Depriving federation account over fuel subsidy payment

Economy

This past week, managers of the economy were rattled to their core as their worst fears came to pass. Over 44 per cent of revenue will not be paid into the federation account between April and June. This is because the Nigerian National Petroleum Corporation will be using over N111 billion to settle the fuel subsidy payment. No one needed a soothsayer to tell the government that things were bound to turn out this way, sometime. But this could have been prevented. The question is: how can Nigeria exit this fuel subsidy abyss? Chris Paul reports

Considering the content of the correspondence that made the rounds across government agencies, last week, it was glaring that the nation was in trouble.

It was one of the most dreaded days in the offices of the managers of the nation’s economy; the letter contained the information stating that the NNPC would not be contributing to the FAAC for the months of April and May.

This is due to the shortfall of N111, 966,456,903.74, the national oil company recorded in February 2021.

This present predicament arose from the fact that NNPC, the country’s apex fuel importer-supplier, was recording a shortage of N56 for every liter of PMS being imported into Nigeria currently.

According to the memo, as the federal government and labour were still negotiating the pump price of fuel, the shortfall came from the landing cost of fuel that skyrocketed by “N184 per litre as against the subsisting ex-coastal price of N128 per litre.”

In the letter addressed to the Accountant-General of the Federation, (copied the Minister of Finance, Budget, and National Planning, the Director General, Nigeria Governors Forum, the Director, Home Finance and the Chairman, Commissioners of Finance Forum), NNPC’s Chief Financial Officer, Umar Ajiya Isa, stated that the sum of N111,966,456,903.74 incurred as landing costs would be deducted from April 2021 Oil and Gas Proceeds due to the Federation in May 2021, which will translate to zero remittance to the Federation Account from NNPC in the month of May 2021.

“Further to our previous correspondences on the above subject, we wish to advise on the projected remittance to the Federation Account for the months of April (May FAAC) to June, 2021 (July, 2021 FAAC).

“The Accountant General of the Federation is kindly invited to note that the average landing cost of Premium Motor Spirit (PMS) for the month of March 2021 was N184 per litre as against the subsisting ex-coastal price of N128 per litre, which has remained constant notwithstanding the changes in the macroeconomics variables affecting petroleum products pricing.

“As the discussions between government and the labour are yet to be concluded, NNPC recorded a value shortfall of N111,966,456,903.74 in February 2021 as a result of the difference highlighted above.

“Accordingly, the AGF is invited to note that the sum of N111,966,456,903.74 will be deducted from April 2021 Oil and Gas Proceeds due to the Federation in May 2021, which will translate to zero remittance to the Federation Account from NNPC in the month of May 2021,”Isa stated.

The chief financial officer said, the corporation has to go this route to ensure the continuous supply of Petroleum Products to the nation and guarantee energy security.

Not a few experts and observers of the fuel subsidy trend in Nigeria, expected this turn of events. Indeed, Nigeria did not need any expert or seer to forecast nay predict or prophesy the day NNPC will be forced to sacrifice allocations meant for the development of the economy and Lives of Nigerians, to pay for fuel subsidy.

To properly appreciate the level of this dire strait, the country’s economy is gradually slipping into, it will suffice to illustrate the arithmetic reality of the situation with figures existing in the public space.

While Nigeria’s daily crude oil output is within the 1.52 million barrels daily (mbd) axis, the cost of production in Nigeria hovers around the $17 per barrel mark.

Therefore, 1.52 million x $17= $25,840,000.

In other words, Nigeria spends over $25 million daily for the production of its crude oil.

The price of oil continues to play in the $60 per barrel orbit.

Therefore, 1.52 mbd multiplied by the $60 market price of the nation’s crude oil, Nigeria should be grossing $91,200,000 daily.

Less production cost of $25,840, 000, NNPC will be left with $65,360,000.

So, assuming this is the net profit per day, converted to naira at N360 to $1, Nigeria has a daily receipt of N23,529,600,000 from NNPC.

Every 30 days since January, NNPC’s pre-subsidy net should stand at about N705,888,000,000. In 30 days, therefore, NNPC’s monthly receipt of N705,888,000,000 less the monthly subsidy payment, particularly that of February- N111,966,456,903, will give an outstanding of N593,921,543,097.

In other words, after deducting cost of production and having paid the subsidy for February, there should still be close to N594 billion extra that could be paid to the federation account, for the month of March, from March to April, ditto for the month of May.

Barring any direct crisis that would have crippled, specifically, production from the last quarter of last year till date, the calculation made above captures the range of the fiscal reality of the Nigerian economy today; from the platform of the Petroleum revenue window.

According to the fourth quarter 2020 economic report of the Central Bank of Nigeria (CBN),

Nigeria’s crude oil production dipped by 19.6 per cent to an average of 1.52 million barrels per day (mbpd) in the fourth quarter of 2020, compared with the 1.89 mbpd recorded in the fourth quarter of 2019.

Within the period, the report revealed that of the 1.52 mbpd produced, an average of 1.07 mbpd was exported, while the balance was allocated for domestic consumption.

The decrease in production was as a result of Nigeria’s commitment to the OPEC+ production cuts agreement aimed at supporting the rebalancing of the crude oil market and hence prices.

As agreed at the Declaration of Cooperation (DoC), Nigeria’s production was expected to increase from January 2021, according to the OPEC+ resolution to increase total production by 0.50 mbpd by January 2021, until it gradually reaches its two mbpd target.

