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Nigeria’s rough path to breaking strongholds of fuel subsidy

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The removal of fuel subsidy has remained Nigeria’s longest challenge, especially at a time when trust deficit between the governed and the government widens. With higher inflation and worsening poverty, government is caught napping, having failed to deregulate and implement its price modulation agenda in 2016. Notwithstanding, removal of subsidy remains a test of government’s resolve at addressing its revenue problems and consumers’ expectations. FEMI ADEKOYA writes.

Since the January 2012 protest when Nigerians stood up against the removal of subsidy, there have been worries about the best way to remove fuel subsidy by the Federal Government without recourse to another protest of such magnitude.

While the onset of the coronavirus availed the government opportunity to take the bull by the horn, the ENDSARS protests that shook the nation, made the government recoil and wary of potential disruptions that may emerge from another civil disobedience or protests that could be far-reaching.

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.

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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 it had earlier introduced in 2016, even though the Nigerian National Petroleum Corporation (NNPC) announced a total removal of subsidy.

While the decision appeared welcoming during the low oil price regime, a change in oil revenue fortunes for Nigeria appears to have become its albatross over inability to adjust prices when consumers are dealing with an all-time inflation.

Indeed, the push for the reintroduction of fuel subsidy to check inflationary trend and higher costs on Nigerians, particularly Labour Unions may cost the federation account about N1trn before the end of this year.

The economics of 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, but divided among nearly 200 million people, the gross domestic product (GDP) averages just $1,695 per person yearly.

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, 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 rise 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.

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The Group Managing Director of the NNPC, Mele Kyari, had last year argued 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.”

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.

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“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.

Recent events however showed otherwise as subsidy appears to have been reintroduced to buffer the effects of rising oil prices.

With the deregulation of the downstream sector, the price of petrol had risen from N121.50 to N123.50 per litre in June, to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September and N163 in November.

Since November last year, the price of Premium Motor Spirit popularly known as petrol had remained unchanged despite the increase in crude oil prices in the international market.

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With oil inching closer to the $70 mark, Nigerians would have to prepare for higher pump prices of at least N200 a litre in the coming months, without subsidy from the Nigeria National Petroleum Corporation (NNPC).

And with the push for the reintroduction of subsidy, it therefore means that the NNPC would be made to bear the burden of subsidy payment through the reintroduction of under recovery.

The implication of this is that with the under recovery element of cost to be borne by NNPC if subsidy is reintroduced, the amount that would be remitted by the Corporation into the Federation Account would be significantly reduced.

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.

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.

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“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.

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 downstream sector to seeking solutions to addressing such challenges.

Oyebanji, said with a fully deregulated downstream industry, the natural fear and anticipation of Nigerians is the increase in the price of transportation, food items and the attendant economic hardships.

According to him, solutions to these challenges can only emanate from a collective resolve by all stakeholders to face up to these challenges together, stressing that the nation must debate and share pragmatic and realistic initiatives to mitigate the impact of a pump price increase which could follow a fully deregulated downstream.

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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.

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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 exiting recession and rising inflation. They want to know that the government has a credible plan and the challenge will arise as 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.

As promised by the government, Oyebanji said a visible and measured reduction in the cost of governance throughout the polity would bring about savings which can be directed toward improving the livelihood of the average Nigerian, adding that cost optimization initiative would demonstrate to Nigerians the good faith of the decision makers in both the public and private sectors.

‘‘We stand with Nigeria and Nigerians through this difficult time and support the Federal Government’s promise to pass the PIB this year and fully deregulate the petroleum downstream sector. The benefit of a liberalized downstream is the most visible means of growing the economy in the medium to long term”, he added.

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