Breaking strongholds of fuel subsidy through consensus, trust

Many years after, fuel subsidy removal remains Nigeria’s longest challenge, especially at a time when the trust deficit between the governed and the government widens. Having failed to deregulate and implement its price modulation agenda in 2016, higher inflation and worsening poverty continue to undermine the government’s decision on subsidy. Notwithstanding, the removal of subsidies remains a test of the government’s resolve at addressing its revenue problems and consumers’ expectations. Will the government and the people arrive at a consensus? FEMI ADEKOYA writes.

The Federal Government’s efforts towards the removal of subsidies and reduction in its deficit spending, especially that of premium motor spirit, otherwise known as petrol, appear to be haunted by worries of social resistance, as witnessed with the turnout of the last #ENDSARS protests.

The government’s challenges are coupled with the fact that many Nigerians are currently struggling to sustain daily living due to a rise in food prices and inflationary trends on basic household essentials, amid dwindling incomes.

While the #EndSARS crisis was primarily a fall-out of demand for the disbandment of the Special Anti-Robbery Squad (SARS) and other police reforms, it later became an agitation for governance overhaul.

With a proposal to remove both electricity and fuel subsidies by 2022, there are concerns about how to implement the proposals quietly without creating uproar from labour unions and citizens.

Already, the Nigerian Labour Congress (NLC) said the plan was an open invitation for unrest and revolt, while the Trade Union Congress (TUC) expressed shock that the government could come up with the idea when negotiations on subsidy removal were yet to be concluded. The Senate, on its part, said the grant proposal was not captured in the 2022 budget, wondering how the government intends to implement it.

Although the World Bank Country Director for Nigeria, Shubham Chaudhuri, suggested that the removal of subsidy may not remarkably cause a spike in inflation, there are fears on how best to manage the situation.

The economics of fuel subsidy
With 36.9 billion barrels of proven oil reserves, Nigeria has the second-largest reserves in Africa (after Libya), and used to be the continent’s largest oil producer until operational challenges undermine production. Yet Nigeria is the only member of the Organisation of the Petroleum Exporting Countries (OPEC) that imports refined fuel, and often suffers scarcity until the NNPC controlled importation.

The ordinary Nigerian by no means feels rich, but divided among nearly 200 million people, the gross domestic product (GDP) averages just $1,695 per person yearly.

Prior to the partial subsidy removal, the pump price of fuel was N65 ($0.40) per litre, against a landing cost of N139 in 2012. The government, therefore, contributed an N73 subsidy, for an annual total of N1.2trillion ($7.6billion), or 2.6 per cent of the country’s GDP. In effect since 1973, the subsidy was regarded by a majority of Nigerians as one of the few benefits they enjoyed as citizens of an oil-producing country.

It was therefore not surprising that on January 9, 2012, a week after the announcement of the subsidy removal, industrial strikes and demonstrations spread nationwide. That reaction prompted the government to bring down the new petrol price from N141 to N97, still higher than the old price but retaining a partial subsidy.

Today, what appears to be a blessing to Nigeria in terms of improved earnings owing to extended production cuts by OPEC and OPEC+, leading to rising in crude oil prices, is becoming a problem for the nation’s ‘managed’ downstream deregulation when the price of petrol is expected to be adjusted accordingly.

With the exception of epileptic power supply that makes many depend on the use of generators, Nigeria’s poor rely primarily on public transportation, as such, their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles. Neighbouring countries also benefit significantly from Nigeria’s fuel subsidy through smuggling.

Indeed, the Nigerian National Petroleum Company Limited has put the amount spent on subsidising Premium Motor Spirit, popularly called petrol, between January and October 2021, at N1.03tn.

The NNPC also said it would deduct its October 2021 value shortfall of N199bn from its November 2021 proceeds meant for sharing at the December 2021 Federation Accounts Allocation Committee meeting.

The oil firm disclosed this in its latest report containing the presentation made to the FAAC meeting in November 2021.

In the report, the oil firm referred to its subsidy spending as under-recovery, as it had repeatedly stated that it had no authorisation by the National Assembly to pay subsidy.

For about four years running, the NNPC has remained the sole importer of petrol into Nigeria. Other marketers stopped importing the commodity due to their inability to adequately access the United States dollar.

Group Managing Director and Chief Executive Officer of Nigerian National Petroleum Company (NNPC) Limited, Malam Mele Kyari, said the subsidy would have been eliminated in 2020 but certain factors prevented it. He, however, said the law provides that by the end of February 2022, the nation should be out of the subsidy regime.

