The Nigerian National Petroleum Corporation Limited (NNPCL) has finally acknowledged that its substantial debt to international oil traders is a major factor behind the ongoing fuel scarcity plaguing the country.

In a statement released on Sunday, NNPC spokesperson Olufemi Soneye confirmed reports linking the fuel shortages to supply disruptions caused by the corporation’s outstanding debt obligations to these traders.

“NNPC Ltd. has acknowledged recent reports in national newspapers regarding the company’s significant debt to petrol suppliers. This financial strain has placed considerable pressure on the company and poses a threat to the sustainability of fuel supply,” he said.

However, Soneye stated that NNPC remains committed to its role as the supplier of last resort, ensuring national energy security in line with the Petroleum Industry Act (PIA).

“In line with the Petroleum Industry Act (PIA), NNPC Ltd. remains dedicated to its role as the supplier of last resort, ensuring national energy security. We are actively collaborating with relevant government agencies and other stakeholders to maintain a consistent supply of petroleum products nationwide,” Soneye added.

Although NNPC has admitted to the situation, the corporation did not disclose the exact amount owed.

Energy expert Kelvin Emmanuel disclosed in August that NNPC’s debt to oil suppliers stands at approximately $6.8 billion, primarily in subsidy-related debts. This massive debt has made it increasingly difficult for the corporation to secure the imported petrol products necessary to meet national demand.

Emmanuel further explained that NNPC’s financial woes have prevented it from remitting funds to the Federation Account since January 2023, in what appears to be a violation of the PIA. According to section 64(c) of the Act, NNPC is obligated to remit 70% of sales from crude oil to the Federation Account, retain 20% as earnings, and allocate 10% to the frontier basin exploration fund.

“NNPC has not remitted money to the Federation Account since January in line with sections 64(c) of the PIA that obligates it to remit 70% of sales from crude oil to the Federation Account, and keep 20% as retained earnings and 10% as allocation to frontier basin exploration fund,” Emmanuel explained.

He also revealed that the company has been seeking to borrow $2 billion from Standard Chartered, using a Production Sharing Contract (PSC) tied to a 35,000 barrels-per-day well as collateral to pay down part of the $6.8 billion debt.

“Like I mentioned last month, the proposed $2 billion loan SC is doing bookrunning for (that was going to tie a PSC well in 35k barrels per day in repayment) was to draw down on this outstanding,” Emmanuel stated.

He questioned the rationale behind borrowing fresh loans to repay existing debts, adding, “Please explain to me how any sensible person is borrowing fresh loans to draw down principal on existing loans?”

However, amid rising concerns and public scrutiny, the NNPC issued a statement on August 18 denying that it owed $6.8 billion to any international trader. The company clarified that in the oil trading business, transactions are commonly conducted on credit, making it normal to owe at one point or another.

“That NNPC Ltd. does not owe the sum of $6.8bn to any international trader(s). In the oil trading business, transactions are carried out on credit, and so it is normal to owe at one point or the other,” the NNPC stated. The corporation also noted that its subsidiary, NNPC Trading, maintains numerous open trade credit lines with several traders and pays its obligations on a first-in, first-out (FIFO) basis,” it said.

“It is not correct to say that NNPC Ltd. has not remitted any money to the Federation Account since January. NNPC Ltd. and all its subsidiaries remit their taxes to the Federal Inland Revenue Service (FIRS) regularly. This is in addition to payments of CIT to road contractors under the Road Investment Tax Credit Scheme. In all, NNPC Ltd. is the largest contributor to the tax revenue shared every month at the Federation Account Allocation Committee (FAAC),” the statement added.

This acknowledgment follows a report by Vanguard, which cited industry sources indicating that NNPC, as the sole importer of petrol, using supply agents, is burdened by over $6 billion in debt that has accumulated over time. The corporation’s failure to settle these debts has led to significant supply disruptions, contributing to the current fuel scarcity across the country.

The fuel scarcity across the country has intensified, with petrol prices soaring to between N840 and N1,200 per liter at various locations. This situation has raised concerns that the corporation may no longer be able to maintain a fixed price for petrol following the removal of the subsidy on May 29, 2023.

Against this backdrop, there are growing indications that the NNPC might seek financial relief from the federal government, possibly in the form of a reintroduced subsidy, to manage its mounting debt and stabilize fuel supplies. While NNPC has not confirmed such a move, its recent statements suggest that government intervention may be necessary to help the corporation settle some of its obligations to international oil traders.

“The way I see it, NNPC and Independent marketers will have no choice but to offtake PMS from Dangote Refinery this month, less the fuel scarcity will continue,” Emmanuel remarked, hinting at the potential reliance on the new refinery to address the ongoing fuel shortage.

There are divergent views about Nigeria’s ability to attain a $1 trillion economy by 2030. I am still optimistic, as it is too early to conclude that it won’t be achievable. Nigeria’s economy has shown signs of improvement and potential for more growth. President Tinubú’s economic policies are gradually paying off despite not having any significant positive impact on the standard of living of Nigerians at the moment. To achieve its target, the Federal Government, must remain focused, and adopt an agile approach as today’s world is volatile, uncertain, complex, and ambiguous (VUCA).

