge subsidy payment weighs heavily on Nigeria’s revenue. For example, between 2018 and 2022, the federal government budgeted 3.75 trillion naira, according to data obtained from the budget office.

Additionally, at the 2022 World Bank/IMF meetings, World Bank President David Malpass said the government needed to revise its subsidy strategy as it was becoming too costly to sustain.

Distribution of the grant increase

It has been estimated that the federal government spent a total of N10.413 trillion on fuel subsidies between 2006 and 2019.

A breakdown of subsidy payment according to data from the Nigerian National Petroleum Company Ltd shows that subsidy payments increased by 349.42% from N350 billion in 2019 to N1.573 trillion in 2021.

The increase is due to cheap prices of petroleum products on the international market as well as the constant devaluation of the local currency.

Why the increase?

The main reason for the increase in subsidy payment can be attributed to the fact that Nigeria imports petroleum products as none of its refineries have the capacity to refine. The situation is further aggravated by the weakness of the local naira which has now fallen from 198 naira to $1 in 2015 to 570 naira to $1 in 2022.

Recall that the recent war between Russia and Ukraine has caused the prices of petroleum products to skyrocket, while the price on the international market now fluctuates between 105 and 110 dollars per barrel.

In the same vein, the coming of the implementation of the Petroleum Industry Act (2021) which prescribes a free market for the downstream sector of the petroleum industry has been put on hold, which many experts point out. warns of the implications that could discourage investment in the sector.

According to data released by the now defunct Petroleum Products Prices Regulatory Agency PPPRA, the Federal Government paid a total of N2,105.92 billion in 2011, an increase of N1,437.84 billion from the payment of 2010.

He also noted that in 2012, 1.35 billion naira was disbursed as a grant, the highest amount in the reporting period.

“A total of 1.316 billion naira in 2013, 1.217 billion naira in 2014 and 653.51 billion naira in 2015 were paid as grant applications, he added.

He noted that NNPC, as of 2016, was the only importer of the product in the country.

Currencies and gasoline smuggling contribute to high subsidy prices – Expert

The Executive Secretary of the Major Oil Marketers Association of Nigeria (MOMAN), Mr. Clement Isong, attributed the rise in the international price of crude oil, the exchange rate and the high rate of smuggling of gasoline across Nigeria’s borders as the main factors contributing to the rise in subsidy prices. to be a witness in the country.

According to him: “The first is the international cost of crude oil and derivative products such as Premium Motor Spirit (gasoline) which has increased considerably as a result of the Russian war in Ukraine. Thus, the price of crude itself, as well as the price of gasoline, diesel and all petroleum-derived products, have risen more than they normally would because of the war and the sanctions imposed on the Russia, which is a big crude exporter.

“Secondly, the exchange rate is extremely high at the moment. That is, the Naira exchange rate is at its all-time high. I’m not talking about the black market which is even higher, I’m talking the Central Bank of Nigeria rate which is N411-N414 per dollar, higher than it has ever been historically.

About Matthew R. Dailey

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