The fiscal necessity of subsidy removal

Oil & Gas
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Tuesday, July 28, 2015 8:47 AM / FBNCapital Research

Earlier this month, the NBS released a report entitled premium motor spirit (PMS) price watch. It shows the average monthly prices for PMS paid by households across the country.

 

This amounted in June to N112.3/litre (l) for the 36 states of the federation including the FCT, and so well above the fixed retail pump price of N87/l set by the previous administration in February.


The average price of gasoline in June represented a 7.3% y/y increase from the corresponding period in 2014. Bayelsa State had the highest price for PMS at N155/l while Zamfara State had the lowest with N93/l. We can see that distance from an import landing terminal is not the principal driver of relative costs in the different states.

The impact on general price levels was observed in headline inflation, which rose from 9.0% y/y to 9.2% in June. A major factor was the then persistent fuel shortages, which pushed up transportation costs.

President Buhari recently expressed his hesitation towards an immediate removal of the fuel subsidies due to the unquantified social effects. This marked a change in nuance from his election campaigning.



The Petroleum Products and Pricing Regulatory Agency (PPPRA) shows an average open market price for PMS for June of N130.0/l, indicating a subsidy cost of N43.0 for the month. Its template incorporates all the costs and margins for the product from import at the terminal.


The government’s ability to keep the subsidy programme intact is quite limited considering the implied subsidy from the PPPRA template, not to mention the recent dip in the global crude oil price and the recurring difficulties in placing Nigerian crude on the international markets.


While immediate deregulation is not proposed, it is unclear how long the system can be maintained. It may be that the authorities are working on palliatives to soften the blow of subsidy removal, mindful of the protests at the last attempt in January 2012.

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