Nigeria’s over-reliance on oil as its major source of revenue and failure of successive administrations to build new or repair existing refineries is here to bring her to her knees. The next few months (at least) appear gloomy for the federal and sub-national governments as the Nigerian National Petroleum Corporation (NNPC) says its projected monthly remittance to the federation accounts allocation committee (FAAC) for May will be zero.
The state-owned oil company hinges its stand on payment for under recovery, popularly known as fuel subsidy. Subsidy payment for the month is put at between N211 and N234 to a litre. NNPC had warned that the corporation could no longer bear the burden of under-priced sales of premium motor spirit (PMS), better known as petrol, to consumers in the country.
The federal government claimed it ended the costly fuel subsidies last year, and said subsidy payment was not included in its 2021 national budget, indicating full deregulation. But NNPC later stated that it has been paying the differential between the landing cost and pump price. NNPC’s group managing director, Mele Kyari had said if prices are floated with no control, that could hurt consumers.
The announcement by NNPC sends shivers down the spines of about 33 states of the federation who can barely survive without federal allocation. Most of the states are already bankrupt. Last week, some of the state governors appealed to the federal government and the central bank to suspend planned commencement of deduction of budget support loan facilities from their monthly allocations.
Nigeria’s plan to fully deregulate its oil sector, especially the upstream segment has been frustrated by failure of its four major fuel refineries to perform up to average refining capacity.
NNPC wrote a letter to office of the Accountant-general of the federal recently notifying it that N111.96 billion will be deducted from April 2021 oil and gas proceeds — due to the federation in May — noting that the deduction is necessary to ensure the continuous supply of petroleum products to the nation and guarantee energy security.
NNPC made N195.705 billion net revenue remittance to FAAC between January and March 2021. In January, the corporation paid N90.360 billion, while N64.161 billion and N41 billion were remitted in February in March respectively. What that means is that the federal government would be losing an average of N65.235 billion every quarter if NNPC continues to withhold the revues as subsidy claim.
Crude oil has a standard price in the international market and it determines the price of refined products. If the cost of crude increases, it means cost of refined product too will increase.
A management staff of the NNPC who asked not to be named said the yoke of under recovery (subsidy) is too much on the NNPC. He said the corporation is doing what the federal government is supposed to be doing which is paying for the differentials because government has no provision for subsidy in 2021 budget. “The burden is too much on NNPC and that was why the GMD NNPC cried out recently that it was spending N120bn on subsidy monthly. There is a gap in the NNPC’s books. FG has to do something about subsidy payment,” the source told our correspondent.
As it stands, marketers can’t import refined fuel because they don’t have access to forex. Government’s negotiation with labour union to allow for the increase in the pump price of petrol has ended deadlock for many times. “The only thing hindering subsidy removal is the ongoing talks with the labour,” the source stated.
Industry experts attribute what they call subsidy scam to failure of the federal government to ensure transparency in the downstream sector.
For instance, Head, Augusto Consulting, Jimi Ogbobine said NNPC needs to be transparent and accountable in its management of the whole process. “How much fuel is being imported into the country what is the subsidy? We don’t know all of these details. So, we just rely on the benevolence of the NNPC to give us information,” he stated.
Although the federal government has said it has some funds to augment the shortfalls in the immediate, there are indications that it maybe forced to take some hard measures, including cutting monthly allocation to the states in the interim.
Solution
Some economic analysts who spoke with us said the states have to look inward and find ways to mobilise internally generated revenues to fund their state budgets.
As a way out of the predicament, Ogbobine said government we will need to resort to taxes and collection of duties through Customs service. S”o basically FIRS and customs, they are the two agencies where the bulk of the money will be coming from for the FAAC allocation,” he said.
Reacting, a tax professional, Sola Oyetayo called for a total overhaul of governance structure by the three tiers of government.
Oyetayo was of the opinion that wage bill of government is not sustainable as there is no justification assigning unnecessary portfolios to people in what could be seen as political consideration.
He stressed the need for government to assign priority to those projects with impactful results, such that wastes will be eliminated.
On his part the Director General, of the Lagos Chamber of commerce and Industry, LCCI, Mr. Muda Yusuf sees the unfolding scenario as quite troubling.
These are consequences of the perpetuation of an unsustainable subsidy regime, Yusuf argues adding that if the NNPC becomes completely incapacitated because of the burden of funding subsidy, the implications for states, and local government would be very dire.
He said “The social and economic systems of many states and local governments would be at risk of complete collapse. Infrastructure spending will suffer serious setbacks across all levels of government, payment of salaries will be a challenge, fiscal deficit may escalate and debt sustainability issues would be aggravated.
He said it is imperative to come up with a creative and innovative exit strategy from the subsidy regime.
Most of the experts who spoke with LEADERSHIP insist that collection of taxes and fees is a key development priority. They opined because it is essential to finance investments in human capital, infrastructure and the provision of services for citizens and businesses, as well as to set the right price incentives for sustainable private-sector investment.
Prof Yinka Omorogbe, President, National Association Of Energy Economists (NAEE) and Attorney-General and Commissioner for Justice, Edo State.
I have not read to know much about the statement by NNPC, but talking about the subsidy on petroleum products, basically we need to remove subsidy. The question is that can the government afford the subsidy? You can only pay what you can afford. I have said this many times.
Former banking czar, Dr Nnaemeka Obiaraeri said the right thing to do is to fully deregulate the sector, remove all consumption subsidies, pass the Petroleum Industry bill.
Further he said the NNPC should divest all its holdings in JVCs and other IOCs to big players in the upstream.
According to him, Nigeria is the only country in west Africa that refines in a yet to be fully deregulated economy, saying it is engaging in criminality of subsidy.
A Chartered Accountant, AbdulMumini Jawondo cautioned the federal government against printing more naira to augment the FAAC revenues.
On the option to print more currency, Jawondo who is the managing partner/CEO of Sanni Mohammed& Co. said printing more naira without any reasonable back up with economic activities such as production of goods and services can further deepen the revenue shortage crisis.
Jawondo added: “CBN has the responsibility of ensuring monetary stability by monitoring the money in circulation but not by printing naira carelessly.
“The issue of subsidy has to be tackled with all seriousness and Nigerians should be ready to face the realities once and for all. The economic realities are setting in and its obvious government cannot continue subsidizing petroleum prices. It gives way to inefficiencies and high-level corruption.”
An Economic expert Dr. Terpase Nomor has allayed fears that if money supply has increase but output has not increased what will happen to the Economy is automatic inflation, and when it happened like that there is danger”
Dr Nomor who was speaking against the backdrop that FAAC revenue to share for the month of May, may not be enough as NNPC is likely to deliver a zero remittance as it bleeds from rising subsidy payments.
According to him, “even though the HelicopterTheory of Money has suggested that Money should be printed when the Economy is in crisis especially when the cost of producing the major source of Government revenue is far far higher than the revenue itself which we all know is going to be zero.
Dr Nomor who is a senior Lecturer in the Department of Economics Benue State University Màkurdi said, what this simply means is that automatically there is no earnings on it, you just bear the cost of producing the oil, now when this happens Helicopter Economics suggest that Money should be printed but the question is can the this money be control?