Nigeria’s Fuel Subsidy Dilemma: Balancing Act Amidst Rising Costs

The Nigerian government may have to spend approximately N1.68 trillion on fuel subsidies for Premium Motor Spirit (PMS) from September to December this year, according to data provided by oil marketers and industry experts. Currently, PMS prices vary between N598 and N617 per liter, depending on the location of purchase, fueling suspicions that the government is quietly subsidizing the commodity.

While the government and the Nigerian National Petroleum Company Limited (NNPCL) have not officially admitted the reintroduction of fuel subsidies, economic factors suggest otherwise. Factors such as the weakening exchange rate of the naira against the US dollar and rising global crude oil prices have put immense pressure on the cost of PMS.

Chinedu Ukadike, the National Public Relations Officer of the Independent Petroleum Marketers Association of Nigeria, explained that the cost of crude oil and the exchange rate account for over 80 percent of PMS expenses. Brent crude, the global oil benchmark, recently reached around $95 per barrel, the highest in 2023. Additionally, the naira has been depreciating, reaching 980 to the dollar on the parallel market.

Ukadike argued that, considering these factors, the retail price of PMS should be around N890 to N900 per liter. He emphasized that the government should consider subsidizing PMS to assist the masses.

The subsidization issue gained attention when a report revealed that the Federal Government paid N169.4 billion in subsidy in August 2023. According to a Federal Account Allocation Committee document, the Nigerian Liquefied Natural Gas paid $275 million as dividends to Nigeria via NNPCL. NNPCL, in turn, used $220 million (equivalent to N169.4 billion at N770/$) to pay for the PMS subsidy.

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Given the current economic conditions, it is evident that sustaining the PMS price at N617 per liter without subsidy is challenging. The government may be incurring a daily subsidy cost of N14.04 billion, potentially totaling N421.3 billion monthly. Over four months (September to December 2023), this could amount to as much as N1.68 trillion.

Before President Bola Tinubu announced the end of fuel subsidies in May, the scheme had already consumed trillions of naira from the government’s coffers. Data from the Nigeria Extractive Industries Transparency Initiative (NEITI) revealed that subsidies cost the country about N1.99 trillion from 2015 to 2020.

To address this issue, experts suggest that Nigeria must consider alternative power sources and energy mix to alleviate the burden of an over-reliance on the national grid. Additionally, the government should transparently communicate its subsidy policies and plans to build public trust and accountability.

The subsidy dilemma remains a complex issue for Nigeria, one that requires careful balancing to ensure both economic stability and affordable energy for its citizens.