How Tinubu’s Petrol Subsidy Reform Unravelled
Postscript by Waziri Adio
It is not inevitable. But here we are. President Bola Tinubu’s reform on petrol subsidy has come undone. The president’s signature reform—his most-trumpeted achievement in office—has not been undermined by the ‘subsidy cabal’, the labour unions, the opposition parties, the passage of time or even by citizens with an incurable sense of entitlement. No.
The reform has been taken apart by the administration of the same president who gleefully pronounced the end of petrol subsidy in his inaugural speech and keeps insisting that ‘subsidy is gone’. However, the rumoured death of subsidy has turned out to be more than a bit exaggerated. Petrol subsidy got resuscitated two months after its public execution. It is not only back, alive and kicking, but also getting set for a new record.
There is still no official acknowledgement of this yet. But three developments within the week put the resurgence and the surge of petrol subsidy beyond the realm of speculation or projection.
The first was from an exclusive story by The Cable, an online newspaper, which showed that about two months ago President Tinubu approved the request by the national oil company to take care of the mounting subsidy bill with the dividends, taxes, and royalties due the Federation from the company. According to The Cable, the memo approved by the president has a breakdown of the actual figures for petrol subsidy (framed as shortfall or PMS FX differential) from August 2023 to April 2024 and the projection for May to December 2024.
The second confirmation is masked in a note in the 2023 audited financial statement of the Nigerian National Petroleum Company Limited (NNPCL). Note 24.2.3 on page 80 of the 120-page financial statement speaks about a N3.3 trillion ‘under-recovery’ for January to May 2023 and an ‘energy security expense’ of N1.8 trillion from August to December 2023. Hint: based on the approved memo, subsidy made a return from August 2023.
And the third development came on Monday via the impressive verbal gymnastics by Mr. Umar Ajiya, the Chief Financial Officer of NNPCL, while announcing his company’s ‘historic’ and ‘gravity-defying’ profits. Ajiya said NNPCL has not paid a kobo as subsidy to any marketer. NNPCL seems to be setting its own question here, as no one had alleged it was paying subsidy to marketers. Besides, making subsidy payments to marketers has never been the responsibility of NNPCL, either by law or practice. But the NNPCL CFO didn’t stop there. He added: “What has been happening is that we have been importing PMS (petrol), which has been landing at a specific cost, and the government tells us to sell it at half price. So, the difference between the landing price and that half price is a shortfall.” There, behind and beyond the lame attempt at spinning, is Mr. Subsidy sun-tanning in public view.
Common sense, all along, had suggested the return of petrol subsidy. Nigeria imports the petrol it consumes. It is thus a no-brainer that subsidy has re-emerged if a product imported with dollars is sold at the same price whether the US dollar officially exchanges for N785 or N1,1570. NNPCL’s monthly reports to the Federation Account Allocation Committee (FAAC) also include some hints. But the communiques issued after FAAC meetings and the reports on FAAC disbursements published by the Office of the Accountant General of the Federation do not include reports that agencies make to FAAC.
The story by The Cable and the two other developments highlighted above have eliminated plausible deniability. They provided confirmation and details. Now, we know that the GCEO of NNPCL, Mr. Mele Kyari, sought approval from the president to use Federation’s entitlements to defray the cost of petrol subsidy that came back from August 2023 and that the president duly approved (though questions can be asked about if the president can solely give approval for utilisation of what belongs to the whole Federation and whether it is tidy and anticipated by the Petroleum Industry Act (PIA) for NNPCL to continue to be run as if it is still a corporation).
Also, we now have some figures and the terms. The president approved for NNPCL to use the 2023 final dividend to the Federation and to pause the payment of interim dividend for May to December 2024. Even with this, NNPCL projected that the accumulated subsidy cost (which it claimed had put its cashflow at risk) would amount to N6.88 trillion by December 2024 while the cumulative amount due as taxes and royalties to the Federation for the same period would amount to N3.99 trillion, with the Federation still owing the company N2.89 trillion. In plain language, this means that the Federation will forfeit everything it is supposed to get as taxes and returns from NNPCL and will still owe the company N2.89 trillion. Is that not incredible? And this will be simply because of a petrol subsidy that is officially gone!
