Nigeria’s fuel subsidy bill soars, NNPC turns to federation dividends for bailout

President Bola Tinubu has approved the Nigerian National Petroleum Company (NNPC) Ltd’s request to use the 2023 final dividends owed to the federation to fund the petrol subsidy, according to TheCable.

The president also approved the suspension of the payment of 2024 interim dividends to the federation to help boost NNPC’s cash flow. Under the Petroleum Industry Act (PIA), the NNPC is obligated to pay taxes and royalties as well as dividends to the federation, its sole shareholder.

The national oil company has also informed the president that it would temporarily be unable to remit taxes and royalties to the federation account due to the subsidy payments, which it referred to as a “subsidy shortfall/FX differential.”

An NNPC forecast revealed that the cumulative petrol subsidy bill from August 2023 is expected to reach N6.884 trillion by December 2024.

President Tinubu announced the removal of fuel subsidies during his inaugural address on May 29, 2023, and by June, Nigeria’s removal of fuel subsidies had saved the government N400 billion ($530 million).

Mele Kyari, the group CEO of NNPC, said the development was short-lived with the devaluation of the naira which led to a month-on-month escalation in the NAFEX exchange rate.

The official position of the Tinubu administration remains that “subsidy is gone.” However, there are strong indications that the government continues to spend billions on subsidies, and the NNPC projects that it will gulp at least over N5 trillion this year alone.

In August 2023, NNPC moved from surplus to negative in fuel importation costs, incurring a subsidy bill of N52.73 billion.

After months of fluctuations, the bill hit N833.68 billion in April. In June 2024, NNPC raised concerns with President Tinubu, stating that the subsidy payments were severely affecting its cash flow, and it was struggling to maintain its status as a “going concern.”

The company said it might not be able to sustain petrol imports because of the ballooning subsidy bill, which it blamed on “forex pressure”.

The bill fell slightly to N537.66 billion in December before hitting a new high of N693.67 billion in January 2024.

Several strategies have been employed to offset these costs, including boosting oil production by tackling theft and vandalism, rescheduling debts and forward sales, deferring payments to suppliers and contractors, postponing non-critical projects, and recovering outstanding debts.

However, the situation was still not looking good as projections showed a consistent increase in cash flow deficit mainly because of the exchange rate.