Is Osinbajo right that FG is not subsidizing fuel?

Vice President Yemi Osinbajo speaking to the media on December 25 in the midst of a biting fuel scarcity crisis, said that the federal government is not paying subsidy on fuel but the Nigeria National Petroleum Corporation (NNPC) is responsible for the payments.

“NNPC is trading in fuel; the Federal Government is not, at the moment, paying for any subsidy. NNPC is trading. If you are buying and selling fuel, you would have to be able to pay for it. So, it’s not a question of government provision for subsidy, the Federal Government, at the moment, isn’t paying any subsidy. And don’t forget that the way that the NNPC trades is that, in many cases, NNPC is actually giving fuel; there is 445, 000 barrels of fuel. So really what you are seeing, in many cases, is more or less an exchange for PMS. So at the moment NNPC is paying the cost,” Osinbajo was quoted as saying.

Osinbajo was saying this in apparent response to the revelation by Maikanti Baru, the Group Managing Director of the NNPC that the landing cost of fuel in the country now stands at N171 per litre, which is already N26 above the maximum N145 per litre selling price of fuel at the pump. When distribution and profit margins are added it takes the implied subsidy on a litre of fuel to N40.70.

However, the Federal Government has not made any provision for subsidy in its national budgets since 2016 after it moved the price of a litre of fuel from N86 to the current N145 claiming that it is doing away with subsidy.  So Osinbajo may have therefore been embarrassed to admit that after the Federal Government claimed to have removed and stopped paying subsidy, it is actually still paying the subsidy.

Osinbajo’s response is also in line with the position that the President Muhammadu Buhari administration had always held. Ahead to the 2015 national elections, in an interview that went viral on social media, President Buhari, then as candidate of the now ruling All Progressive Congress (APC) had claimed that there was nothing like subsidy. He had in fact gone ahead to say that subsidy is a fraud. At the time, Buhari’s statement had gained a lot of support because of the controversy around subsidy payments by the previous Goodluck Jonathan administration.

Now, the same President, who called subsidy a fraud, is being forced to pay subsidies, in other words to sustain a fraudulent system.

The truth is that at the time the pump price of fuel was adjusted upwards to N145 per litre, the average price of crude oil in the international market was about  US$40 per barrel. Since that adjustment, crude oil prices has been rising consistently touching a new high of US$67 per barrel on December 27.

Also a price modulation that was also to come into effect following the price adjustment has been abandoned by the government because it would have seen pump prices of fuel adjust as crude prices rose. The consequence is that the current prices no longer represent market realities, a position that the government is reluctant to admit. The NNPC has largely been the sole importer of fuel into the country since late last year as crude oil prices rose and it became unprofitable for marketers to make profit at the current price cap of N145 per litre.

The oil marketers in a recent statement signed by Olufemi Adewole, its executive secretary stated that as Nigeria presently runs a fixed price regime of N145 per litre for PMS without any recourse to subsidy claims, it does not make business sense to import and sell fuel at a loss.

It is therefore convenient to say that NNPC, which is 100 percent owned by the government, is the one paying subsidy and not the government. An examination of NNPC monthly financial reports show that the subsidies have been appearing in its books as under recoveries for some time now. “Under recoveries” simply means that fuel has been brought in at a higher price than it was sold in the open market. This translates into losses in the books of the NNPC and consequently, the money that NNPC remits to the consolidation account which is shared between the three tiers of government. Not only is government subsidizing the pump price of fuel, it is also subsidizing the foreign exchange allocated for fuel as it is fixed at N306/US$1 instead of the average market rate of N360. Without the foreign exchange subsidy, the actual subsidy would be higher than the N40.7 per litre.

So while Osinbajo is right in saying that the government is not paying subsidy, the government still bears the cost of subsidy in terms of forgone revenues from the NNPC. In reality, Osinbajo’s statement is really like saying that there is a difference between six and half a dozen.