First ''Under-Recovery'', Now ''Value Shortfall''; Can Nigeria Bite the Bullet on Subsidies?


Friday, September 24, 2021 / 10:36 AM / by CSL Research / Header Image Credit: Hidustan


A Vanguard report says the Nigerian National Petroleum Corporation (NNPC) has spent N175.32bn on petrol subsidy in July 2021, which will be deducted from its remittance to Federation Account Allocation Committee (FAAC) in September. The corporation also noted that a previous outstanding balance of N40bn will also be deducted, bringing the total deductions to N215.32bn. With no provision for petrol subsidy in the 2021 budget, the NNPC has resorted to direct deduction from FAAC remittance, which it terms 'value shortfall' in its books. These deductions affect the revenues accruable to the federation. There have been attempts in the past to remove the fuel subsidy but a steep devaluation in the currency and an increase in crude prices in the international market which implies an increase in the landing cost of petrol, on many occasions have caused the continuation of the subsidy regime, which was previously booked as under-recovery losses in the books of NNPC.

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So far, in 2021, crude oil prices have continued to rise, implying an increase in the landing cost of PMS. In 2020, a steep decline in global crude prices triggered by the 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 and paved the way for talks of deregulation. The PPPRA announced a reduction in ex-depot price to N113/litre and the official pump price to N125/litre. Between June and November 2020, the petrol price was revised four times, rising from N121.50-N123.50 per litre in June to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September and N165-N170 in November. Without a doubt, an attempt to revise the price to suit current realities will be strongly resisted by the populace who have been hard hit by two recessions and a pandemic in the last five years.

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The Group Managing Director (GMD) of Nigerian National Petroleum Corporation (NNPC), Mele Kyari, earlier this year, noted that the corporation could no longer bear the over N120bn monthly subsidy on Premium Motor Spirit (PMS) also known as petrol. He noted the NNPC pays between N100 billion and N120 billion a month to keep the pump price at the current levels. According to him, the landing cost of petrol with current fundamentals comes to N234/l (in March), yet the corporation sells the product at N162/l. He put the daily consumption at 60million litres, all imported by NNPC. He noted that negotiations with labour unions and civil organisations were ongoing as the President has given the corporation the mandate to work out appropriate pricing.


The deregulation of the downstream oil sector remains a politically sensitive discourse. Deregulating the downstream sector, which would in many times involve raising the pump price of petrol with increasing oil price, is always a challenge in a country where the subsidy on petrol prices is seen as the only source of social security. We have always expressed concerns that the current timing by the government to get rid of the long-standing subsidies is inopportune. In effect, the government may be forced to retain the subsidy given the impact of the pandemic, high food prices and hike in electricity tariffs on the already squeezed Nigerian consumers.

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