Talks of the total deregulation of the petroleum sector has been in the public space for some time now. When price of petrol was increased from 143 to 153, I remember telling my mum about the increase and also told her that there is the possibility of further increase in the future. This is because my understanding of what happened then was that the petrol price has been deregulated and the era of subsidy is over. This was even before NLC started their negotiation with the government. My conclusion was further reinforced when I saw the agreement between the government and NLC. The agreement basically accepted the deregulation but so as not to be seen leaving the negotiation table empty handed, NLC gave some demand to the government team which was accepted. Some of these demands include the revamping of the Portharcort refinery so that it would be at a production capacity of 50% by the end of 2021 and also put policies in place for the adoption of gas as fuel for cars and distribute a certain amount of conversion kits. I would have posted the agreement here but I could not find it online.

So when the price of petrol was further increase from 153 to the present retail price, I was surprised by the uproar it gathered in the public space. The increase was to be expected given that the price of the raw material which is crude oil has also increased internationally. From the reactions of NLC and most especially the media, it is like they don't understand the terms of the agreement they reached with the government team (or maybe I am the one that do not understand).

The retail price of petrol is determined predominantly by two factors, the price of the raw material (crude oil) and foreign exchange. As of present, the government have allowed the price of the finished product (petrol) be datamined by the price in the international market which is directly proportional to the price of the raw material. But from what I read somewhere in the media, the foreign exchange used in procuring the petrol is still regulated. That is the naira-dollar exchange rate used in procuring the petrol is lower than the market price thereby putting pressure on our foreign exchange reserve. So if the government should hands off controlling the two major determinant of the price, the retail price of petrol would even be higher than it currently is.

Is the government justified in removing the subsidy given the present economic situation?

Answer to this question would depend on who you ask. If you should ask a politician or politically inclined person, the answer would either be Yes (because they are in support of the government in power) or No (because they do not support the present administration). Personally, I would like to ask the economist in order to get an objective and data driven answer. Since as far back as 2014 or thereabout, the finance minister came out to say payment of petrol subsidy is not sustainable and is riddled with corrupt practices and tried although unsuccessfully to remove the subsidy at that time (at the time the country was performing better in terms of revenue compared to present) and the present government have tried to remove it in one form or the other. Even external bodies like the world bank, IMF etc. supports the removal of the subsidy.

The removal of petrol subsidy is very unpopular among the general public given the trickle down effect it has on the economy like the increased price of transportation, food, etc. (Even general inflation in linked to this) but it is a sacrifice we have to make given the present situation we found ourselves. The 2021 budget which does not include subsidy payment is about 12trn naira with a deficit of about 2trn (this figures may not be correct as I can't remember the exact figures but it is something like that). This 2trn naira is money that have to be borrowed to finance the budget and assuming an ambitious revenue performance of about 70%, there is still a lot of projects left unfunded. Now, if petrol subsidy is included ( about 500bn to 1trn naira) where will be money to finance it come from? Except we want to start borrowing to finance petrol subsidy, then I don't know how else the subsidy is possible. Personally, I would rather have my borrowed money go into financing capital expenditure and investments rather than a recurrent one like petrol subsidy.

What is the way forward?
There are two ways this could go with regards to government negotiation with NLC. Either NLC agrees with the continuous deregulation of the petroleum sector (this would lead to periodic variation in the price of petrol in accordance with the price of crude oil) and hold the government by the neck to see that their demands in the previous negotiation are implemented or go on strike and request for some kind of subsidy on petrol (personally, I do not support this). Assuming NLC decides to go for the second option, my advice to the government is that if subsidy is to be reintroduced, it should be in the form of a percentage to the retail price (lets say 5% - 10%) example if you should buy petrol of 1000 naira, you pay 900 naira and the government pays 100 naira (10%) as subsidy. This way, the government would not have to absorb the full impact of the variation in the price of petrol. I would also advice the government not to use the foreign exchange reserve as a form of petrol price regulation as it is best used in financing other capital investments.


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