The ridiculous reintroduction of petroleum subsidy by NNPC

By Sunny Chuba  Nwachukwu, PhD

The International Monetary Fund (IMF) has raised worries over the reemergence of the subsidy policy regime in the Nigerian downstream oil subsector. The global financial institution expresses worries because, the nation’s ailing economy, rather than improving, is being dragged to plunge deeper, without taking cognisance of the hurt and damage brought by this policy in recent times.

The NNPC’s Group Managing Director, Alhaji Mele Kyari, on Monday the 6th of April 2020, during an AIT live telecast declared thus: “The era of subsidy on petrol is gone forever”. Surprisingly, this same economic scourge has reemerged in this oil rich nation, well known for its abundant crude oil deposits, consistent involvement in upstream extractive operations for crude exports.

It is indeed ridiculous to note that this decision earlier taken by the national oil company, declaring a total and permanent removal of this economic destructive package, has once again been made to completely stand on its head, just a couple of months after it was made. Indeed, what a policy somersault on a very unstable economy! An economy that is suffering growth-in-retreat, with high inflation rate, especially made worse by high food prices.

This recent discordant sound beat from the NNPC drum paints an embarrassing picture of lack of seriousness, conveying an impression of low integrity with poor managerial economic principles, of the institution. The expected impact from Nigeria’s oil industry operational dynamics, however, is basically expected to feed the nation’s economy, not to drain or run it down. From all intents and purposes, this appears to be what it has become, a drain on the country’s economy.

With the benefit of having  a wider view of the downstream sub-sector –  distribution and marketing of the petroleum products (petrol, for instance) – the microeconomic indices on demand, capital/investment, production, pricing/market structure and profit management, are all completely at variance with the line of thought and decision taken by the NNPC management; to reintroduce subsidy and then fully activate deregulation for all interested private oil marketers in the country, with the encouragement to officially support them with CBN’s products’ loan package for massive importations of refined products; where the prevailing open market forces will determine products’ pump pricing.

This line of thought is totally unacceptable because, there shall never be any healthy competitive pump pricing dynamics that will favour products consumers. The major reason is that these businesses being wooed by NNPC management buy forex at a highly exorbitant exchange rate to our poorly valued local currency.

Since these businesses must venture to make profit, the imported products’ pump price costs would not be any better than the present NNPC $300 million/N120 billion monthly subsidy undercover paid for N165/litre from N234/litre; on the basis of the nation’s 60 million litres daily petrol consumption. This unsustainable financial burden by NNPC is what shall manifest in full blast once private investors take over. The likely consequence of that is, given the situation in the country, this will, of course, increase tension and worsen the already heated polity, and burst inflation ceilings.

From a simple quantitative analysis carried out, it was observed that this unsustainable arrangement of importation of refined products, using the NNPC’s daily consumption data of 60 million litres of petrol (with the above cost figures given), the monthly subsidy payment of $300 million and the one paid by consumers @N165/litre ($618,750,000) comes to a total figure of $918,750,000. From these figures, it is obvious that about 52 percent of the total daily consumption of refined products utilized is wasted as the losses sustained by the NNPC.

Why then is the management of the NNPC not applying the adequate decision making principles of managerial economics that can deliver this country from the present economic doldrum? Utmost care must be applied,  timely and prudently, to make sure that this tide of economic woes is reversed, and then reposition the economy for progressive growth. Otherwise, this very poor decision could adversely take us back to a very, very unpleasant economic situation, judging from the above illustration.

The proper thing the NNPC’s management should be doing to douse the economic tension is to aggressively saturate the subsector with local refining facilities that can take up the nation’s daily energy demand and make the economy a net exporter of refined products, through the ongoing rehabilitation programmes of the abandoned plants in the country. That will significantly ease off the present stress on forex demands and, of course, it will further strengthen the local currency exchange rate.

NNPC is, therefore, admonished to be proactive in its plans, programmes and all the strategies it is deploying. These are patriotic steps that ought to be taken to change the uncomplimentary image attached to this nation, as the world’s poverty capital. Building this economy at this critical time demands that all hands are on deck, for the sake of actualizing a better, progressive, and very viable economy.

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Nwachukwu, a graduate of pure and applied chemistry with an MBA in management, is an Onitsha based industrialist, a fellow of ICCON, and vice president, finance, Onitsha Chamber of Commerce.

Sunny Chuba Nwachukwu (FICCON, LS)

Onitsha, +2348033182105