July 7, 2020

Always Look on the Bright Side of Life!

With apologies for having borrowed the title of this column, we are looking for some positives to have emerged from the ravages of the COVID-19 pandemic. There are many personal stories of generosity and sacrifice: our favorite is that of the Catholic priest in his seventies who gave up his bed in a COVID ward in hospital in northern Italy for a fellow sufferer forty years younger. Then there are policy changes forced upon governments by the acute fiscal pressures arising from COVID-19.

In this context we noted the FGN’s statement in its global investor call on 23 June 2020 that the removal of the fuel subsidies regime was among the fiscal consequences of COVID-19. The suspicious might say that the Federal Government of Nigeria (FGN) has not borne the cost of subsidies in its budgets since 2017 and that the NNPC has taken the hit in below-the-line adjustments in its accounts. To the doubters, the corporation quoted the Group Managing Director as saying in early April that “as at today, subsidy/under-recovery is zero”. He added: “going forward, there’ll be no resort to either subsidy or under-recovery of any nature”.

Given the current administration’s historic support for fuel subsidies on the grounds that they are somehow ‘pro-poor’, we need to continue probing. In the past the regulator set the maximum retail price for petrol/gasoline/premium motor spirit at the pump but has now begun to indicate the ex-depot price. The setting of a price, whether indicative or not, is inconsistent with full deregulation. An alternative, practiced in South Africa, Kenya and elsewhere, is to set a price at regular intervals, usually monthly, on the basis of crude and refined product prices, freight charges and exchange rates. In this case, the authorities in question share the details of the calculation for the sake of transparency (and there is no subsidy involved).

These changes have been forced upon the FGN by the fiscal hit from the double-whammy of the global virus and the crashing oil price. The chairman of the Senate committee on petroleum resources said in early June that the annual cost of the subsidy had averaged N511bn over the past decade. In 2011 alone, the year before the Jonathan administration managed to push up the maximum retail price, the cost was close to N2trn. To put the subsidy cost into perspective, the National Assembly last month approved the 2020 budget with total oil and gas revenue of N1.4trn, compared with N3.7trn in the pre-COVID budget approved (and signed off by the president) in December. The assumed average oil price was slashed from US$57/b to US$25/b over the six-month period.

At this point we cannot quantify the extent of the reform with any precision. We can say, however, that the removal of subsidies brings closer another change, namely the unification of FX rates or at least the scrapping of the preferential/CBN/official rate. The main application of this rate is for petroleum product imports. In the absence of subsidy, these imports will be shared by the NNPC and private marketers. The rationale for the special rate then becomes much weaker.

The removal of the subsidy also changes the dynamics of the illegal cross-border export trade in petrol. Nigerian tax rates are not the same as those in neighboring Franc Zone states naturally, yet the trade becomes less of a ‘no-brainer’, particularly when product prices are relatively high. Without getting carried away with ourselves, we add in conclusion that the FGN’s straitened fiscal circumstances have forced it to set a date for the end of electricity subsidies and may well have contributed to the current restructuring within the NNPC.

Gregory Kronsten

Head Macroeconomic and Fixed Income Research, FBNQuest