“Domestic crude oil production and export recorded a slight decrease in the fourth quarter of 2020, as the OPEC+ sustained its agreed production cuts with improved compliance from Nigeria and other countries participating in the DoC.

“Nigeria’s crude oil production, including Agbami, recorded an estimated decline of 0.01 million barrels per day (mbpd) or 0.7 per cent, to an average of 1.52 mbpd in the fourth quarter of 2020, compared with the 1.53 mbpd produced in the third quarter of 2020,” the report stated.

A broader look at the economy revealed that in the fourth quarter of 2020, the Nigerian economy expanded by 0.11 per cent. In other words, the economy had exited one of its worst recessions in the fourth quarter having posted a decline of 6.1per cent and 3.6per cent in Q2 2020 and Q3 2020, respectively.

With a 1.7per cent growth in the quarter, the window responsible for the improved GDP performance in the fourth quarter of last year, was the non-oil sector.

Nigeria’s crude oil sector remained in recession with a negative growth of 19.8per cent in Q4, mainly due to lower crude oil output.

Real GDP growth for 2021 is expected to be positive. The economy is expected to expand by 1.3per cent in 2021 in a moderate case scenario and 2.3per cent in the best case.

Macroeconomic instability associated with the COVID-19 pandemic and weak crude oil prices, amidst other structural factors, continued to dampen the near-term outlook for the weakening growth prospect in the period under review.

The performance of the economy, according to the Report, continued to be weighed down largely by the headwinds associated with the resurgence in COVID-19 pandemic and weak crude oil prices.

Growth was expected to, consequently, remain subdued as economic activities retained its lukewarm state, as lingering structural challenges continued to punctuate the impact of the COVID-19 pandemic.

“Staff estimates showed that real GDP would record higher growth in the first quarter of 2021, given current economic fundamentals.

“However, by the first quarter of 2021, the economy is expected to be more resilient, following continuous monetary and fiscal policies interventions, including the judicious execution of the stimulus package of N2.3 trillion and the likely roll-out of the COVID-19 vaccine.

“These, coupled with possible rebound in crude oil prices and improved consumer demand, are expected to moderate the rate of contraction in the near-term and speed up recovery in 2021,” it stated.

According to the report, the N2.208 trillion, federally collected revenue in the fourth quarter of 2020 fell by 13.1 per cent and 8.3 per cent below the budget benchmark and the level in the preceding quarter, respectively, and was also 16.8 per cent below the collections in the corresponding period of 2019.

Oil receipts accounted for 44.6 per cent of the total collection, while non-oil constituted the balance of 55.4 per cent.

The relatively low receipts recorded in the review period underscored the lingering effect of the COVID-19 pandemic on domestic and global economic activities.

The report also stated that the retained revenue of the Federal Government of Nigeria (FGN), at N903.52 billion, fell by 38.1 per cent and 39.0 per cent below its quarterly benchmark and collections in the fourth quarter of 2019, respectively.

Evidently, this latest trend of sacrificing money meant for allocations to defray fuel subsidy cost has punctured a hole in last year’s outlook for 2021.

This deep cut to the veins of federal allocations to the government’s purse because of subsidy payment is both a sign and an illustration of the new phase of the fiscal crisis, the nation’s downstream sector of the oil and gas industry is about to plunge her economy.

This is really crunch time for the nation, her economy and the citizenry. As it stands now, federal government will be denied over 44 per cent of revenue coming from crude oil receipt.

With the drastic hike in the landing cost from N128-184, the N56 differential which amounts to the current subsidy cost, is not a good place to be at the moment.

More worrying is the fact that, this landing cost differential is not the last bus stop; but a journey of a thousand miles that threatens to drag the sanity and the depleting sanctity of the Nigerian State through a bloody road.

With the growing anarchy and raging insecurity in the land, it is doubtful that Nigerians and indeed, the combustible state of the nation can accommodate the reflexive cost that may come from the increasing cost of landing the imported Petroleum product in the country.

However, all of these can be avoided at little or no cost to the government.

All the Nigerian government needs to do at this point is to approach private refineries and negotiate on a barter basis, how it can free the nation’s precious crude oil revenue from the clutches of fuel subsidy.

A simple arrangement will require government to give the Refineries crude stock in return for a double digit pricing of the all the Petroleum products: from Premium Motor Spirit (PMS), diesel, to domestic Kerosene among others.

Without a doubt, the economy will breathe better across its fundamentals. For instance, the forex part of the financial system will be relieved a great deal.

Whatever the outcome of negotiations with the Labour Unions, the dynamics in the downstream will continue its uncertainties as the interplay of factors surrounding the price of oil will remain a challenge; going forward.

But the bottom line, here, is that the options before NNPC are shrinking by the day.

This bitter situation Nigeria has found herself will obviously taste sweet in the mouth of some Experts who will seize the moment to declaim their usual romantic words ‘bite the bullet and remove fuel subsidy.’

More than ever before, this bitter pill will subject the economy to an intolerable inflationary pressure that will bring worse pain to the Nigerian people.

There is a need, therefore, for the state oil firm to take the bull by its horn and enter into a barter deal with available local refiners; to avoid a needless backlash.

This is not the time for the Muhammadu Buhari administration to pander to the gallery of ‘fuel subsidy removal’ grandstanders. It is a time to apply a little wisdom and take the only commonsensical option available to any normal and rational-thinking government in a situation such as this; meet available local refiners, enter into a deal to supply them crude oil at little or no cost, in return for lower prices of petroleum products for the average Nigerian to buy.