Dealing With Nigeria’s Fuel Subsidy Debacle

In this piece, Chika Izuora takes a look at the latest round of fuel scarcity across the country following unsettled subsidy claims by major oil marketers who are now confronting the outgoing administration of President Goodluck Jonathan to pay the outstanding N200 billion subsidy for products imported by its members.

The current round of fuel scarcity commenced after a succinct warning by the secretariat of the major oil marketers association of Nigeria (MOMAN) that the marketers would bring to a close its partnership with the government in the importation of premium motor spirit (PMS) also called petrol.

The executive secretary of the MOMAN, Mr Femi Olawore, said precisley on April 24 that the association is fatigued by the significant debt hanging on its neck following funds borrowed from banks to finance petrol import on behalf of the government.

Befuddled, Olawore told the media in Lagos that a huge subsidy outstanding of N350 billion is owed to the marketers by the federal government.

The association said that the industry to date had only received approximately N30 billion in foreign exchange differential claims out of the N100 billion owed.

“In the same vein, only N345 billion has been received in core subsidy payments, covering payments up to the second quarter of 2014. Specifically, only three companies out of the six MOMAN companies received payments for foreign exchange (FOREX) differentials and no company, the MOMAN or DAPPMA, has been paid interest charges on delayed payments,” he stated.

He argued further that the MOMAN comfortably controls about 60 per cent of the downstream sub-sector of the oil and gas sector and the need for the government to pay marketers to avoid fuel scarcity. Following the threat, the commercial nerve center of Nigeria, Lagos, was quickly besieged by motorists from neigbouring states to salvage what was available. Daily the scarcity continued to spread to other major cities in Nigeria, including the Federal Capital Territory (FCT), Abuja.

Few days after, the federal government said it had made a subsidy payment of N156 billion ($787 million; €705 million) to fuel the vendors to ease the crippling petrol shortage that has bewildered the country. The minister of finance, Ngozi Okonjo-Iweala, said the vendors were still owed an additional N98 billion but warned that government revenue remained under extreme strain because of low crude prices.

“The federal government has made maximum effort, in spite of the well-known fact that the fall in oil prices has significantly reduced national revenues, to prioritise (subsidy) payments,” Okonjo-Iweala said.

The petrol subsidy scheme is one of the most controversial elements in the budget of Nigeria which is Africa’s leading economy and top oil producer. Many, including Okonjo-Iweala, want the scheme scrapped entirely.Currently, petrol vendors must sell fuel at N87 per litre, far below international market rates, with their losses offset through the subsidy and when the government does not pay, fuel runs in short supply, causing gridlock and panic.

In the economic capitals, Lagos, Abuja, Enugu, Port Harcourt, Asaba, Onitsha, Aba, Abakaliki, Ibadan, Kano, Niger, among other cities, long queues dot the scenery outside petrol stations, causing traffic congestion. A massive and unruly crowd formed outside a petrol station in Lagos with dozens of people clutching jerry cans at the gate, hoping to purchase even just a few litres of fuel. Urchins took advantage of the situation to start brisk businesses of selling petrol at overpriced rates in the full glare of security agents.

Okonjo-Iweala urged vendors to show understanding because of the revenue crunch by continuing to stock their stations so that “Nigerians would not suffer more.”

Despite producing more or less two million barrels of crude oil per day, Nigeria is recurrently hit by fuel shortages because of its paltry domestic refining capacity as locally produced crude is shipped out of the country for refining and then imported for sale. Observers collectively agree that the process has been devastating, with billions of dollars wasted over decades in subsidy payments that do little to benefit the economy.The scheme, however, has some popular support as many Nigerians see low petrol prices as their only advantage from the nation’s vast resource wealth, which has largely been squandered through sleaze. Repeated calls to invest in domestic refineries have so far yielded little progress but Nigerian businessman and Africa’s richest person, Aliko Dangote, has vowed to find the way out.

The 2015 budget approved by the National Assembly included no additional funds for subsidy payments, marking a significant exodus from past budgets. But the measure may prove meaningless, as president-elect, Muhammadu Buhari, and his loyalists in the National Assembly can push through amendments once the new government is sworn in on May 29. Okojo-Iweala’s comments also highlighted a key challenge facing Buhari as he gets ready to take office. The dwindling revenues will almost certainly affect his ability to make the promised improvements in infrastructure and security.

After failing to adequately save when crude prices were above $100 dollars per barrel, Nigeria’s oil-dependent economy has been hammered by the global oil price shock since mid-2014. Joining in the call for removal of fuel subsidy and revamping of the local refineries, the Nigeria Labour Congress (NLC) and the Trade Union Congress (TUC) have proposed for a legislative framework that would facilitate the revival of government-owned refineries. The unions made the call at the 2015 May Day celebration with the theme, The Working Class, Democratic Consolidation and Economic Revival: Charting the Way to National Rebirth.

The NLC president, Ayuba Wabba, expressed displeasure that 56 years after commercial oil mining began in Nigeria, the country had not been able to meet its domestic demand of petrol through local refining.

“In our estimation, boosting local refining on a sustainable basis is an option we hold dear. We urge that all the necessary legislation and policy should be put in place to realise this. We believe our refineries can work.We believe that rather than sell them as scraps, an enabling environment should be created for government-owned refineries to co-exist and compete with private refineries.

“The information on the non-provision of fuel subsidy in the 2015 national budget is already public knowledge. We hope this is not an attempt to plunge the country into unnecessary crisis,” Wa​bb​a said.

Wabba said the position of the labour movement on the need for internal refining of crude oil into various petroleum products was well known. He noted that as an oil producing country, Nigeria must have a functional internal refining capacity in order to meet the nation’s domestic petroleum consumption needs. The NLC president said ​the ​government had a responsibility to ensure that the existing refineries work and that new ones were set up. He stated that modular refineries could be established within 24 months, adding that the turnaround of our refining capacity would eliminate the need for petroleum subsidy and the inherent corruption.

Analysts foresee that the persistent face-off between oil marketers and the federal government over payment of subsidy claims will no doubt present enough validation for the incoming administration of General Muhammadu Buhari to deregulate the downstream sector and save the country the huge resources being wasted on payment of subsidy claims.

Political analysts are of the view that key members of APC are in support of deregulation as the most viable option to end the perennial scarcity of petroleum products caused by the delay in the payment of subsidy claims.As the May 29 handover date approaches, the marketers have intensified their agitation for the present administration to liquidate all the outstanding claims.

It is believed that if this present administration does not pay all the outstanding claims before the handover date, it will lead to a more serious fuel crisis of unimaginable proportion as the NNPC cannot bridge the supply gap created by the inability of the private marketers to import products.