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Government Braces for N1.68tn Fuel Subsidy, Marketers Foresee N900/Litre

Title: “Government Faces Substantial Petrol Subsidy Costs as Naira Weakens and Oil Prices Soar”

The Nigerian government is poised to spend a significant sum, estimated at around N1.68tn, on subsidizing Premium Motor Spirit (PMS), commonly referred to as petrol, between September and December this year. This revelation comes amid mounting concerns within the oil industry regarding the exchange rate’s depreciation against the United States dollar and the surging global crude oil prices.

Currently, the pump price of petrol varies between N598 and N617 per liter, leading to speculation that the government is quietly subsidizing the commodity, despite President Bola Tinubu’s announcement in May about ending the subsidy regime.

The subsidy for PMS is facilitated through the Nigerian National Petroleum Company Limited (NNPCL), the sole importer of PMS, as other marketers have ceased imports due to difficulties in accessing foreign exchange.

The removal of the subsidy earlier this year caused the pump price of petrol to rise from approximately N198 per liter in May to the current rate of N617 per liter. However, the continued depreciation of the naira against the dollar and the escalating crude oil prices have intensified the pressure on PMS costs.

Oil industry experts explain that over 80% of PMS costs are driven by the prices of crude oil and the exchange rate of the naira against the dollar. Brent crude, the global benchmark for oil, surged to approximately $95 per barrel, reaching its highest level in 2023. At the same time, the naira’s exchange rate on the parallel market weakened to 980 to the dollar.

The combination of a forex crisis and the rising crude oil prices has made it challenging for the government to maintain the petrol price at N617 per liter. Consequently, experts argue that the government may have quietly reintroduced fuel subsidies.

A media report indicated that the Federal Government disbursed N169.4bn as subsidy in August 2023, citing a Federal Account Allocation Committee document. According to this report, the Nigerian Liquefied Natural Gas paid $275m as dividends to Nigeria via NNPCL, with $220m (N169.4bn at N770 per dollar) being used to cover the PMS subsidy in that month.

Chinedu Ukadike, the National Public Relations Officer of the Independent Petroleum Marketers Association of Nigeria, emphasized that it’s implausible to maintain the petrol price at N617 per liter without subsidy due to the continuous depreciation of the naira. He suggested that the retail price of PMS should be around N890 to N900 per liter, considering the current forex rate in Nigeria.

While the subsidized ex-depot price of petrol from NNPCL ranged between N585 and N600 per liter, calculations suggest that the government might be providing approximately N290 per liter as subsidy at present.

With an estimated daily consumption of 48.43 million liters and an assumed subsidy rate of N290 per liter, the government’s daily subsidy cost could reach N14.04bn. This could escalate to N421.3bn on a monthly basis, and projections indicate it might soar as high as N1.68tn for September through December 2023 if the naira continues to weaken and crude prices remain elevated.

The history of fuel subsidy in Nigeria reveals that it has historically incurred significant costs for the government, with trillions of naira spent on it over the years. Critics argue that maintaining price stability in the hands of private sector entities in a deregulated market is challenging, as these entities tend to influence prices to maximize profits. They believe that transparency and accountability are crucial in ensuring good governance and protecting the interests of Nigerian citizens.

As the government grapples with the decision to either maintain or reintroduce petrol subsidies, the Nigerian public remains concerned about the impact on their daily lives and the overall economy. It is clear that this issue will continue to be a subject of debate and scrutiny.

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