Explainer: What NNPC’s N3 Trillion Subsidy Request may Mean for Nigeria’s 2022 Fiscal Year

The Nigerian National Petroleum Company (NNPC) has requested N3 trillion as fuel subsidy in 2022.

This was disclosed by the country’s Finance Minister, Zainab Ahmed at the end of the National Executive Council (NEC) meeting yesterday. 

At the NEC meeting, the minister said, “It was agreed by the Council that it is desirable to exit fuel subsidy. The Nigerian National Petroleum Company, NNPC has presented to the ministry a request for N3 trillion as fuel subsidy for 2022. What this means is that we have to make an incremental provision of N2.557 trillion to be able to meet the subsidy requirement which is averaging N270 billion per month”.

She explained that the reason the 2022 figure is high is because of the increase in the price of crude oil per barrel in the global market which is now pegged at $80 per barrel. She also stated that, based on NNPC’s assessment, the country is now consuming 65.7 million litres of petrol per day.

An additional N2.557 trillion to the country’s 2022 budget has implications that are important to examine.

Subsidy is a form of waiver given to reduce the cost of a product and the Nigerian government has been subsidizing petroleum prices since the 70’s making it lesser than the market price.

The removal or otherwise of subsidy has been subject of hot debate at various times in Nigeria’s history. In November 2021, the Buhari-led administration announced the removal of fuel subsidies beginning from 2022. The Minister of Finance who made the announcement was quoted as saying “The subsidies regime in the [oil] sector remains unsustainable and economically disingenuous”. She then announced that instead of subsidy, funds will be used to mitigate the impact of subsidy removal on the most vulnerable Nigerians.

True to their promise, the federal government only captured subsidy funds (447 billion) for a mid-year transition to the no subsidy regime.

Now barely a month into the no subsidy year, the NNPC is requesting N3 trillion as subsidy funds for 2022. The reason? The corporation has not explained why subsidy removal, planned for mid year 2022 is no longer working for them and their reasoning was not obvious in the Finance minister’s speech.

If the N3 trillion demand is approved, it would mean that another N213 billion would be needed each month as under-recovery by the NNPC (factoring in the already provided N443 billion in the 2022 budget). 

Here is how the government had subsidized fuel prices; subsidies are paid from NNPCs earnings before it is remitted to the federation account and tagged under-recovery which means the difference between petrol price and the pump price that the NNPC bears. Simply put, if the landing price for fuel is N5 and pump price is N3, under recovery is that N2 difference that the NNPC pays. If NNPC’s earnings in a month is N7, that N2  difference called under-recovery is removed so that actual revenue which the NNPC remits is N5.

Now since the federal government had anticipated the removal of subsidies by June, they would have anticipated complete remittances from NNPC sans the “under-recovery”, and factored this into the revenue projections for the 2022 budget. 

NNPCs request will reduce the anticipated revenue to the federation account from the oil company by N213 billion monthly. The country’s anticipated revenue of N10.74 trillion (minus loans and aid) for 2022 will take a direct hit on the premise that the government will give approval for NNPC to make subsidy deduction before remitting the balance as has always been done. Thus, overall projected revenue from oil proceeds to the federation account of N6.51trillion may be reduced by the N2.557 trillion figure now demanded by the NNPC.

Factoring the above, the federal government’s share of oil revenue (at 52.68%) will drop from N3.382 trillion (pre-NNPCs request)  to N2.01 trillion (if request is approved). This will result in a shortage of N1.35 trillion.

If Nigeria’s revenue falls, the further implication is that the country’s budget deficit, the difference between projected expenditure and revenue in the budget, may increase by another N1.35 Trillion, the amount that would have accrued to the federal government as revenue after faac sharing..

Already, Nigeria’s budget deficit stands at N6.38 trillion, the figure may go up to N7.73 trillion to cover the country’s N17.1 trillion budget.

Budget deficits are financed by loans among other things and the country is already borrowing at least 98% of its deficit figure in the approved 2022 budget. If the NNPCs request is granted, the country may have to borrow even more. With borrowing comes debt servicing and as the more loans you take the higher the debt servicing figures. 

Today, Nigeria’s debt servicing figure stands at N3.8 trillion for 2022 and N14.6 trillion between 2022-2024.

The implication of an increase in debt servicing may also mean lesser monies in subsequent years for infrastructure development as the current debt servicing figure is 22% of the total budget and may increase with more borrowings due to the widening budget deficit gap.

But the federal government is not the only arm that will feel the bite of NNPCs subsidy requests, states are not left out of this squeeze. This is due to the fact that both states and federal government share revenue monthly through the Federation Accounts Allocation Committee(FAAC). Oil revenues are a substantial part of revenue shared alongside the Value Added Tax. Less oil revenues means less revenue to share among the tiers of government.

So how does Nigeria generate more revenue? Tax is one of the ways governments generate revenue, and it appears Nigeria has locked eyes on taxation given the tax increments and new taxes introduced since the passing of the Finance Act in 2020. VAT up to 7.5%, “Sugar Tax” etc. are just some of the taxes that directly impact citizens, there are several others like Tertiary Education Tax increased from 2% to 2.5%, educational institutions will now pay Corporate Income Tax etc.

NNPCs request may not only impact federal and state revenues but also citizens and their businesses if it ushers in a regime of even higher taxes to increase government revenue.