Oil Subsidy Worsens States’ Revenue Crisis

The contradiction in the retention of the policy on subsidy is underscored by the dire revenue situation of the government at the state level, with most of them facing the burden of salary arrears on account of the depletion in revenue accrued to the Federation Account. As the NNPC continues with deductions from oil and gas earnings to fund the corruption-prone fuel subsidy policy, Festus Akanbi writes that it’s like wasting the resources meant for the nation’s development

From all indications, there is no better explanation for the failure of the current administration to end the controversial policy of oil subsidy this year given the groundswell of the opposition of states and other well-meaning Nigerians to the policy which has remained a drainpipe to the nation’s economy.

The bitter truth about the state of the economy is that things are really bad. The state governments are indeed in a bad situation as many of them are battling revenue shortfall which is currently being blamed for the failure of many of the states to pay salaries and gratuities at the appropriate time.

And contrary to the all-is-well-posture of the federal government and some state governors, especially in a period of transition, one of them, who is also the Governor of Kaduna State, Nasir El-Rufai disclosed that virtually all the states, except for the oil-rich ones, are at their knees as revenue shortfall from the Federal Account Allocation Committee (FAAC) purse is hampered by the retention of the policy on fuel subsidy.

 The Kaduna governor raised the concern at the 2022 Tax Dialogue organised by the Kaduna State Revenue Service held in the state capital recently.

El-Rufai: We are Going the Way of Sri Lanka

According to El-Rufai, Nigerian states are affected by the failure to remove fuel subsidy and operate a single exchange rate regime, as the Nigerian National Petroleum Company (NNPC) Limited has not been remitting proceeds of oil revenues into the federation account.

El-Rufai said the states had supported the removal of fuel subsidy in 2022, but it was kept. “If we continue on this track, we would end up like Sri Lanka,” the governor stated. 

However, the NNPC had explained that its deductions from FAAC were due to the humongous subsidy spending it shouldered.

The question is if the states have all agreed on subsidy removal, at whose behest is the federal government maintaining the policy which has continued to drain the revenue?

Analysts said the problem is worsened by the dispensation of the avoidable fuel crisis which Nigerians face from time to time.

To them, it’s like double jeopardy as states’ civil servants who are owed several months of unpaid salaries are being forced to look for money to pay a higher cost of fuel during a period of disappointing performance of the various power sector operators.

“We agreed that by November 2022, fuel subsidies should go because we saw it would affect the solvency of many states, and affecting many states, but somehow the consensus was not implemented.” 

Speaking at the World Bank programme, El-Rufai opined that the danger with maintaining fuel subsidy is why the 2023 presidential candidates have been campaigning on the assurance that subsidy will be removed. 

Because of the policy on subsidy, the NNPC has failed to remit funds to the federation account, thereby denying the state the much-needed fund for their development.

Painful Deductions

In September, the NNPCL deducted N1.348 trillion from oil and gas earnings it was supposed to remit to the Federation Account in three months.

The deductions were mainly for subsidy costs, while other costs include, pipeline operations, repairs and management, as well as strategic holding costs, and government priority projects.

In its September report to FAAC, NNPC disclosed that it deducted N448.78 billion in August 2022 for petrol subsidy payments.

Checks on the company’s previous reports to FAAC also disclosed that in July it deducted N447.93 billion with payment for petrol subsidy costing the federation N319.17 billion, pipeline operations, repairs and management cost N8.35 billion while strategic holding cost was N989.74 million.

Also in June 2022, a total of N451.86 billion was deducted with petrol subsidy accounting for N327.06 billion, pipeline operations, repairs and management cost of N158.3 million, and strategic holding cost of N339.9 million.

The company also deducted N42.28 billion in July and N18.4 billion in June, for government priority projects. 

High Petrol Subsidy

Following the deduction of N448.78 billion from Federation Account revenue in August for petrol subsidy, it means FAAC has lost N2.212 trillion to the petrol subsidy regime in the first seven months of 2022.

The deductions came amid a dispute over Nigeria’s actual petrol consumption level with several panels investigating the process at the National Assembly.

NNPC has, however, insisted that without the federal government’s subsidy on petrol consumers would be paying N462 per litre, rather than the current pump price range of N174-N210 per litre.

Group General Manager, Group Public Affairs Division, NNPC, Mr. Garba Deen Muhammad, was quoted as explaining that presently the government was paying N297 per litre for the 68 million litres of petrol consumed daily.

Despite questions being raised about the volume of petrol consumed in the country, NNPC has insisted that between January and August 2022, the total volume of petrol imported into the country was 16.46 billion litres, which translates to an average supply of 68 million litres per day.

It also disclosed that import in the year 2021 was 22.35 billion litres, which translated to an average supply of 61 million litres per day.

El-Rufai disclosed that the federal and state governments now rely on revenues and taxes generated by the Federal Inland Revenue Service (FIRS) and Nigerian Customs Service (NCS) for survival.

According to him, the situation has led to the inability of most states to pay salaries and fulfill their social contract to citizens.

Organised Labour on the Offensive

As the cost of living continues to rise daily, pressure has begun to mount from the labour union for a wage increase. The argument is that the N30,000 minimum wage is no longer realistic at a period when the value of the naira has crashed to rock bottom.

However, the reality is the inability of many of the states to meet the demand by organised labour for increased wages since many states are carrying the burden of salary arrears without a clear signal of how to offset the accumulated salary before the next year’s general election.

El-Rufai corroborated this when he explained that several states are under financial pressure and can’t afford to increase wages, as they don’t have access to the liquidity of the Central Bank of Nigeria (CBN) as the federal government. 

El-Rufai revealed that the states are now dependent on the federal government to pay salaries, similar to the financial support received from President Muhammadu Buhari’s administration in 2014-15. 

“Most states, other than oil producing states still receiving derivation, are under pressure, except Lagos State which has a large tax base. 

“We all know and can see the impacts of the fiscal threats on Nigerians, ranging from minimum wage to earnings of Nigerians, ideally we should be multiplying wages of Nigerians but we simply can’t afford it, many states are struggling, and we are back to 2014-15 levels when the Buhari administration inherited 27 sub nationals with salary arrears.” 

He added: “How can we deliver that when we are struggling to pay salaries of civil servants, most state governments are not as large as the federal government, I can assure you at least half the states are struggling already and these reforms must be implemented.”

The development has been blamed for the decision of JPMorgan to remove Nigeria from its list of emerging market sovereign recommendations that investors should be ‘overweight’ in, saying Nigeria had not taken advantage of high oil prices while adding Serbia and Uzbekistan. 

The analysts said Nigeria’s national oil company, NNPC, did not transfer any revenue to the government from January to March this year, due to petrol subsidies and low oil production, as it moved Nigeria’s debt out of the bank’s ‘overweight’ category.

“Nigeria’s fiscal woes amid a worsening global risk backdrop have raised market concerns despite a positive oil environment,” they said.

As presidential candidates of the leading political parties crisscross the states of the federation, the electorate needs to demand the commitment of these office seekers to end the policy of fuel subsidy and to prosecute all those that have benefited from the sabotage of the nation’s economy. Nigerians cannot continue to suffer when they are amid plenty.

While other oil-producing nations are improving the conditions of their citizens, why should it be difficult for Nigeria to utilise its oil resources for the benefit of the generality of the people?