The Federal Government of Nigeria, on Wednesday announced the reduction of petrol pump price from N145 to N125. In a statement signed by the Honorable Minister of State for Petroleum Resources, Timipre Sylva, it said that the drop in global oil price has necessitated the reduction. Therefore, president Muhammadu Buhari has approved the pump price of N125 and directed responsible agencies to implement it with immediate effect.

“The drop in crude oil prices has lowered the expected market price of imported petrol below the official pump price of N145 per liter. Therefore, Mr. President has approved that Nigerians should benefit from the reduction in the price of PMS which is a direct effect of the crash in global crude oil prices.

“In view of this situation, based on the price modulation template approved in 2015, the Federal Government is directing the Nigerian National Petroleum Corporation (NNPC) to reduce the Ex-Coastal and Ex-Depot prices of PMS to reflect current market realities. Also PPPRA shall subsequently issue a monthly guide to NNPC and marketers on the appropriate pricing regime.

“The Agency is further directed to modulate pricing in accordance with prevailing market dynamics and respond appropriately to any further oil market development. It is believed that this measure will have a salutary effect on the economy, provide relief to Nigerians and would provide a framework for sustainable supply of PMS to our country.

“The Ministry of Petroleum Resources will continue to encourage the use of Compressed Natural Gas to complete PMS utilization as transport fuel,” the statement said.

A day before this announcement, former vice president Atiku Abubakar, among others, had urged the Federal Government to review pump prices to reflect the realities of the global oil market.

“As the landing cost of Premium Motor Spirit, also known as petrol, has reduced significantly, it is strongly recommended that the government should not absorb the savings, but should pass it on to the Nigerian people by way of reducing the pump price of PMS to reflect the current prevailing market costs,” he said.

Whilst the development has been seen as a step in the right direction in the face of looming economic turmoil, there is the dark side of it that may cause more harm.

In December 2019, crude oil price stood at $67.86 per barrel while the budget benchmark remains $57. In January 2020, due to drop in oil prices, landing cost dropped 34.2%, (N92.89 per liter). By March, the downturn in the oil market had taken the price further down. The Expected Open Market Price, (EOMP) dropped N112.26 according to the data published by the Petroleum Products Pricing Regulatory Agency (PPPRA).

The crashing oil price instigated a significant drop in the Cost Plus Freight of the commodity to Nigeria by 35.81%. The $575.81 cost per metric tonne, (N131.82, per liter) dropped to $369.62 per metric tonne (N84.60 per liter). That was the beginning of the events that resulted in the reduction of pump price.

While the oil price was dancing around $67.86 per barrel, the Federal government was paying N47.5 per liter in subsidy. As the price eventually plunged below the budget benchmark, creating a huge deficit in the budget implementation, it also relieved the FG of the burden of subsidy.

At the current price of $21 per barrel, over half of the budget benchmark has been wiped off, but on the other hand, the subsidy regime has been curtailed in the meantime.

From November 2018 to November 2019, the subsidy payment witnessed an increase of 2,001% from the previous year, representing N36.59 per liter.

Information published by DataPhyte indicated that Nigeria spent about N1 trillion, about 10% of its budget on subsidy in 2019 alone. In the same year, the country experienced a budget deficit of N1.92 trillion, indicating that 52% of the budget deficit has been as a result of petroleum subsidy. As oil market price increased, the Nigerian government was projecting N750.81 billion for subsidy in 2020, a decision that would likely result in a similar deficit on the N10.59 trillion 2020 appropriation bill.

But the $21 current oil price means that the government is no longer paying fuel subsidy, as landing cost has similarly reduced to the barest minimum. The situation left the government with two choices; continue to sell at N145 in Nigeria and save the excess to make up for the budgetary deficit created by the downturn in the oil market, or reduce the pump price as an austerity measure to curtail the impact of coronavirus on the economic needs of Nigerians.

The government chose the latter, resulting in the N20 reduction in pump price, which can only be obtained in NNPC petrol stations for now. Independent marketers said they cannot comply with the directive, citing old stock of petroleum products that reflects former costs.

However, Nigerians are likely going to pay more through the budget’s deficit as the realities of the global economic meltdown unfolds. Though the Federal Government is proposing to cut the 2020 budget size by N1.5 trillion, which puts it at N9.09 trillion, the deficit gap is still wide, and cannot be bridged by the revenue generated from other sectors.

Experts believe that the situation would have been contained with fewer challenges if the refineries are working.

While many see the pump price review as an austerity measure to alleviate the economic impact that coronavirus will have on Nigerians, others believe it to be a sign of incoming economic woes.