As The Fuel Subsidy Regime Ends…

As The Fuel Subsidy Regime Ends…
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Not too long ago, the Group Managing Director of the Nigerian National Petroleum Company, NNPC, revealed that fuel subsidy would end by February 2022. He added that the petroleum pump price would range between N320 and N340 per litre about 100% above the current price.

It is believed that the oil subsidy was intended to minimise the impact of ‘rising global oil prices’ on Nigerians.

Therefore, buying oil products at a high price was seen largely as inimical to the interest of the ‘ordinary Nigerian’. That is why perhaps fuel pump prices have remained unchanged despite the rise in world oil prices by about 50% in recent times.

The GMD of NNPC said the nation picks around N120 billion per month for fuel subsidy, thus weighing down the country’s economy. Indeed the subsidy question has been with us for a long while. 

However, to ameliorate the impact of fuel subsidy removal, the Finance Minister announced a plan to start giving cash handouts to a group of Nigerians from July 2022. The Minister estimated that about 40 million poor citizens would get a monthly consumption allowance of N5,000 for 12 months amounting to  N2.4 trillion a year.

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We had noted at the time that fuel subsidy bites deeply into the nation’s budget but replacing the same with haphazard cash transfers would definitely not solve the problem. It is therefore not within rational perspective to replace one type of subsidy with another. There must be a more responsive approach to the issue that stares us precariously in the face.

It is worrisome that there is an issue of bending the Fiscal Responsibility Act 2007 ,FRA. The 2022 budget shows a net borrowing of about N6.25 trillion, approximately 3.39% of GDP, which is slightly above the 3% ceiling set by the FRA. It is logical to assume the N5,000 is included. Borrowing to finance the consumption of 40 million adults goes against the FRA principle as the law only permits borrowing for capital expenditure and human development. The estimated N2.4 trillion in the 2022 budget means that for every 10 naira borrowed, 4 naira will be given out to the poor in a season when elections are in view.

 We are concerned that Nigerians would be weighed down by the high cost of fuel, will distract businesses using petrol generators and vehicles and would have to increase their prices in proportion to the rise in fuel cost.

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As a result of the shock in the situation, the cost of doing business will increase, which will indeed affect foreign investment resulting in forex scarcity. Companies that cannot cope will eventually close down, which will increase the unemployment level.

“In short, the effects of fuel subsidy removal will be felt across the economy, not just by the poor. The average Nigerian will have to deal with higher inflation while salaries remain the same. According to estimates, if the cost of goods and services increases in proportion to the 100% increase in fuel pump price, the N5000 handout will be equal to half of its value”, one analyst stated.

 We are concerned that efforts are not afoot towards making our refineries work even when private entities are beginning to look in the direction of setting up theirs.                                                        

We urge the government to enhance capacity for the private sector to build modular refineries towards making products accessible at reasonable cost.

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The amount intended for cash transfer can add up to effectively build state of the art refineries at cost that would not waste too much resource.

We are also quick to point out that cash transfer as a policy has not been an effective tool in dealing with the issue of alleviating poverty; rather it has been largely politicised and abused. 

Again, Small and Medium Enterprises, SMES, would be edged out if we do not find a way of handling the subsidy regime as a good number of these entities rely on petrol to power their businesses.

We are aware that organised labour is warming up for a showdown with the Federal Government over the planned subsidy removal. There is the need for both parties to work out a phased-out programme that would mitigate the effects of government’s actions on the citizenry.


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