Tinubu has approved payment of fuel subsidy.
After a very important National Economic Council meeting, President Bola Ahmed Tinubu has approved that the Nigerian National Petroleum Company Limited should utilize the 2023 final dividends accruable to the federation to fund the subsidy on petrol. The development was in line with the President’s approval of the suspension of 2024 interim dividends to support cash flow for NNPC.
TheCable reports that the decision is in reaction to the current financial strain on NNPC as exacerbated by huge subsidy payment. The national oil company has written to say it will be unable to remit taxes and royalties to the federation account for what it describes as “subsidy shortfall/FX differential.”
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A forecast from NNPC puts the cumulative petrol subsidy bill of the company from August 2023 to December 2024 at N6.884 trillion. This means it would not be in a position to remit about N3.987 trillion in taxes and royalties to the federation account.
Though TheCable could not ascertain how much dividends is being withheld or suspended, NNPC is expected to suspend the payment of its interim dividends from May till the end of December. Basically, interim dividends are paid monthly to the federation account based on inflow projections, before the final dividends are paid at year-end following reconciliation.
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The Petroleum Industry Act (PIA) has saddled NNPC with the sole responsibility of paying taxes, royalties, and dividends for the federation.
‘Save Our Soul’
In June 2024, NNPC sent a ‘save our soul’ message to the government over the negative impact subsidy payment had on its cash flow, informing the latter that it was barely keeping itself as a “going concern.” The firm attributed this to spiraling subsidy bills, which it claimed were due to “forex pressure” eroding its financials.
NNPC’s Group Chief Executive Officer, Mele Kyari, said that with the removal of the subsidy in June 2023, an initial result of realizing monthly savings of about N400 billion for the federation was seen. This consequently helped the company remit a total amount of N2.032 trillion in taxes and royalties paid into a sequestered account at the Central Bank of Nigeria by January 2024. The savings were short-lived because of the continuous devaluation of the naira, which resulted in an increase in the NAFEX exchange rate.
It was gathered that fuel importation was liberalized in August 2023, with the subsidy bill rising to N52.73 billion. The figure increased to as high as N665.60 billion by November and rose further to N693.67 billion by January 2024. The amount reduced slightly to N497.39 billion by the end of March. But the subsidy bill again jumped to N833.68 billion in April, which became so unbearable that Kyari had to write a letter to the President.
He said the incessant pressure had strained the national energy security, and NNPC could not continue to supply petrol if the situation persisted beyond July 2024.
All Efforts Not Working
In his letter, Kyari broke down what would be done from August 2023 to April 2024: oil production optimization, debt rescheduling, deferment of payments to suppliers, and debt recovery. All of these were pursued to no avail, as the financial situation remained very gloomy; the projected cash flow deficit was majorly driven by the exchange rate fluctuations.
NNPC is projected to owe N3.987 trillion in taxes and royalties by December 2024, while it will be left with a deficit of N2.897 trillion after deductions of its obligation and subsidy expenses. On June 6, 2024, the president approved the Kyari appeal to cover the subsidy cost using the 2023 final dividends and deferring 2024 interim dividends.
An Admission of ‘Subsidy’
The Presidency had earlier denied any plan to return the subsidy, amid reports to the contrary, under President Tinubu. The word “subsidy”, which the Muhammadu Buhari administration never used, instead opting for “under recovery”, made a comeback in official correspondence.
The position of the current administration is still that “subsidy is gone”, though NNPC plans for the cost of subsidy to gulp over N5 trillion this year alone. It is in the face of this that the coming off of the petrol subsidy in June 2023, massive devaluation of the naira, and high crude oil prices have combined in a “doubly whammy” deal for NNPC.
The NNPC keeps petrol prices within the N600-N700 per liter range by using some sort of “derived FX rate,” wherein the subsidy/FX differential is the difference between the derived FX rate and the official rate.
