The federal government may be considering using the funds from the Excess Crude Account (ECA) to pay for the additional $4 billion required to fund fuel subsidy in the current year.
A government memo warns that the subsidy would wipe out funds saved up as insurance against a drop in the price of oil.
Coordinating minister for the economy and minister of finance Dr Ngozi Okonjo-Iweala, who disclosed that the country requires additional $4 billion to pay for fuel subsidy for the rest of 2012, also warned that the country would be unable to safeguard itself against external shocks if it covered this cost.
In an interview with the Financial Times of London, the minister said the country required a whopping $4 billion (N620 billion) as additional budget to maintain payments for fuel subsidy in the current year, after the federal government spent more than half this year's N888 billion allocation for the subsidy plugging holes from 2011, and that the presidency has floated the idea of a supplementary budget worth $4 billion to cover the subsidy cost.
According to Okonjo-Iweala, the ECA has about $4 billion, equal to the amount being floated by the presidency to cover the 2012 subsidy. However, by law, the funds in the account must be divided among the federal, states and local governments, meaning that government would have to borrow to maintain the subsidy to the year's end.
The cost of the subsidy rose more than 150 per cent from 2010 without a corresponding increase in either prices or demand to explain it. A parliamentary inquiry attributed the increase to collusion between officials and fuel marketers in the fraudulent diversion of funds and fuel.
However, because of arrears payments and continuing waste, the overall cost this year could be as much as 75 per cent of the record $14 billion (N2.2 trillion) spent in 2011, even after the government halved the subsidy in January.
Attempts to remove the subsidy altogether led to mass protests, forcing the government to compromise by restoring half of it.
Okonjo-Iweala said, "We are vulnerable if there is a contagion from Greece. We can afford to keep paying the subsidy but it means we will be very thin on buffers," she said, adding that losses from oil theft were also taking a huge toll on government finances. However, she vigorously defended the administration's record in trying to straighten out the mess.
A government memo seen by the FT suggests that maintaining the subsidy would wipe out funds saved up as insurance against a drop in the price of oil.
The memo also called into question the government's ability to pay the wage bill and meet its obligations to the 36 states of the federation should oil prices fall.
A total of N451 billion ($2.84 billion) has so far spent paying off arrears for 2011 out of the N888 billion ($5.54 billion) budgeted for the fuel subsidy in 2012, Okonjo-Iweala said.
January's protests at the removal of the subsidy gained momentum not just because of a rise in petrol and transport prices but because of a much broader impatience with corruption.
Another senior official, who requested anonymity, said the government has been slow since then to take the measures necessary to plug the leaks.
Okonjo-Iweala denied this, saying subsidy claims were being thoroughly checked now before payments were made.
The two accounting firms responsible for auditing the subsidy last year had been sacked, she added, and McKinsey, the management consulting firm, has been brought in to advise the government on how best to plug the holes.
Separately, a task force dealing with the same issue and headed by Nuhu Ribadu, the former anti-corruption tsar, is preparing to submit its findings.
A further complicating legacy lies in the build-up of debts that fuel marketers owe to international banks, including BNP Paribas, Société Générale and JPMorgan.
An adviser to one of the banks said the arrears totalled $3.4 billion. The banks suspended financing of Nigeria fuel importers a year ago as a result. The Nigerian National Petroleum Corporation, which itself is in arrears to the marketers, has since been covering the cost of fuel imports with opaque crude oil swaps, which have further complicated efforts to assess the overall cost of the subsidy.