Analysis conducted by Agora Policy, a think tank I head, adds extra layer to this grim dimension. With data from various sources (including NEITI’s oil and gas reports, NNPCL’s reports to FAAC, annual statistical bulletins of the CBN, The Cable, and NNPCL’s 2023 audited financial statement), Agora Policy revealed that the N5.10 trillion incurred on petrol subsidy in 2023 was, in nominal terms, the highest subsidy paid in 18 years. The subsidy figure for 2024 is likely to set an all-time record. Yet, the subsidy is gone!
Agora Policy’s analysis also shows the following: petrol subsidy was 2.2% of GDP in 2023 (only surpassed by 2011, when it was 3% of GDP); it was 49.6% of the net distributable revenue from FAAC in the seven months of 2024 (the highest ever in 18 years and seven months); and it was 113% of gross oil revenue in seven months of 2024 (only surpassed by the 126% for 2023). Put another way: in the seven months of 2024 and in 2023, petrol subsidy was higher than the gross oil revenue to the Federation. Is that not something, considering that the subsidy is officially gone?
A comparison of the dollar value of petrol subsidy over time based on the official exchange rate for each year shows a slightly different picture. A total of $8 billion was incurred on petrol subsidy in 2023, only exceeded by the $13 billion for 2011. Remember that 2011 was a special year of infamy in the annals of petrol subsidy in Nigeria. But then, the 2011 subsidy figure as a portion of the gross oil revenue (21.4%) and net distributable revenue at FAAC (25.7%) was considerably lower than comparable figures for 2023 and the seven months in 2024.
If petrol subsidy has returned and is burning a big hole in Nigeria’s public purse, why has the Tinubu Administration refused to openly admit so? I want to assume good faith and will say the government approach is a product of shame and ego. President Tinubu was supposed to be the president that finally slayed the subsidy demon in Nigeria, and in his very first minute in office, even right there at the inauguration venue, even when it was not included in his prepared speech. The president and his handlers have positioned him as the leader who had the guts to do what others dithered on or failed to see through. They have also sold petrol subsidy removal as his singular and consequential achievement.
How does he now say that the subsidy he slayed publicly, with dramatic verve, has resurrected? How do you explain to Nigerians that despite all they have gone through the same administration is still paying subsidy and in such significant amount? Admitting to such would amount to taking away the administration’s definition of key achievement and a chunk of its self-image. Ego will get in the way of conceding to having tried and failed. Concerns about the shame and the condemnation such will invite will also crowd out the need to say it as it is. Hence, the resort to the obfuscation and the self-deceit on display. However, the administration will have to admit to its botched job, and the sooner the better.
President Tinubu’s signature reform has unravelled from his own making, not due to the usual suspects. One, there is no clear plan for the reform. The president deserves all the applause he got for boldly announcing the end of petrol subsidy in his inaugural speech. But an announcement is not a strategy. And courage is not the only thing needed to see such a difficult reform through. For contentious reforms to succeed, there is need for carefully-calibrated plans: a step-by-step, well-thought-out and faithfully-executed design about what to do, by whom, when and how. There is also the need for a reform coordinating unit that undertakes constant reviews, decides on iterations and manages strategic communication.
The announcement at Eagle Square created immediate panic, with consumers and marketers caught flat-footed. There was confusion about whether petrol subsidy was gone immediately or would linger till June 30th as the President Mohammadu Buhari administration had allocated N3.36 trillion for subsidy for January to June in the 2023 budget. On 31st May 2023, two days after presidential inauguration, NNPCL announced a tripling of petrol prices. In Abuja, a litre of petrol went from N185 to N537. There were some murmurs but Nigerians largely chose to give the administration a chance. However, it soon became apparent that not enough thought was put into designing and executing the reform. Relief to the poorest of the poor became a matter for political football. If there was a plan for circuit breakers and multiple suppliers, it wasn’t manifest.
The second issue was a lack of conceptual clarity. The administration mistook price adjustment for full deregulation of the downstream sector. Removing subsidy is an important step but it is not all that there is to full deregulation. A fully deregulated market is not one with one major supplier or a sole supplier. Subsidy removal is a signal for competition but that doesn’t automatically create competition. A proper strategy should have incorporated how to remove the binding constraints to deregulation in the downstream sector of the petroleum industry.
