Federal Government’s Funding of Petrol Subsidy Through Crude Oil Sales Revenue

Understanding Petrol Subsidy in Nigeria: What You Need to Know

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In recent news, it has come to light that the Nigerian National Petroleum Company Limited (NNPC Ltd) is reportedly spending a staggering N17.72 billion every day to fund petrol subsidies. This significant expenditure has raised questions about the government’s strategy for funding this subsidy and its impact on the economy.

While the details of the funding strategy remain somewhat secretive, it is believed that the NNPC is using proceeds from crude oil sales and direct cost recovery to cover the subsidy costs. Essentially, this means that the government is bridging the gap between the landing cost of imported petroleum products and the actual wholesale price paid by petroleum marketers.

Nigeria relies heavily on imported petrol, as highlighted by Farouk Ahmed, the Chief Executive of the Nigerian Midstream and Downstream Petroleum Regulatory Authority. With a daily consumption of approximately 44.3 million litres of petrol, the country’s subsidy spending has reached alarming levels.

The effects of this subsidy spending are evident in various aspects of the economy. For instance, the monthly reports from the Federation Account Allocation Committee (FAAC) now reflect substantial losses or revenue shortfalls, estimated at about N531 billion per month based on current prices and exchange rates.

President Bola Ahmed Tinubu’s declaration on May 29, 2023, that petrol subsidies had ended was met with an immediate hike in pump prices. The prices soared from N185 per litre to a lower limit of N480 per litre, with some areas even reaching N680 per litre. Despite this, NNPC-owned stations have maintained a price of N617 per litre, while independent and major marketers are selling at higher rates.

The current situation has led to concerns among petroleum marketers, who argue that the actual landing price of petrol is above N1,000 per litre. They attribute this increase to the depreciation of the Naira against the Dollar, which has nearly doubled since the subsidy removal announcement.

The lack of transparency from NNPC regarding petrol imports and pricing has added to the confusion. Efforts to obtain official data from the Finance Ministry and NNPC have been rebuffed, leaving many questions unanswered.

In the midst of this subsidy controversy, financial experts and analysts have expressed their views. Tunde Abidoye from FBN Securities Limited highlighted the return of petrol subsidies, citing the discrepancy between the current pump prices and the prices of other deregulated fuels like diesel and kerosene.

David Adonri, Executive Vice Chairman at Highcap Securities Limited, emphasized the need for NNPC to provide transparency despite its status as a publicly sponsored enterprise. He noted that the continued importation of petroleum products and the depreciation of the Naira point towards a subsidy.

Mallam Garba Kurfi, Chief Executive Offer at ATP Securities & Funds Limited, called for the publication of NNPC’s financial statements to provide clarity on the subsidy issue.

In conclusion, the resurgence of petrol subsidies in Nigeria has sparked debates and concerns about its impact on the economy. With conflicting reports and a lack of transparency from NNPC, the true extent of the subsidy remains unclear. As the government continues to grapple with this issue, transparency and open communication will be crucial in building public trust and understanding.