According to the National Bureau of Statistics, Nigeria’s Gross Domestic Product grew by 3.19% in the second quarter of 2024 (on a year-on-year basis) which is higher than the 2.51% recorded in the second quarter of 2023 and the 2.98% recorded in the first quarter of 2024. With Nigeria’s GDP standing at $384 billion, a GDP growth rate of 3.19% is seemingly too low if Nigeria is to attain a $1 trillion GDP by 2030. However, the National Bureau of Statistics is in the process of rebasing Nigeria’s Gross Domestic Product. When the last rebasing exercise was done in 2014, Nigeria’s Gross Domestic Product moved from $270 billion to $510 billion, an increase of 89%. We can only keep our fingers crossed while we await the conclusion of the current rebasing exercise.

It is no longer news that Nigeria’s headline inflation on a year-to-year basis decreased in July 2024, for the first time since December 2022. It dropped to 33.40% from 34.19% in June 2024. Also, on a month-on-month headline inflation has been on the decline consistently since March 2024, with June 2024 being an exception. However, the government needs to monitor the situation closely, as the recent fluctuation in the value of the Naira may undermine this progress.

Nigeria’s debt service-to-revenue ratio dropped from 97% to under 70% under the watch of the current administration. There is still a lot of work to be done, as it is far higher than the 22.5% prescribed by the World Bank. However, it has freed up resources for the government to invest more in infrastructure, healthcare, education, security, and other sectors of the economy. These investments will increase the growth of Nigeria’s Gross Domestic Product.

As part of efforts to reach a $1 trillion economy, Nigeria targets an oil production of 2 million barrels per day by 2025 and is intensifying its efforts to diversify the economy. With the Port Harcourt, Warri, and Kaduna refineries yet to recommence operations, the Dangote refinery will boost the Nigerian economy when it becomes fully operational due to the positive multiplier effect it will have. The refinery projects a turnover of $30 billion in the next two years. More domestic refineries are expected to become operational before 2030.

The implementation of the new national minimum wage will stimulate consumer spending. Household consumption shrunk as a result of the devaluation of the Naira. The demand for non-essential goods and services drop significantly. Companies experienced declining revenues, and some downsized staff strength to remain afloat. Also, better wages lead to more innovation, productivity, less staff turnover, and reduced brain drain as a result of “Japa,” leading to increased GDP in the long run.

Using the rebasing exercise conducted in 2014, which led Nigeria’s Gross Domestic Product to jump from $270 billion to $510 billion, as a precedent, one should be optimistic about the outcome of the current rebasing exercise by the National Bureau of Statistics. Furthermore, there are positive signs of increased economic growth, namely’; increased oil production, diversification of the economy, multiplier effect of the implementation of the new national minimum wage and self-sufficiency in refining of crude oil, etc. The government must be agile and remain steadfast in its economic reforms if Nigeria is to achieve a $1 trillion economy by 2030.

By Kenechukwu Aguolu   FCA, ACIT, PMP, FCIA

Kenerek1@gmail.com

Agusto & Co, a prominent credit rating agency, has issued a cautionary statement regarding Nigeria’s inflation, warning that the recent slight moderation could be short-lived due to several imminent fiscal measures.

The agency’s concerns are primarily centered on the proposed supplementary budget, increased Federation Account Allocation Committee (FAAC) disbursements, and the upcoming minimum wage hike, which they believe could reignite inflationary pressures and prolong the nation’s battle with high inflation.

In its latest monthly newsletter, published on Friday, Agusto & Co highlighted the risks posed by the government’s fiscal policies.

“The risk of a renewed inflationary surge is heightened by several factors, including the proposed supplementary budget of N6.6 trillion, increased liquidity from monthly disbursements to the three tiers of government, and the impending implementation of the N70,000 minimum wage. These factors could potentially offset the positive impact of recent policy measures and prolong the disinflationary process,” the newsletter stated.

The agency’s analysis underscores the complexity of Nigeria’s economic environment, where fiscal policies aimed at stimulating the economy could inadvertently fuel inflation. For instance, the supplementary budget and increased FAAC allocations are expected to inject significant liquidity into the economy. In contrast, the proposed minimum wage increase could raise consumption levels, both of which are naturally inflationary.

Economic Challenges and CBN’s Dilemma

Agusto & Co also pointed to existing economic challenges that exacerbate the risk of inflation, such as food supply disruptions and the high cost of fuel. These issues, coupled with the anticipated fiscal measures, present a challenging scenario for the Central Bank of Nigeria (CBN) as it navigates its monetary policy.

Given these conditions, the agency anticipates that the CBN may opt to maintain the current policy rate at the upcoming Monetary Policy Committee (MPC) meeting in September 2024. The decision to hold the rate would be based on recent inflation data, which, according to Agusto & Co, validates the CBN’s tightening stance.