But the president and his team kept saying they had deregulated sector. If this was true, so what happened on August 14th and 15th when both the NNPCL and the Presidency respectively announced that there would be no further increase in the price of petrol? Do you fix or freeze prices in a deregulated market and still maintain there is no subsidy between the actual and the frozen prices? On 15th August we returned not just to regulated pricing but also to a naked-hedge form of subsidy—government will pay whatever the difference is between regulated price and actual price, not matter how big the difference. Of course, only NNPCL can handle the returnee subsidy because of the Federation’s crude oil in its care. Needless to say, this arrangement is obscured from public glare, is without independent verification, and therefore is susceptible to the kind of things that routinely happens in such circumstances. In fact, Presidency and NNPCL officials continue to insist that subsidy has ended and deregulation is on course. Indeed!
The third and the most critical error is the decision to float the Naira. To be sure, the Naira was deemed overvalued. The existence of multiple exchange rates also created room for corruption. But the decision to float the Naira within two weeks of removing petrol subsidy is clearly bizarre. Apart from the not-so-tiny danger of inflicting two shocks simultaneously on the economy and the citizens, it was a reckless gambit based on assumptions about forex liquidity flows that are yet to materialise and without appreciation of the real state of our external reserves. Someone in the decision-making room should have asked how floating the Naira could have interacted negatively with the price of petrol or how it could have undermined the petrol subsidy reform. The reason for such a question is simple: petrol is imported with foreign exchange and its value will be a function of the exchange rate. Even when crude oil is refined at home and is sold to refineries in Naira, the dollar cost of crude oil will still affect the price of petrol.
Someone should have asked: what would happen to the price of petrol if a dollar goes to N900 or N1000 or N1500? What if the price of dollars changes every day, are we ready for petrol price to change every day? How much of such changes can people tolerate at this early stage and what does that mean for subsidy reform?
This is where scenario planning meets second order thinking. Both clearly were absent in the introduction of the double shocks. On 15th August, the price of petroleum was frozen because the scenario that the reformers didn’t take time to plan for had materialised. Even the pausing was largely based on the hope that Naira would firm up and stabilise and the subsidy would disappear. It hasn’t played out that way. Naira was exchanging for below N800 in August 2023 but by February it hit N1,500. Hope-driven policies are likely to come to grief.
The floating of the Naira remains the cardinal error. Yes, the CBN is independent. But it is improbable that the interim management at CBN would take such a consequential action as embarking on the free float of the national currency without informing the president and getting his sign-off. A more considered approach would have been to eliminate the many official exchange rates and to gradually devalue the Naira in a way that uses the parallel rate as an anchor and narrows the gap between the official and parallel rates.
If CBN had gradually devalued Naira toward N762 to a dollar, which was the parallel market rate on June 14th when the free float was announced, petrol price would have landed at about the current regulated price, subsidy would have been remained in its resting place, and Nigerians would have been spared the enormous stress of the ongoing cost-of-living crisis. The foreign exchange reform is President Tinubu’s second signature intervention.
Even though the three tiers of government are getting more money from FAAC on account of the rapid depreciation of the Naira, the president cannot ignore the overwhelmingly negative impact of floating the Naira on Nigerians. Neither can he extricate himself from the backlash. Both are his reforms. They were not well-thought-through, not well-timed, and not properly-paced. My point here is not that the reforms shouldn’t have been undertaken, but they could have been better conceived, better spaced and better implemented. As I have said repeatedly on this page, it is possible to do the right things wrongly, or in the wrong order.
Now that the subsidy subterfuge is in the open, the government has to own up. Instead of continuing in denial and allowing NNPCL to engage in tortured double-speak, it is better for the president to say that some form of subsidy has returned because he feels that there is a need to protect Nigerians from constant increases in petrol prices at a time that most citizens are struggling to make ends meet. It is a reasonable excuse. Even when his opponents will attack and ridicule him, many Nigerians will understand. There is no shame in not meeting the mark at the first try.
An open acknowledgment is a necessary starting point, for you cannot address what you haven’t even accepted exists or is a problem. After coming clean, the government needs to level up with Nigerians about how it plans to manage the subsidy in a transparent and accountable way. The current arrangement is open to abuse and distrust. Allowing NNPCL to be the sole determiner of the landing cost of petrol, of the subsidy element, of the amount that is owed and the fiat to deduct it upfront is a throwback to a dark era. It doesn’t pass the smell test. Lastly, the president needs to have a plan to rescue or modify his reform. On account of its systemic importance and the linkage between subsidy and forex reforms, achieving a fair and stable value for the Naira should form the core of that plan.
