ANALYSIS] What you should know about fuel subsidy.

By Michael Eboh

According to Investopedia, subsidy is a benefit given to an individual, business, or institution, usually by the government, and is usually in the form of a cash payment or a tax reduction.

It stated that subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy.

“Fuel subsidy,” in Nigerian parlance, occurs when the price at which the product is sold at the filling station is lower than the real price at which the commodity is supposed to be sold, which is called the “Expected Open Market”.

The government bears the shortfall, which in this case is the difference between the Expected Open Market Price of PMS and the price at which it had ordered that the product be sold at petrol stations.

The shortfall borne by the government is called Subsidy, and this money is usually paid to importers of the commodity, or as at today, the NNPC, which is currently the sole importer of PMS.

Because the country’s four refineries had been continuously shut down for unending repairs and rehabilitation for more than four years now, the country had had to rely solely on imported fuel, putting a significant strain on the foreign reserves of the country and on the value of its currency, the naira.

Putting this in perspective, it is important to understand that crude oil had over the years, accounted for about 90 percent of Nigeria’s foreign exchange earnings and about 70 percent of the country’s revenue.

It is the country’s biggest export, while ironically, PMS ranks among the biggest consumer of Nigeria’s foreign exchange earnings.

As the country continues to spend billions of its hard-earned foreign reserves to import PMS, the depleting reserves put a strain on the value of the country’s currency, forcing the landing cost of the commodity in Nigeria to rise, even when the value of the commodity in the international market remained the same or record slight change.

The landing cost of PMS is the amount at which the commodity is brought into the country, and it comprises actual cost of the commodity, shipping/freight cost and other port charges. The amount is normally in dollars.

To worsen the country’s plight, in period of low crude oil price, limited foreign exchange is available to the country, forcing the naira to drop against major international currency. As the value of the naira drops, it becomes expensive to import PMS; as the landing cost rises, even when the price of crude oil remains the same.
Again, in period of high crude oil prices, while foreign exchange earnings rises, the landing cost of PMS also rises, as the crude oil becomes expensive to purchase, thereby, affecting the Expected Open Market price of the commodity.

This means that as long as Nigeria continues to depend on importation to meet its demand for fuel consumption, there would never be respite for the average Nigerian, whose income remains stable irrespective of the decline in the value of the country’s currency and the attendant reduction in the purchasing power of the naira.

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