Unpaid N800billion subsidy arrears threaten banks, downstream sector

Oil vessel

Unless the Federal Government urgently offsets the accumulated subsidy arrears, interest on loans and the foreign exchange differentials of N800 billion that accrued to petroleum marketers between 2014 and 2017, the Nigerian banking system and the downstream sector may face serious challenges.
The Ministry of Finance is yet to pay the N800 billion for imported petrol, despite a directive by the Acting President Yemi Osinbajo that the marketers should be paid without delay.
The marketers now import less than three per cent of the country’s demand, leaving the Nigerian National Petroleum Corporation (NNPC) to take full responsibility of importation of petroleum products into the country. They said, although, the Federal Government has scrapped subsidy regime, interest on loan has continued to accumulate from 2014 to 2017.

Already, many of the petroleum marketers have embarked upon staff retrenchment after stopping the importation of PMS thereby depending on supplies from NNPC.
The marketers, comprising Major Oil Marketers of Nigeria (MOMAN), Independent Petroleum Marketers Association of Nigeria (IPMAN), and Depot and Petroleum Products Marketers Association (DAPPMA), said their inability to pay or service the loans, has not only stalled the importation of fuel by the private marketers but is also threatening the operations of the affected banks and the country’s financial system.
Experts who spoke with The Guardian yesterday said that the unpaid debt would lead to a serious crisis in the banking sector, which they said was already burdened by a series of bad debts, with the majority of these coming from the oil and gas sector.
The group said in a statement by its Legal Adviser, Patrick Etim, which was made available to The Guardian yesterday that the debt had greatly impeded their ability to operate. “Our operating funds have been eroded, the situation has curtailed our ability to access funds from the financial institutions and some of our members have resorted to staff retrenchment due to inactivity. Besides, our worst fear is that AMCON at some point may take over our firms as a result of this debt. It is for these reasons and other challenges facing the downstream petroleum subsector that we seek government’s intervention to approve the immediate payment of the debt,” they added.
To the marketers, urgent intervention of the government and authorisation to pay the outstanding debt will enable them to commence importation of petrol.
“Acting President Osinbajo summoned a meeting on May 22, 2017 in which the Minister of Finance, Minister of State for Petroleum Resources and the Central Bank governor were in attendance. The meeting was on how to pay the debt.”
“Osinbajo, at the end of the meeting, directed the Minister of Finance to within two weeks resolve the problem of the outstanding debt to them, adding that the Minister of State for Petroleum should confirm the indebtedness at the meeting. He said government would do everything possible to clear the debt so the marketers can commence the importation of petrol. As it stands now, only the Nigerian National Petroleum Corporation (NNPC) currently imports petrol,” the marketers said.
According to them, the foreign exchange differentials, which arose as a result of the initial devaluation of the naira by the last administration from the initial N165/$1 and the interest payable due to delayed reimbursement by the government, both of which the Federal Government had approved for payment to marketers, have not been fully settled by the appropriate government agencies.
Efforts to confirm Osinbajo’s directive for payment of the debt failed as press time.
The marketers said: “The recent further devaluation of the naira from N195 to N285 and later to over N305 to $1, while the Federal Government agencies based their reimbursement calculation on N197 to $1, has left members of our association with additional debt burden in excess of N300 billion. The downstream subsector is now saddled with a debt burden of over N400 billion, which keeps rising because the banks are still charging interests on it until the total debt is fully liquidated.
“As a result of the unpaid interest and foreign exchange differentials, we are becoming insolvent and financially handicapped to continue operating profitably. Commercial banks, the original and actual owners of these funds are already hard hit by our inability to return these funds within the ‘contract tenure of 45 days’ and have, in line with the Central Bank of Nigeria’s guidelines, ‘classified’ marketers’ accounts in all the banks in the country.”
According to the statement, the marketers are unable to pay because the sums they owe the banks form part of what they are in turn owed by the government and their inability to pay or service the loans, has not only stalled their further importation of fuel but is threatening the operation of the affected banks and the nation’s financial industry at large.
“The problem of the banks is compounded by the fact that they provided billions of dollars to finance the importation of cargoes of petrol. They opened Letters of Credit at approximated exchange rate of N197/$1.00. Petrol was supplied and sold by marketers at the then prevailing government-approved pump price and the repayment was calculated using the above exchange rate. “As at 2016, the banks have not liquidated the Letters of Credit from 2014 because of lack of foreign exchange from the government.”
Executive Secretary of the Major Oil Marketer’ Association of Nigeria (MOMAN), Obafemi Thomas Olawore, said that only a few marketers were importing an insignificant quantity of petroleum products into the country.
According to him, there is still subsidy. “At least the Federal Government bears over N300 million daily as subsidy as NNPC becomes the sole importer of petroleum products.”
On the implication of marketers’ indebtedness to the banking sector and the economy in general, Professor of Banking and Finance, Mountain Top University, Ojo Joshua, said the delay in the repayment of the debt might lead to retrenchment in the banking and the oil and gas sectors.
He noted that the situation on ground showed that the government might not be able to pay the debt due to the present economy recession. According to him, unless urgent measure is taken to offset the debt, it may translate to a non-performing loan.
The Director-General, Lagos Chamber of Commerce and Industry, Muda Yusuf, attributed the high non-performing loans in the banking sector to the oil and gas indebtedness to the banks.
“This can have negative effects on the financial sector stability, which is not good for the economy. A situation, where a banking sector is being owned N800 billion is a major threat to the continuous existence of the sector.”

Yusuf also called for a complete liberation of the sector. We cannot continue to run the sector like this. This is why we have not been able to unlock the huge potential in the downstream area. The marketers need to be settled and urgently too.”
The Chairman of DAPPMA, Dapo Abiodun, said in addition to paying the marketers’ outstanding $2 billion claims, the permanent solution was to remove the cap on the pump price of petrol and fully liberalise the downstream sector.
Abiodun, who is also the Chief Executive Officer of Heyden Petroleum Limited, said it was not by choice that the marketers allowed NNPC to currently import 95 per cent of products.