Economic necessity, dilemma of fuel subsidy removal

The arguments for the removal of fuel subsidy has always bordered on the need to free resources and take necessary steps towards long-needed reform, since the country can no longer sustain the cost, especially as the economy braces for another recession. Although now resolute, one legitimate criticism against the Nigerian government is that it has done a poor job in planning for the subsidy removal and in communicating the huge costs of the fuel subsidy and the benefits of its removal to the population. FEMI ADEKOYA writes on efforts to remove the burden of subsidy on the economy.

With consumer prices already high, many Nigerians protested when the government abruptly announced an end to petrol subsidies, nearly doubling prices at the fuel pump in January 2012. Since the civil action, there have been worries about the best way to remove fuel subsidy by the Federal Government without recourse to another protest of such magnitude.

Riding on its Change Agenda, many economists and observers expected that the Buhari administration would use its political capital to eliminate the existing fuel subsidies within the first six months of the administration’s first term, even though President Buhari did not promise to do so during his electioneering campaign.

In fact, while some members of the administration and some leaders of the ruling All Progressive Congress (APC), have been advocating the removal of subsidies, the President and some other members of his administration have been very reticent on the issue. This is because of the likely inflationary impact and the backlash from labour unions and the people that have been benefiting massively from the subsidy payments.

With the recession in 2016, former Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kwachikwu, announced in January that the prices of petroleum products in Nigeria will be “modulated” to ensure efficiency and availability of products.

However, the minister appeared rather vague and incoherent as to the true meaning of price modulation and how it relates to the vexed issue of removal of subsidies. It is also not clear how the “price modulation” will stop the ills that have plagued the Nigerian petroleum products market over the past 30 years.

With fuel pump price adjusted only once since 2016, the Federal Government, as a result of the effect of the COVID-19 pandemic, which led to drop in oil prices, re-visited the price modulation scheme, while the Nigerian National Petroleum Corporation (NNPC) announced a total removal of subsidy.

Who benefits from fuel subsidy?
With 37.2 billion barrels of proven oil reserves, Nigeria has the second-largest reserves in Africa (after Libya), and is the continent’s largest oil producer. Yet Nigeria is the only member of the Organisation of the Petroleum Exporting Countries (OPEC) that imports refined fuel, and often suffers scarcities until the NNPC controlled importation. The ordinary Nigerian by no means feels rich: divided among nearly 200 million people, the gross domestic product (GDP) averages just $1,695 per person annually.

Prior to the subsidy’s removal, the pump price of fuel was N65 ($0.40) per litre, against a landing cost of N139 in 2012. The government therefore contributed a 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, 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.

In debating the merits of Nigeria’s fuel subsidy, it is important to understand who benefits the most from the programme. Contrary to popular belief, it is the rich not the poor who disproportionally benefit from Nigeria’s fuel subsidy. With the government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy.

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.

The Group Managing Director of the NNPC, Mele Kyari, recently stated that: “Subsidy is elitist because it is the elites that benefit from it. They are the ones that have SUVs, four, five cars in their garages.

“The masses should be the ones to benefit. There are many things wrong with the under-recovery because it makes us to supply more than is needed. This makes the under-recovery to be bloated because we unwittingly subsidise fuel for the whole of West Africa. That has to stop.”

Prior to the border closure in August 2019, Kyari confirmed that the nation’s economy loses about N2billion daily to fuel smuggling. Indeed, the national oil company submitted that it had witnessed a significant drop in Premium Motor Spirit (popularly called petrol) evacuation from the depots since August 22.

With the removal of subsidy, Kyari explained that this would automatically correct the distortions it created in the market such as products arbitrage and smuggling, while also providing the needed impetus for the NNPC to establish retail outlets in neighbouring countries.

“There is no conversation of coming back to subsidy. The regulators are not there to curtail the price or fix the price and that does not happen anywhere in the world, but what people do is that there is no exploitation of ordinary people and again the forces of demand and supply will take care of itself even when we have fixed price at a high rate, for instance people run to NNPC filling stations today because the fuel integrity is real and secondly is that in most occasions, we do not sell below the regular price that others sell and that is what will play out.

“I see this working for this country, this is the consumption support that we agreed we should never do. We should support production and not consumption and as long as we support consumption, we will continue to have issues of housing, resources and we believe overtime, it will be to the benefit of this country”, Kyari added.

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 can no longer sustain the cost.

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.

Chairman of MOMAN, Tunji Oyebanji, said: “Our current situation, lays 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, 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.

“Government should no longer fix petroleum prices. Health and educational sector should be given a higher priority than paying for subsidy on petroleum. We support the pronouncement of the NNPC GMD, Mallam Mele Kyari, which said subsidy or under-recovery must be things of the past,” he added. The Lagos Chamber of Commerce and Industry (LCCI), on its part, said the NNPC’s decision to put an end to fuel subsidy will be a game-changer for the oil and gas sector and the economy.

The Director-General, LCCI, Dr Muda Yusuf, urged that “it is vital to ensure that this new policy direction will be entrenched so that there will be no contemplation of any form of reversal.

“We are aware that similar attempts to undertake this crucial reform in the past had not been successful. However, we are confident that in the current dispensation, this will not be the case.”He said urgent steps should be taken to consummate the reform process with an appropriate legislative framework, adding that such a legislative review would reconcile the initiative with some extant laws.

According to Yusuf, examples of such legislation are those setting up the Petroleum Subsidy Fund (PSF), the Petroleum Product Pricing and Regulatory Agency (PPRA), and the Petroleum Equalisation Fund (PEF). He said: “It is imperative to ensure clarity on access to foreign exchange for petroleum marketers to import petroleum products.

“Operators (who are currently in a quandary on this matter) are eagerly awaiting guidelines from the Central Bank of Nigeria on this critical aspect of access to forex for the importation of petroleum products.”

The LCCI also commended the NNPC’s pronouncements on the future involvement of the private sector in the operation of the countries’ moribund refineries.“This is another laudable initiative which will ensure that these national assets are put to use for the growth and development of our economy,” Yusuf said.

Sustaining reforms amidst concerns
The real challenge the government faces is winning the trust of the people. Working Nigerians are hurting and their livelihoods are in danger with the looming recession and rising inflation. They want to know that the government has a credible plan and the challenge will arise when oil prices rebound amidst call for the government to quickly implement post-subsidy programs.

Some form of social protection must be launched immediately to protect the most vulnerable. This could include measures to reduce the cost of public transportation in the near term.

According to the Executive Secretary, United Nations Economic Commission for Africa, Vera Songwe, it is too early to tell whether the Nigerian government will succeed in these efforts but after over 20 years of dodging the issue and trillions of Naira spent, the removal of fuel subsidy should be supported.

“If implemented correctly, the subsidy funds could lead to major development gains. Moreover, the removal of the fuel subsidy – if successfully implemented – creates the space for Nigeria to finally develop refinery capacity, and consequently increase its potential revenue from the oil sector and create jobs.

“Civil society organisations should take this opportunity to fully engage in the debate on how best to redirect the funding from the subsidy program. In turn, the Nigerian government must communicate its plans and actions transparently to the people,” she added.