A Return to the Subsidy Regime?

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Monday, December 21, 2020 / 01:39 PM / By CSL Research / Header Image Credit: Strenuousblog

 

A Punch news report says the oil marketers under the aegis of Petroleum Products Retail Outlets Owners Association of Nigeria (PETROAN) have called on the Federal Government to work with the private sector to fix the dysfunctional refineries in the country. The President of the association, Dr Billy Gills Harry, noted that fuel price had always been linked to the US dollars, which depletes resources meant for the nation's growth. He further stated that re-introduction of subsidy on refined petroleum products would have an adverse effect on the economy.

 

About 90% of the refined petroleum products consumed in Nigeria is imported. The refineries located in Kaduna, Warri, and Port Harcourt with a combined capacity of 445,000 bpd have long operated at low levels due to many years of underinvestment and poor maintenance. Despite continuous talk of revamping the refineries. In 2019, combined capacity utilization of the refineries fell to 2.5%, an all-time low annual activity level since 1998 when NNPC started providing the data. However, the government has been assisting the private  sector to develop modular refineries and a few private refineries are expected to come on stream soon.

 

In September,  the  Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPRA) Abdulkadir Saidu, stated that PMS prices would  henceforth be determined by the forces of demand and supply and the international cost of crude oil. The agency said it would no longer release guiding price bands for Premium Motor Spirit (PMS). According to him, the role of the agency would henceforth be to ensure that oil marketers do not profiteer, as petroleum marketers  are now free to source for product and fix their prices.

 

In 2020, a steep decline in global crude prices triggered by the global pandemic completely wiped out the subsidy via significantly lower landing costs, paving the way for a reduction in the pump price of Petrol in mid-March. The PPPRA announced  a reduction in ex-depot price to N113/litre and official pump price to N125/litre. Since then, the PPPRA has gone on to raise fuel pump price to N135-N145/litre in April before implementing a reduction to N121.50 - N123.50/litre in June. An increase to N140.80 - N143.80/litre in July was implemented and was raised again in August to N148 - N150/litre to reflect rising cude prices. In November, the NNPC increased its ex-depot price which led to an increase in the pump price of petrol to between N168 and N170/litre.

 

Following a meeting with the Labour Union leaders on 7 December however, the Minister for Labour and Employment, Dr Chris Ngige, announced that the Federal Government was going to reduce the pump price of petrol from N168 to N162.44 per litre effective 14 December. The Minister, however, noted that the reduction will not impact government's deregulation policy. We continue to reiterate that the removal of the subsidy on Petrol is a critical free-market reform in our view, and we believe it is beneficial to the economy and government finances. However, we remain concerned that the timing may be inopportune and the government be forced to return to the subsidy regime given the effects of the pandemic and recent hike in electricity tariffs on the already squeezed Nigerian consumer.



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