Oil price decline opens window for subsidy removal, increased savings

19 October 2014, Lagos — As oil prices continue to make their descent and are expected to fall below $80 a barrel, oil market analysts have called on the federal government to seize the window of opportunity provided by the decline to remove the subsidy on petrol and kerosene.

They added that the removal of subsidies on both products would increase distributable revenue to the three tiers of government, especially to cash-strapped states and local governments, from the savings that will be made.

However, under the 2015-2017 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Policy (FSP) submitted by the executive to the National Assembly this week, the federal government has proposed a subsidy budget N971.4 billion for petrol and N250 billion for kerosene for the three years under review.

A worker holds a fuel nozzle at a petrol pump in MumbaiThe market analysts recalled that in January 2012 when the federal government removed the subsidy on petrol, oil prices averaged $113.81 a barrel during the month and $111.67 a barrel for the entire year, making it inexpedient and unpopular for the government to have tampered with subsidies at the time.

While acknowledging that removing subsidies just before the elections might not be politically expedient for the Jonathan administration, they said if the policy is properly handled and the price of petrol drops, it could work out to the advantage of the government.

“With the price of crude oil sliding to almost $80 a barrel, a price parity has been achieved as the price of refined petroleum products would also decline and this gives the government the opportunity to remove the subsidy on petrol and kerosene.

“Already, the price of diesel, which is a deregulated product has started to decline gradually at fuel stations, as importers are buying it a lower price from traders and refiners overseas. This means that prices of other refined products would also fall,” said one analyst. When his attention was drawn to the fact that the government is proposing N1.167 trillion as its subsidy bill between 2015 and 2017, he said this was too preemptive in the face of lower crude oil prices, which might not rise for a while due to slowing growth in China and rising shale oil production in the US, which are respectively the highest consumers of crude oil in the world.

“As your paper has already reported, Saudi Arabia, the swing producer, is not in a hurry to cut output, neither is Russia, another major oil producer. So we may have to get used to the idea of lower prices for some time to come.

“This is the time the government should capitalise on the opportunity offered by lower oil prices to remove the subsidy burden which has been serially abused by fraudsters, has cost the country trillions of naira and put undue pressure on the naira by fuel importers who constantly need to buy foreign exchange from the Central Bank of Nigeria.

“Besides, with lower crude oil prices, Nigeria’s foreign exchange earnings are bound to drop, but with a lower or zero subsidy bill, the savings can offset the drop in earnings,” he explained.

He also called on the Federation Accounts Allocation Committee (FAAC) comprising finance commissioners of the states and the Federal Ministry of Finance, which has been agitating for the removal of subsidies to increase their campaign now as the timing couldn’t have been better.

Under the MTEF/FSP submitted by the executive, the federal government has also proposed N570 billion for borrowings in 2015 and plans to spend N259 billion on Subsidy Reinvestment and Empowerment Programme (SURE-P) next year. It also put states’ share from the Federation Account during the next fiscal year at N1.675 trillion and local governments’ share at N1.291 trillion.

The document also contains N750 billion estimates for debt service and N11.1 trillion as the total federally collectible revenue in 2015. In a related development, the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, has warned against the effects of falling oil prices and called for increased prudence by the three tiers of government in the management of resources.

The minister, who spoke at the National Council for Finance and Economic Development (NACOFED) conference in Enugu yesterday, also gave an update on the state of the global economy, a subject which she told her audience was extensively discussed at the just concluded annual meetings of the World Bank and International Monetary Fund (IMF), and how it affects the Nigerian economy.

The IMF had lowered its growth projection for the global economy citing increased uncertainty over sluggish growth and stagnation especially in Europe.

Specifically, she spoke about the implication of the decline of the oil price on Nigeria’s economy against the backdrop of other revenue challenges such as oil theft.

She said the executive arm of government had consistently pushed for a lower benchmark price in its discussions with the National Assembly, because price-sensitive country’s like Nigeria which depend on a single commodity like oil for most of their revenue, cannot afford to take things for granted, warning that a steep fall in oil prices could have serious economic consequences.

“We have been preaching prudence in the management of oil revenues because whether the price is high or low, with prudence you can’t go wrong,” she said.

Essentially, the country is facing both price and quantity challenges which deserve serious attention, she said. The minister, however, added that the cooperation between the federal and state governments had helped the country to cope quite well in spite of the challenges.

She urged both tiers of government to quickly draw up contingency plans to deal with the serious challenges posed by the decline in oil prices on the economy, adding that the federal government would soon announce its own contingency plan to deal with the revenue challenges.
*Omololu Ogunmade and Ejiofor Alike – Thisday

About the Author