Subsidy on PMS, electricity: Stakeholders weigh options

The unending subsidy regime on Premium Motor Spirit and government’s continuous intervention in the power sector do not only drain the nation’s economy, but also retard the development of oil and gas, as well as the power sector.

Some economic experts and stakeholders are of the view that subsidy payment itself does not constitute an unfavourable economic policy, especially when rightfully applied, and does not hinder production and economic efficiency. They, however, maintained that subsidies currently paid on petrol and electricity were creating more problems for the economy and not beneficial in the long run to those who should benefit.

Penultimate week, the Emir of Kano, Muhammad Sanusi, while speaking at a workshop organised by the Office of the Accountant-General of the Federation at Government House, Kano, said the country was on the verge of bankruptcy and expressed opposition to the ongoing subsidy payment in the petroleum products and electricity tariff.

Sanusi, who said he was not joking warned: “I was the governor of Central Bank. In 2011, the Federal Government earned $16b from the oil sector. The country spent $8b importing petroleum products and $8.2b subsidising the products. One hundred percent of what we earned in the oil sector went out to import petrol. You are treasurers, is this sustainable? The country will be bankrupted, and we are heading to bankruptcy.

The monarch charged President Buhari to tell Nigerians the truth about the country’s economic situation and also act quickly on this.

Sharing the fears of Sanusi is PricewaterhouseCoopers’s Associate Director, Energy, Utilities & Resources, Habeeb Jaiyeola, who noted that the social interventions were not achieving their purposes, but were making way for losses and also remained a major barrier to the development of affected sectors.

According to Jaiyeola, the cost of social interventions was way too high and unsustainable, adding that the middle and upper classes were benefiting from the scheme at the expense of poor Nigerians.

“The reality is that the petroleum industry cannot fully function without forces of demand and supply. We need a price that can be sustained and allow the industry to operate and attract investors.

“The people being subsidised are more in rural communities. They don’t really benefit from subsidy. The middle and upper class are the beneficiaries. The overall cost is affecting the masses,” Jaiyeola said.

He, however, noted that while government must be courageous to remove subsidy and the interventions for the power sector, Jaiyeola maintained that equalisation on petrol remains critical to citizens.

On the power sector, Jaiyeola noted that government’s inability to allow the sector operate freely has compounded the challenges in the sector, adding that there was no need for intervention if challenges in the sector were tackled headlong.

He said: “The sector is not generating enough to finance itself, and government interventions would not be needed if it is doing that. So, a collection of issues has to be addressed. There is a problem of liquidity and the sector is collapsing. The country has to be metered, but that is not enough, there is need for cost-reflective tariff.

“People are spending and incurring a lot to power their houses and businesses; people are spending on generators, inverters, etc. They will spend less if the sector is allowed to operate freely,” he added.

Also sharing Sanusi’s thoughts on the removal of subsidy is the Lead Director, Centre for Social Justice (CSJ), Mr. Eze Onyekwere, who insists that removing subsidy would lead to the removal of under recovery, and the dominance of oil in the revenue profile.

Onyekpere said the relatively meagre revenue expected from the non-oil sector compounds the country’s revenue challenge, adding that increasing recurrent expenditure that is accruing from the national increase in the minimum wage implies the need to partly fund salaries with borrowed money, which is not sustainable either in the short, medium or long-run.

The monarch’s position also appeals to the Managing Director of the Institute for Fiscal Studies, Godwin Ighedosa, who told The Guardian that the call for subsidy removal was the way to go.

“Without any further controversy, the country is long overdue for subsidy removal. So, I want the Federal Government to remove it as most of the fuel imported into the country was being diverted to neighbouring countries on a daily basis.

Nigerians, especially the poor are not benefitting from the subsidy, except a few rich and those in government. I don’t think our people are getting the full benefit of the subsidy, which has continued to create avenues for leakages, as well as official recklessness. So I don’t see how you can possibly say that the subsidy regime has benefitted the people.

“An in-depth analysis of the country’s financial situation indicates that it is almost going insolvent. What we have seen is that the proportion of the revenue accruing to its coffers remains at between six to seven percent. So, there is very little revenue coming from tax. Therefore, the government does not even have enough money for people-oriented programmes,” he said

However, for the Director, Centre for Petroleum, Energy Economics and Law (CPEEL), University of Ibadan, Prof. Adeola Adenikinju, subsidy payment is good when it is rightfully applied and does not hinder production and economic efficiency

But he was quick to point out that the subsidy payment on petrol and electricity as currently practiced are creating more problems for the economy than solutions.

In fact, he believes that these subsidies have crippled domestic production in the downstream petroleum sector, as well as the electricity sector, adding that the multiplier effects on the economy and the livelihoods of Nigerians were huge.

“There are other means of addressing equity issues beside the current subsidies, which in my opinion are wrongly targeted. The short and long-term impacts of petrol and electricity subsidies are not good for this economy. Government must find the courage and will to wind them down.”

Corroborating this, the Chairman/CEO, International Energy Services (IES) Ltd., Dr. Diran Fawibe warned that the new administration must be at its best to steer the country’s economy away from imminent collapse.

While stating that there was need to look at a gradual method of removing subsidies, Fawibe noted that the petroleum sector must be allowed to operate independently.

According to him, subsidies on consumption remain unsustainable in the long run because of its economic and multiplier implications, adding that new refineries being built across the country would eventually address some of the challenges.

He called on the government to put the country’s refineries in working condition in order to address the importation of refined petroleum products.

The former Chairman of Council, Chartered Institute of Bankers of Nigeria, and Dean, College of Postgraduate Studies, Caleb University, Prof. Segun Ajibola, said while there is nothing wrong for a country that is in a hurry to grow and develop to go into deficit budgeting and borrow, the end must justify the means.

“The positive impact of such borrowings must be clear for all to see. The multiplier effects must be visible in the critical sectors of the economy. The borrowed funds must drive performance in critical sectors of the economy and directly and indirectly generate returns that would pay both the principal and interest on such borrowings. This demands from managers of the economy, prudence in resource management, accountability and fiscal discipline,” the don said.

On subsidies, Ajibola insisted that prices of most basic consumer goods and services take a cue from the prices of petroleum and electricity, adding that subsidy has a lot of influence on economic welfare of the citizenry.
He however said while there was nothing wrong in the call for the removal of subsidy, government must provide compensatory packages for the citizenry.

“The question is, where would the removed subsidy go into? We saw the activities of PTF of old, but the fear has always been that the removed subsidy may be squandered and the citizenry subjected to double jeopardy. Can the authorities guarantee judicious application of the savings from the subsidy removal by applying the savings to provide the much-needed basic infrastructures such as roads, education, health, etc.? This is the vexed question,” Ajibola concluded.

But expressing a different opinion on the issue, Professor of Agricultural Economy at the University of Calabar, Ajayi Omo-Ogun berated those calling for subsidy removal as enemies of the common man.

Omo-Ogun said: “Until there are social infrastructure-functional refineries, rail tracks, modern road network among others, removing fuel subsidy now would further push the masses into extreme suffering and unbearable poverty.
“I think we should remove security votes, jumbo salaries of the legislature as well as excessive government spending from our body polity. Common sense seems to show that functional refineries will crash the prices of petrol and related products,” he said.

Mr. Gregory Emeh, a stockbroker, who is against subsidy removal warned that doing so will further impoverish the average Nigerian.

“I must say without any fear of contradiction that subsidy removal will further make the masses poorer. It would be serious punishment for the average man because many may not be able to afford the high prices of commodities that may follow. So, my opinion is that the removal of the subsidy is not the issue, but the prudent management of the economy is.