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Oil price shock: FBN Capital, LCCI call for fuel subsidy removal

By BusinessNews Staff on January 26, 2015

As crude oil prices continued to hover below $50 per barrel at the international market last week, prompting the cut in the pump price of premium motor spirit (PMS) from N97 to N87 per litre by the Federal Government, analysts from the FBN Capital at the weekend lent their voices to the renewed call by the Lagos Chamber of Commerce and Industry for the removal of fuel subsidy in the interest of the 2015 budget.
According to a report by the FBN Capital, the Federal Government’s directive on a 10 per cent cut in the pump price of premium motor spirit (PMS) may signpost the final movement towards the removal of the controversial petroleum subsidy regime.

Analysts however believed the Federal Government, which in 2012 failed to effect the removal of fuel subsidy may have got enough justification to withdraw the subsidy given the current fall in oil price.

The Petroleum Products Pricing Regulatory Authority listed the open market price of PMS (the landing cost, together with various fees and levies) as N89.84/l on January 16. On this (moveable) basis, the FGN subsidy amounts to just under N3.0/litre.

The prevailing situation, according to economic watchers, is an indication that Nigeria is moving to the end of petroleum subsidy regime.

Meanwhile, President of LCCI, Alhaji Remi Bello, who made the call for the scrapping of fuel subsidy, stated that the biggest burden on government treasury in the country was the appropriation for petroleum subsidy, saying the provision of subsidy in 2015 budget is difficult to justify.

“Besides the global oil price dropping to below $50 per barrel there is no longer any justification for budgetary provisions for petroleum products subsidy.”
He said in the 2015 budget, N200 billion was proposed as subsidy for petrol, in 2014, it was N971 billion, saying N91 billion was budgeted for kerosene subsidy in 2015.

Bello urged the National Assembly to take subsidy into account in its deliberations on the 2015 appropriation bill.

According to analysts from FBN Capital, the cut in the pump price clearly reduces the profits of the downstream oil and gas companies.

The research firm noted that in the past, delays in subsidy payments have resulted in cash flow problems for petroleum marketers. However, relatively high diesel prices have compensated in part.

“In both 2013 and 2014 the FGN’s subsidy payments for PMS were projected at N970bn. Notes on the 2015 budget proposals by the Budget Office of the Federation put the bill at N200bn. Since these proposals in December were based on an average oil price of US$65/b, the actual cost may prove lower’” FBN Capital said.

FBN Capital said in the report that based on estimated national daily consumption of about 30 million/l per day, the annual subsidy bill, assuming N2.84/l, translates into N31bn. It said, “We recall that the bill for 2011, before the increase in the pump price to N97/l the following January, reached N2.2trn.”

It believed the reduction at the pump will provide some comfort to the battered consumer, have a small positive impact on the January inflation report and probably feature in the current election campaign.

Analysts said “regardless of the election results, we would expect deregulation later this year. The FGN would do well to remove the subsidy while international prices remain low. The inevitable protest would be more subdued than otherwise and it would be saving itself from fiscal pain when the prices do recover. Our thinking is that Q2 will see the floor, and that UK Brent/Bonny Light will close 2015 at US$65/b.

“The FGN would be able to channel any fiscal savings from deregulation into capital expenditure including some measures to sugar the pill for the consumer for the loss of the subsidy. We would hope that such steps would be of a one-off capital nature, and not a further addition to the mountain of recurrent spending.”

Analysts noted that the tumbling prices of oil has continued to take its toll on the country’s monthly revenue collection as gross receipts for December further dropped to N490.03 billion compared to N500.07 billion the previous month.
Also, within the period, the sum of N15.63 billion was deducted from the excess crude account (ECA) to augment revenue shortfall for the month, leaving its balance at $2.45 billion from about $3.1 billion last month.

The reality of the ensuing fiscal crisis became even more glaring as unlike in the previous months; no provision was made for the subsidy re-investment programme (SURE-P) by FAAC at its last meeting. Previously, the sum of N35 billion had been distributed monthly to the three tiers of government.

[ThisDay]

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