A variation on fiscal recoveries

Proshare

Thursday, February 25, 2016 7:00 AM / FBNQuest Research

The template for premium motor spirit (PMS, petrol) on the website of the Petroleum Products Pricing Regulatory Agency (PPPRA) shows that the FGN should be benefitting from a negative subsidy. The agency’s data for 19 February has the open market price, the sum of the landing cost and margins, at N69.7/litre (l). The difference between this price and the retail pump price amounts to N16.3/l or N240bn over a full year on daily domestic consumption of 40 million litres. The agency told the local media last week that such proceeds totalling N2.6bn had been lodged in a new account at the CBN from imports in December.

The authorities will be grateful for such monies, and may decide to reduce the retail price. Our preference would be that they remove the subsidy altogether, and set the retail price monthly on the basis of the oil price and the exchange rate. This is the practice in Kenya, South Africa and elsewhere.

The FGN is dragging its collective feet and the head of state views the subsidy as “pro-poor”. Deregulation today would attract limited protest, in contrast to January 2012, and would require fewer palliatives from the FGN.

Our contrasting view is that the subsidy favours the owners of SUVs and the middle classes generally. We also think that its removal would attract additional investment in refining capacity and facilitate the efforts to secure equity partners for the NNPC’s four operations. The benefits for the balance of payments and for employment are self-evident.

The FGN submitted a supplementary budget for 2015 in November for N450bn (including N410bn for subsidy payments). Its proposals for 2016 allocate just N150bn for subsidy arrears.

The fiscal cost has fallen dramatically, which we hope does not become a reason not to act: the World Bank has put the fiscal cost in 2010-14 at US$35bn equivalent. For 2011, the year before the last attempt at deregulation, its exceeded N2trn.

The PPPRA template has an over recovery because the fx for the imports is sourced at N197 per US dollar. This helps to explain why the CBN is opposed to devaluation and why it views petroleum products as priority imports.

The authorities have directed that fuel stations selling PMS above the retail price of N86/l should be subject to a menu of penalties. The NBS price watch for January, however, shows that households paid an average across the country of N109.6/l and that Lagosians paid the lowest (N91.1/l).

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