Investors Thursday 20 Feb 2014indd.indd

Two years after street protests against the plan to remove the petrol subsidy, Nigeria’s opaque oil industry is hogging the headlines. This time around, it has been revealed that NNPC has spent N543.8bn ($3.51bn) on subsidizing kerosene, between January 2012 and July 2013, without official appropriation.

This is contrary to a presidential directive in 2009 by the late president Umaru Musa Yar’Adua to scrap the subsidy because “subsidy payments do not reach the intended beneficiaries.”

Ngozi Okonjo-Iweala, the finance minister, admits there has been no budget allocation for kerosene in the past three years. Dizeani Allison-Madueke, the minister for petroleum, argues that the subsidy was not scrapped so as not to inflict pain on Nigerians.

These recent events confirm a number of things: we have a terrible memory, executive orders can be flouted, and thus politicians and public officers can take us for granted.

In 2011, a pro-forma invoice for kerosene was sold to “marketers”: politicians and depot owners, for N40.99 a litre. These then sell to other independent marketers through their agents at prices higher than N50, who retail the “subsidised” product at between N150 to N170. The margin, as much as N94.01 on a litre of kerosene, serves as patronage: logistics and mobilization of supporters for politics.

Assuming that all other costs remained constant, the politicians and independent marketers made a profit to the tune of N94.01 on a litre of kerosene sold. Politicians and briefcase businesspeople are pocketing an outsize margin of 300-500 percent. The masses on the street don’t get a kobo, except a bag or rice and few naira notes during elections.

The story of how Nigerians are fleeced through kerosene subsidy partly explains why there’s an increasing disparity between the value of oil produced and revenues remitted in the Federation Account. Industrial-scale oil theft and fiscal leakages are additional reasons why Nigeria is not building a fiscal buffer.

The rate of increase in Nigeria’s foreign reserves and its Excess Crude Account (ECA) is not enough to withstand an external shock, for example, a lower oil price.

The federal government of Nigeria earns 90 percent of its foreign exchange reserves and over 70 percent of its revenues are from oil. There’s a direct correlation between oil and GDP, the naira and foreign reserves.

High and stable oil prices correspond to stronger naira and higher reserves. Our foreign reserves ($41.7bn as at February 2014) can support 9 months of imports. For an import–dependent economy, higher foreign reserves are necessary.

But the oil industry is contracting. It shrunk by 0.53 percent in the third quarter of 2012. This decline is expected to continue overtime.

In addition, about $20bn of our foreign reserves was mostly foreign portfolio investments, also known as “hot money”. Some of this money has gone – the performance of the stock market last week is a reflection that portfolio investors are leaving. Foreign investors accounted for 48.91 percent of transactions on the Nigeria Stock Exchange (NSE) as at December 2013.

Essentially, Nigeria has been relying on “rented reserves” rather than boosting its oil reserves through reforms: transparency, curbing leakages and passing the petroleum industry bill etc.

Time and the tools (monetary policy) are not on Nigeria’s side. In 2008, the last time there was an oil price shock, government was able to stimulate the economy with money from the ECA, the monetary policy rate was reduced and the foreign reserves dwindled by 15 percent as investors pulled out of the country.

Nigeria’s fiscal buffer is nowhere near that of 2008. And we doubt if economic policy is on the agenda of the government as political campaigns begin. Ignoring the economy risks undoing the benefits that a stable naira, declining inflation and investors’ confidence have brought.

We urge President Goodluck Jonathan and his economic team not to take their eye off the economy. It’s not too late to put measures to rebuild fiscal buffers. A few, those that can afford it, are building personal buffer: dollar-denominated deposits are rising.