“Subsidy is Gone”: A Simple Explainer, by Abdulhaleem Ishaq Ringim
The enactment of the Petroleum Industry Act 2021 was intended to mark a significant shift in the regulation of the downstream petroleum sector. The act aimed to align petrol prices with market dynamics, phasing out the fuel subsidy regime. However, despite the planned full deregulation in February 2022, the government continued to allocate funds for subsidies, leading to financial strain and mounting debts.
Under the Petroleum Industry Act, the government ought to have terminated fuel subsidies and allow petrol prices to reflect the general market rates six months after its enactment. However, the government continued to provide for subsidy costs in its budget. Due to financial constraints, the government could not back the subsidy provisions in the 2022 and 2023 budgets with financing, resulting in unpaid subsidy costs. The Nigerian National Petroleum Company Limited (NNPCL) acting as the supplier of last resort offset these costs. This resulted in the accumulation of a debt of N2.8 trillion for the government in the process.
The new President, Bola Ahmed Tinubu has pronounced the termination of the subsidy regime. This is in line with the law and is further necessitated by the inability to finance subsidy commitments since February 2022. The removal of subsidies means that petrol prices will now fluctuate based on market dynamics rather than being fixed.
While the arguments continue on whether the announcement approach was systematic or not, it has to a certain extent saved the country the intense speculative buying activities that would have resulted from scheduling the announcement and other implications that would have marred such gradualism. I consider it a welcome development and commend the President for such uncommon courage which has been missing in the governance space for long.
However, the repercussions extend beyond price adjustments. The rise in price will naturally raise costs of transportation which will in turn further pressurize the country’s inflation rate. The government’s lack of resources to offset subsidy liabilities since February and the outstanding debt to NNPCL means there hardly will be any room for reinvestment including allocating funds for palliatives or post-subsidy shock alleviation. Moreover, it is crucial to note that even when the government was able to offset the subsidy costs, it relied on borrowing rather than revenue to cover the costs, exacerbating the financial burden.
With the subsidy officially and finally gone, the government must prioritize strategies to repay NNPCL’s debt of N2.8 trillion and other subsidy related debts while refocusing on the productive sectors of the economy and social welfare. This commitment demands immediate attention, as the accumulated debt poses a significant liability and might impede effective utilization of government revenues.
An encouraging prospect arises from the current situation as we grapple with outstanding subsidy debts. Once the government’s financial circumstances improve, its focus will permanently shift away from the subsidy regime and towards prioritizing crucial areas such as education, health, infrastructure, and other significant sectors. This shift is anticipated and underscores the government’s intention to allocate resources towards enhancing public value and renewing national hope.
Meanwhile, the government should advisably prioritize the enhancement of public transport systems and collaborate with state governments to improve mass transit systems and infrastructure especially by incorporating more diesel-based buses to the stock of public transport vehicles in their various states. The situation should also serve as an incentive for state governments to renew focus on developing Bus and Light Rail Transit systems.
To consolidate this hard decision, the government should consider the privatization of state-owned refineries to enhance efficiency and promote private sector participation in the downstream sector. By opening up the refineries to private investment, the government can improve their operational performance, output and overall local refining capacity. As Dangote refinery gets ready to begin operations, the government should also support other private oil-refining projects like the BUA refinery in Akwa Ibom.
Additionally, the Nigerian National Petroleum Company Limited (NNPCL) should explore the possibility of an initial public offering (IPO) to raise capital and expand its operations. Emphasizing the development of the gas sector could also be beneficial, considering its potential for revenue generation and reducing dependency on imported fuels.
Abdulhaleem Ishaq Ringim is a political/policy/public affairs analyst. He writes from Zaria and can be reached via [email protected]