Kyari assured that fuel subsidy removal would definitely be achieved in 2022 as it was now fully backed by law.

The World Bank Country Director, Chaudhuri who engaged The Guardian management and editorial team on the issue and related matters for about two hours at the newspaper’s corporate headquarters in Lagos, was not specific on the subsidy exit strategy, but he was certain the programme is not sustainable anymore even though there was ‘no answers’ to the lingering questions it has raised.

He, thus, suggested a healthy dialogue as a necessary route to achieving “a national consensus” on the exit strategy and how to manage the impacts its eventual removal could leave on struggling Nigerians. He insisted that the scheme does not benefit the majority of poor Nigerians, as most public transport vehicles run on diesel.

Reforms needed
Despite the widespread condemnation, most economists and stakeholders agree that the removal of the subsidy is a necessary step towards long-needed reform since the country has failed to make refineries work.

Chaudhuri argued that building or fixing existing refineries would not stop Nigeria from making a choice on what to do with the trillions of naira spent on subsidies.

He said the country would need to choose whether to continue to spend its scarce resources on PMS consumption subsidy or channel it to education, primary health care and other important social services.

He stressed that Nigeria could not do without making the choice, adding that resource allocation decisions are critical to the growth and development of any country.

He also advised that the political elite would do better in advancing their interest if they work at “growing the pie” rather than scrambling for a share in the small pie.

The Governor of Kaduna State, Nasir El-Rufai, recently decried the high cost of fuel subsidy, which, according to him, was not reasonable.

He stated that the Nigerian Governors’ Forum had met and agreed to back the Federal Government’s transport palliative scheme as well as halt the petrol subsidy regime.

El-Rufai had said, “This is why the Nigerian Governors’ Forum met and agreed to support the Federal Government’s social compact. Withdraw this subsidy by February.

“Use the N250bn per month that would have been lost between February and May to do this conditional cash transfer that would put money in the pockets of Nigerians and alleviate not only the cost of transportation but the two to three per cent job inflation that is expected when the subsidy is eliminated. We cannot sustain it. We cannot continue with it.

“I don’t want to predict what will happen when 35 out of 36 states cannot pay salaries of civil servants, or even have any money to run the government. We will not have enough money to pay salaries. Already, some states are building up arrears, even oil-producing states are struggling to pay salaries.”

However, operators in the downstream oil sector, as well as economic experts, stated that while it was okay to remove the petrol subsidy, the government must be cautious in its withdrawal.

For instance, Major Oil Marketers Association of Nigeria (MOMAN), noted that removing fuel subsidy at the period of drop in prices would eliminate waste, address the nagging issue of low margin for marketers as well as set the country on the path of determining appropriate pricing for the product in the country.

MOMAN had said: “Our current situation, laid bare by the challenges of Coronavirus to the health of our citizens in particular and economy of our country in general, demands that we are honest with ourselves at this time. A fundamental and radical change in legislation is necessary.

“When crude oil prices rise, the government has always been unable to increase pump prices for socio-political reasons leading to these high subsidies, and we believe the only solution is to remove the power of the government to determine fuel pump prices altogether by law.

“Purchase costs and open market sales prices should not be fixed but monitored against anticompetitive and antitrust abuses by the already established competition commission, subject to its clearly stated rules and regulations.

“We want the market to determine the price. There should be a level playing field. Everybody should have access to foreign exchange to be able to import and sell petrol at a pump price taking its landing and distribution costs into consideration.

With higher oil prices, MOMAN noted that the removal of petrol subsidy and price control would no doubt lead to challenges for Nigerians, adding that debate among stakeholders should now move from the deregulation of the downstream sector to seeking solutions to addressing such challenges.

Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, reiterated his earlier position that the government must be tactical in handling the matter.

According to him, subsidy removal is a tricky issue that could pose a serious challenge to the government if not tactically managed.

“The reality is that the sentiments among the citizenry are not favourable to the deregulation of petroleum product pricing or petroleum subsidy removal. Even some elites are curiously not persuaded on the justification for the subsidy removal,” he stated.

Concerns linger
The real challenge the government faces is winning the trust of the people. Working Nigerians are hurting and their livelihoods are in danger despite economic recovery figures and rising inflation. They want to know that the government has a credible plan and the challenge will arise as oil prices rebound amidst calls for the government to quickly implement post-subsidy programmes.

Already, the feasibility of the plans to give transportation grants to poor Nigerians has raised doubt on the source of funds and impact on the volume of money in circulation, as well as transparency and accountability issues.

While there is a consensus that some form of social protection must be launched immediately to protect the most vulnerable, the government needs to win the trust of the citizens.