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Amid neglected reforms, rise in global oil prices fails to benefit Nigerian economy

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NIGERIA is currently paying the price for neglecting reforms in its oil and gas sector as the rise in global oil prices means the Federal Government would require more money to fund the unsustainable petrol subsidy in the country.

Brent crude, Nigeria’s highly priced product sold for $116.88 in the global oil market on Wednesday.

This amount should ordinarily mean more revenue for Nigeria. However its not the case because the government still subsidises oil consumption in the country.

The neglected reforms has seen Nigeria shift implementation of the Petroleum Industry Act (PIA) for the next 18 months.

As a result of the shift in the implementation of the PIA, President Muhammadu Buhari sent a supplementary budget of N2.557 trillion to the National Assembly to fund subsidy payments.

“For the NNPC, anything above $70-$80 will create major distortions in the projections of the corporation and add more difficulties to the company,” Mele Kyari, the Group Managing Director of Nigerian National Petroleum Company Limited said recently.

Kyari had at a recent virtual Citizens Energy Congress, tagged ‘Securing a Sustainable Future Energy System through Strategy, Collaboration and Innovation’, described the increase in global prices of crude oil as a “chicken and egg” situation.

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He lamented that oil prices had started exiting the comfort zone set by the NNPC, and becoming a burden.

Industry analysts say for a government that complained about low oil prices when it came into power in 2015, to now complain about rising oil prices shows poor fiscal reforms in the sector.

“The current rise in global oil price is not showing in government’s revenue. This is the time to build up reserves for the rainy day. In fact, the rainy day is here, but we are being beaten by heavy rain,” a professor of Energy Economics at the University of Ibadan, Adeola Adenikinju told The ICIR.

Adenikinju stressed that Nigeria currently has the problem of not meeting up with oil production quota and retaining overbearing subsidy payment.

He also noted that importation costs and logistics concerns have worsened the situation for the country, insisting that the government must bring the refineries back to life.

Many industry stakeholders are worried about the spiralling figures of petrol subsidy payments.

Former Central Bank of Nigeria (CBN) governor Sanusi Lamido Sanusi explained recently that Nigeria benefited nothing from the oil price rise in the global oil market as it would use the gains to pay for petrol subsidy.

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He described the subsidy as an impediment to developmental projects.

“Oil price goes up, oil-producing countries are happy. However, in Nigeria, oil price goes up, it doesn’t favour Nigerian economy because of subsidy payment,” he said.

“We have this scheme called subsidy which is a scam, hence everything that practically comes in goes back out to import of petroleum products and to pay subsidy because our refineries are not working and we rely on imports hugely.”

To sustain the subsidy, Buhari in February requested an additional provision of N2.557 trillion for petrol subsidy payments in 2022.

The request has been approved by the National Assembly.

The Federal Government has been subsidising petrol for Nigerians with over N2 trillion annually, but analysts say the government is helping the middle-class and the rich who buy petrol at the expense of the poor.

Amid petrol and electricity subsidies, the government has been on a borrowing spree with about 74 per cent of its revenue spent on debt servicing in the first eight months of 2021.

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Although the Nigerian government has shifted the implementation of the subsidy removal after the first half of 2022, there are indications that labour unions across the country are resisting the removal.

According to analysts, if the government fails to reach a truce with the labour unions, the country may face a deeper economic crisis.

“This is the part that led to the collapse of the Venezuelan economy. It is this subsidy that brought down that economy. Go and check Venezuela economy, and it is an oil-producing country,” an economist and Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE) Muda Yusuf said.

“I think people that are labour leaders and all of that, I am appealing to them to be a bit more realistic to their position and engage a lot more. We have to think about sustaining this economy. I mean look at the fiscal position of the economy. Look at the amount of debt that we are accumulating and look at the amount of debt service.

“We can have engagement about the cost of governance generally, but that should not allow the continuous bleeding of the economy,” he added.

The Ghana National Petroleum Corporation (GNPC) Professorial Chair in Oil and Gas Economics and Management, Institute for Oil and Gas Studies, University of Cape Coast, Omowumi Iledare also backed the removal of petrol subsidy.

He said: “The government missed the opportunity to do that in 2012, 2015. Now, the opportunity is there. They don’t have a choice. It is the law with the enactment of Petroleum Industry Act (PIA).

“Removal of subsidy is more beneficial to the economy in several ways than keeping it.

“First, if the pressure of forex will be lower than it is, less volume of naira will be required to buy energy-intensive essential goods and services.

“Priority projects with higher multiplier effects on the economy will get funded. Road infrastructure can be improved with subsidy fund. Education budget and medical institutions can be upgraded.”

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