Renewed bid for review of petroleum subsidy in West Africa

Following the fall in crude oil prices, there is renewed by West African countries who subsidies petroleum products to review the policy. Data obtained by West Africa Energy show that as at September 28, 2015, Nigeria and Ghana have the lowest fuel pump price in West African sub region. According the data, Nigeria has the lowest pump price of fuel in the sub-region at $0.43 per litre followed by Ghana with $0.79 per litre. While the highest pump price of fuel is obtained in Senegal, Mali, Bukina Faso, Cote d’Ivoire, Republic of Benin, Sierra Leone and Liberia with the pump prices of $1.31, $1.23, $1.20, $1.12, $0.96, $0.91 and $0.86 respectively.

African governments are reviewing their energy subsidy schemes. Removing fuel subsidies is a cheerless job for any government especially in sub-Saharan Africa. But energy subsidies are often regressive overall, with over 80 percent of the total benefits accruing to the richest 40 percent of households, according to a global analysis made by the IMF. “Fuel subsidies are a costly approach to protecting the poor due to substantial benefit leakage to higher income groups,” argue the IMF in a report. “In absolute terms, the top income quintile captures six times more in subsidies than the bottom”.

A quick review of the current macro-economic environment in Nigeria, according to Bismarck Rewane, Chief Executive Officer of Financial Derivatives Company Limited, shows a slowing economic growth rate (2.35 percent in Q2), lower revenue due to sharp plunge in oil prices, depleted external reserves, creeping inflation, higher unemployment rate, but to name a few.

“Nigeria being an oil dependent economy has been severely hit by the over 50 percent drop in oil prices and usually in a period of lower oil prices, subsidies are reduced while with higher prices, subsidies increase. This is because the opportunity cost is less when oil prices are low compared to at a price of $100 per barrel and above. A number of oil producing countries that have had to either reduce or remove their oil subsidy scheme include Angola, Venezuela, Ghana, Iran but to name a few”.

Oil subsidy regime and national economic health

Bismarck Rewane, and other discussants at a one-day conference put together by the School of Media and Communication Pan Atlantic University in Lagos on “Oil Subsidy Regime and National Economic Health,” called for a review of the subsidy regime to ascertain its sustainability and relevance to the welfare of all Nigerians.

Rewane noted that with the drop in the price of crude oil by over 50 per cent, it has become imperative for the government to review the subsidy scheme. According to him, the drop in the price of crude oil has reduced the cost of petroleum products, thus reducing the burden borne by the consumers. While declining to support or oppose the removal of subsidy, Rewane however pointed out that with the current low price of crude oil, the burden on consumers by subsidy removal would be minimal.

Rewane, who was represented by Damilola Akinbami, also of the Financial Derivatives Company Limited, said subsidy removal would increase government’s revenue for the provision of other amenities to the people, adding that the multiplier effect is so huge that it will erode the burden on consumers arising from the removal.

He said the aim of subsidy payment was to reduce the burden borne by the consumers in the purchase of petroleum products but argued that there is corruption in the payment of subsidy.

According to him, an outright removal of subsidy without addressing the fundamental problems of corruption and inadequate local refining capacity will not provide the solutions.

Orji Ogbonnaya Orji, the Director of Communications at the Nigeria Extractive Industry Transparency Initiatives (NEITI), said the position of the agency has always been a total removal of subsidy because of the corruption in the scheme.

Ghana scraps subsidy this month

Ghana’s government will scrap its remaining fuel subsidies this month in a bid to reduce expenditure while ensuring stable supply to drive economic growth, Petroleum Minister Emmanuel Buah said.

The government has set aside $12.5 million for subsidies in 2015 down from $150 million last year and took the decision in line with the terms of a three-year International Monetary Fund aid programme aimed at restoring fiscal stability.

Ghana exports gold, cocoa and oil and until 2013 its economy was one of the fastest growing in Africa, but it has slowed sharply due to a fall in commodity prices and a fiscal crisis seen in a high debt-to-GDP ratio and a weakening currency.

The country also faces a severe electricity shortage with frequent power cuts that have hurt the economy and angered voters. The government will safeguard against abuse or rapid price rises on bus fares caused by the decision, Buah said.

“The objective is to fully decontrol fuel pricing,” Buah said. “It also means that the perennial burden of subsidy arrears on the government’s budget will come to an end.”

Ghana subsidizes fuel under a partially regulated downstream sector run by the National Petroleum Authority but the government will allow oil distributors to fix pump prices in a process to be implemented between July and September.

The government started reducing fuel subsidies last July after previous attempts to scrap them failed.

Nigeria’s fuel subsidy unsustainable

Nigeria is Africa’s largest oil producer, with 37.4 billion barrels of crude in its reserves. Crude accounts for more than 90 percent of Nigeria’s export earnings and about 80 percent of federal government revenue.

Emmanuel Kachikwu, head of Nigeria’s state oil company on assumption of office said the country’s fuel subsidy was an unsustainable drain on the economy, calling for deregulation of the oil and gas sector.

“Subsidy creates distortions in government revenue distribution,” Nigerian National Petroleum Corporation (NNPC) managing director Emmanuel Kachikwu said. Nigeria spent more than five trillion naira ($25 billion) on fuel subsidies between 2006 and 2012.

“Subsidy accounted for 20 percent of the federal government budget in 2013,” said Kachikwu.

Nigeria produces some two million barrels of crude a day but despite its huge reserves, the country imports much of its fuel due to a lack of refining capability, a situation blamed on corruption and mismanagement.

To make fuel affordable, Nigeria has frozen the price of a litre of petrol at 87 naira ($0.43), lower than the market rate. Fuel importers expect subsidy payments from the government to make up the difference.

When the government does not pay, fuel runs scarce, frequently causing gridlock and panic, and the subsidy programme has been found to be rife with corruption, including false claims and overpayments.

In 2015, according to data from FBN capital, fuel subsidy in Nigeria per litre has increased from N3 per litre to N50 per litre in June before dropping to N47perlitre in July. Historical data shows a steady increase in the amount of oil subsidy paid by the Nigerian government.

According to Rewane, in 2006, subsidies paid were $1.18bn and by 2011, had increased by 836 percent to $11.05bn. Since 2011, there has been a steady decline in subsidy payments from $5.47bn in 2012 (which was when there was a partial reduction in subsidy payments) to $3.68bn in 2014. This is approximately 0.65 percent of GDP in 2014.

FRANK UZUEGBUNAM