“The latest inflation data vindicates the CBN’s tightening monetary policy stance. The consistent moderation in month-on-month inflation since March, coupled with a slower pace of year-on-year increases in the latter half of H1 2024, reinforces the CBN’s conviction that the contractionary monetary measures are yielding positive results,” the newsletter noted.

However, the agency cautioned that while inflation has moderated, the underlying structural issues driving core inflation remain unresolved. This suggests that the risk of inflationary pressures resurging remains significant.

CBN’s Strategic Pause

Agusto & Co’s analysis suggests that the CBN might adopt a “wait and see” approach at its next MPC meeting. With Q1 2024 GDP growth showing signs of strain due to rising borrowing costs, the CBN may decide to keep the policy rate stable, allowing time to monitor inflation trends, exchange rates, and the upcoming Q2 GDP data before making further policy adjustments.

“The CBN, at the last MPC meeting in July 2024, re-emphasized its commitment to stay on course with the tightening cycle in view of the urgent need to address inflationary pressures to consolidate on the gains thus far achieved. While acknowledging the recent progress made, Governor Cardoso hinted at potential rate cuts in the future if inflationary pressures continue to ease,” the newsletter stated.

This strategic pause would give the CBN the opportunity to assess the effectiveness of its current measures and the impact of the government’s fiscal policies. It would also provide the bank with crucial data on how the economy is responding to both monetary tightening and fiscal stimulus.

Despite the recent decline in inflation, Agusto & Co. warned that the persistent structural issues reflected in core inflation indicate that the risk of inflationary pressures resurging remains significant. The agency highlighted that the underlying factors contributing to inflation, particularly those linked to structural elements such as supply chain disruptions and inefficiencies, continue to pose a threat.

“The underlying factors contributing to inflation, particularly those linked to structural elements, continue to pose a threat, making the possibility of further increases in inflation a real concern,” the report concluded.

I have tried to ignore the own goal policy frameworks in Nigeria. But this one is painful to ignore since it is coming from NNPCL, an iconic national institution. Recall that in June 2023, I noted that Nigeria would be unable to float Naira and remove fuel subsidy at the same time.  I posited that within 18 months, the nation would get into a vicious circle of carry-capacity, where trying to “suppress” subsidies and “hold” Naira, Nigeria will trigger significant welfare losses for the citizens.

For NNPCL to drop this statement, it does mean it wants to open the veil: “NNPC Ltd. has acknowledged recent reports in national newspapers regarding the company’s significant debt to petrol suppliers. This financial strain has placed considerable pressure on the Company and poses a threat to the sustainability of fuel supply.” Whoever tells you that you can float Naira and keep the prices of petrol and diesel constant is lying to you.

PRESS RELEASE – NNPC Ltd Faces Financial Strain Due to PMS Supply Costs, Impacting Supply Sustainability

NNPC Ltd. has acknowledged recent reports in national newspapers regarding the company’s significant debt to petrol suppliers. This financial strain has placed considerable pressure on the Company and poses a threat to the sustainability of fuel supply.

In line with the Petroleum Industry Act (PIA), NNPC Ltd. remains dedicated to its role as the supplier of last resort, ensuring national energy security. We are actively collaborating with relevant government agencies and other stakeholders to maintain a consistent supply of petroleum products nationwide. – NNPC /1st September, 2024

A Great Summary from TC Daily newsletter

Nigeria’s petrol subsidy, a decades-long government intervention that has defied all efforts at dismantling, was scrapped unceremoniously in May 2023. It was hailed as an important but poorly executed reform, but other problems like FX volatility and a government struggling to raise revenues have made follow-through difficult.

The devaluation of the naira, for instance, has increased the cost of importing petrol and has ensured that a 3x increase in fuel price is no longer sufficient. Depending on who you talk to, the current landing price of petrol is ?1,000 ($0.63)/litre, significantly higher than the ?610 ($0.38) fuel currently retails for. It means the federal government has been paying subsidies for months.

Those subsidies have strained the government’s finances and caused late payments to fuel importers. Late payments lead to long fuel queues and Nigeria’s fuel scarcity, which has historically been seasonal, is now a feature in many major cities.

It is creating headaches for individuals and businesses. Logistics operators are struggling to get fuel and sometimes paying above market price. They’re also passing on those costs to end users. The scarcity also makes life difficult for millions of people who generate their own power given the country’s unreliable power supply.

Yet the situation may only get worse.

On Sunday, the Nigeria National Petroleum Company Limited (NNPC) admitted that its debts to fuel importers are significant and the “financial strain has placed considerable pressure on the company and poses a threat to the sustainability of fuel supply.”

If you’re not versed in government speak, the NNPC, which reported ?3.3 trillion ($2.07 billion) in 2023 profits in August, will likely use all of those profits to pay subsidies. And that may not even be sufficient. Some reports put the backlog of payments at $6 billion.

While NNPC continues to “engage with stakeholders,” Nigerians have to brace themselves for more queues and a possible fuel price increase.

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