Pandora’s box

Nigeria’s President Bola Tinubu used his inaugural address to announce a significant policy: “Fuel subsidy is gone.” It is unclear when the…

Nigeria’s President Bola Tinubu used his inaugural address to announce a significant policy: “Fuel subsidy is gone.” It is unclear when the new policy will kick in, but his announcement has led to a rise in the price of petrol and could have a knock-on effect on other costs. The Nigerian National Petroleum Company (NNPC) Limited has adjusted petrol pump prices across its retail outlets in line with current market realities. The development triggered a 100 percent hike in transport fares, while long queues resurfaced at fuel stations.

A famous quote largely attributed to former Soviet dictator Joseph Stalin goes, “You can’t make an omelette without breaking eggs.” Fuel subsidy removal has been one of the key points we have advocated for a long time in this editorial. It is a necessary policy choice to avert fiscal disaster for the country. We said in the past that along with the decisions on foreign exchange management, it might represent the most major policy pillar the Tinubu administration must tackle for an economic turnaround from the dire fiscal straits the Buhari administration led the country into. The Nigerian government spent ₦1.2 trillion ($1.6 billion) on fuel subsidies in 2022, about 1.8% of the country’s GDP, a significant increase from the ₦600 billion spent in 2021. We have a weird situation where subsidies give Nigerians cheaper local fuel prices than those in the wealthier countries the country imports petrol from. Nigeria imports petrol from Belgium, India, the Netherlands, Norway, and the United Kingdom, and the global average price of petrol is $1.28 per litre, which is approximately ₦1,000. But before the subsidy removal, Nigerian petrol cost ₦185, the lowest in Africa. The subsidy was unproductive, so it had to go, but the Nigerian government needs to make sure it commits to taking steps that limit the rate of inflation that could come from the subsidy removal. Mr Tinubu, in his inaugural speech, decided to grab the bull by the horn and also stated his intent on the FX side, following up with a meeting with the CBN governor the day after. However, the subsidy removal should have been better executed from a communications and stakeholder management perspective. The ongoing panic in the country over it and the scarcity it has precipitated while the presidency remains silent over the details of such a landmark announcement leaves much to be desired. Just like erstwhile President Buhari, who used his early days in office to criticise a shortage of forex and a “no show” to the idea of naira devaluation, Tinubu has sprained the Nigerian economy by putting the wrong foot forward and sending the worst possible signal. Under the deal reached by the previous administration and the National Assembly, subsidies were meant to be in place until the end of June. What Tinubu has done is help petrol stations earn undue profit by giving them the impetus to sell at almost double the prices they obtained the product from the NNPC for. As a sole importer, the government-owned company swaps crude oil it should have been refining locally for petrol. The deal happens under a Direct Sale, Direct Purchase agreement with refiners and large traders. The cost of shipping, transferring the product into smaller vessels, offloading and holding up the products in ports and terminals around the country is borne by the NNPC. When the products are on land, they are transported to depots owned by 27 select firms, including the NNPC’s retail arm. That cost and the depot charges are added to the product landing price. The depots load the petrol brought to them by the NNPC at an ex-depot price, which is set at a government-determined ceiling plus the profit margin for the facilities holding the product. When trucks drive up to the depots owned by these select firms, they load the product at the ex-depot price and sell at an agreed profit margin of their own, which hovered between ₦170 and ₦190 as of July 2022. In the periods leading up to this increase, which the government secretly consented to but openly denied, non-select depots and filling station owners had been lamenting that they were buying a litre of petrol at more than ₦200. The depots holding the NNPC’s stock for it were claiming to be under-supplied. Before President Tinubu’s announcement, both parties appeared to have reached a balance of the high ₦200 as the chosen price in most parts of the country, except t some places where the product sold for over ₦300. The last known ex-depot price reported by the media before the claims by the non-select marketers that they were buying the product at ₦200 plus was ₦148. That ₦148 supported a subsidised price tag at the pump of ₦165 for the lucky ones. Nationwide, the average gasoline price was ₦10.89 higher than the subsidy ceiling. At the end of January 2023, the government approved a ₦24 increase from the prior price to ₦172. In April, the month before President Tinubu forgot his new office and spoke like a man having grilled catfish and beer with friends, the average petrol price across the country dropped by 3.87%, from ₦264.29 to ₦254.06. If you are doing the math, the April figure is ₦64 or 33.72% higher than the ₦190 ceiling from July 2022. While the ex-depot price was at ₦148 and ₦172, most of the unfavoured independent marketers, who control 80% of the market, say they rarely bought at this price from the “chosen ones.” Since the federal government banned publishing petrol price templates, Nigerians cannot distinguish between the subsidy at the landing cost, where forex components influence pricing, and the artificially fixed ex-depot cost. Without addressing this information gap that should be lucid to the public, Tinubu has acted like Donald Trump. His announcement jump-started the subsidy regime one month before it was due to effect, leaving Nigerians to wonder if the NNPC had not pre-budgeted for June and would now profit from the savings without recourse to the federation account. Suppose the NNPC supplied petrol to depot owners at ₦172, and they have not finished stock. In that case, they are taking advantage of the president’s blab to worsen life for Nigerians, who are already overburdened by a high inflation rate. On Wednesday, the company reportedly released a price list that sets prices at more than 100% of the current ex-depot price. Yet, the company would have already claimed a subsidy at source for the difference between the ex-depot price and the landing cost for importing current stock. Before his ungainly remarks, Tinubu should have worked with the midstream and downstream regulatory authority to set out a transparent way of informing Nigerians on regular pricing templates, just as the defunct Petroleum Product Pricing Regulatory Authority was doing before it was silenced. Marketers should have been allowed to sell the subsidised stock from the end of June and granted a discount rate to buy new volumes from July. By July, the trigger to remove subsidies in the first place, the Dangote refinery, would have come onstream and sold to the Nigerian market with fewer forex fees incurred from shipping. Tinubu’s speech makes you wonder if the show was not choreographed to erase a few bills for the boys. The dreaded announcement has been made, and while we have criticism about how President Tinubu went about it, the fact is that it was never going to be pretty. If it were easy, petrol subsidies would have been done decades ago — President Jonathan failed to follow through in 2012. The withdrawal symptoms are here: fuel queues, inflation and uncertainty. The next steps should be talks about increasing the National Minimum Wage, the only logical palliative that can be implemented. However, the government must avert industrial action from the unions and a potential economic recession. In the long run, subsidy removal should benefit the economy, freeing up resources, reducing the debt burden and encouraging capital investment in critical sectors.