Monday, 25th September 2023

‘Why fuel subsidy removal may be difficult’

By Collins Olayinka, Joseph Chibueze and Anthony Otaru (Abuja)
09 April 2023   |   5:08 am
Ahead of Federal Government’s planned fuel subsidy removal in June, economic and energy experts have declared that prevailing situation and indices in the country might make it near impossible.

President-Muhammadu Buhari and Minister of Finance Zainab Shamsuna Ahmed.

• Petrol price projected to increase by 400%
• Unemployment may hit 40.6%
• Nation on edge As $800m subsidy loan may push debt profile to $171.8b
• Raise gas framework to reduce energy cost — Emmanuel
• ‘Buhari’s social intervention programmes have failed’

Ahead of Federal Government’s planned fuel subsidy removal in June, economic and energy experts have declared that the prevailing situation and indices in the country might make it near impossible.

According to them, aside from the hardship it would bring to Nigerians, most of who already live beyond the poverty line, the government has done almost nothing to prepare the nation for the new regime of removal.

This is besides indications that the $800 million World Bank facility, aimed at cushioning the effects of the planned subsidy removal, would raise Nigeria’s projected debt stock of $171 billion by a further 0.47 per cent.

This development, analysts say, will further raise the sinking fund for refinancing and servicing of the debt stock from 29 per cent scheduled in 2023 appropriation act, to 43.8 per cent for the 2024 financial year.

It is equally projected that the price of petrol may rise by as much as 401 per cent if marketers are importing and 297 per cent if the Dangote refinery starts functioning before June 2023.

Minister of Finance, Budget and National Planning, Zainab Ahmed had, during the weekly Federal Executive Council meeting, announced that Nigeria secured an $800 million grant from the World Bank as part of its subsidy palliatives measures ahead of the removal of a costly fuel subsidy by June.

“The first tranche of funding from the Washington-based lender will enable us to give cash transfers to the most vulnerable in our society that have now been registered in a national social register,” Ahmed said.

According to the minister, the palliatives would be targeting 50 million vulnerable Nigerians or 10 million households. Ahmed added that engagements are ongoing with the newly established Presidential Transition Council (PTC) and the incoming administration to drive the palliative programme, which includes the need for buses among various considerations.

Since assuming office on May 29, 2015, President Muhammadu Buhari has spent more than N2 trillion on Social Investment Programme (SIP). Yet, an estimated 133 million Nigerians, according to statistics, have sunk into multidimensional poverty, just as another 24.2 million people face acute food insecurity.

Appraising the effectiveness of the new $800 loan in reducing the harsh effect of the planned subsidy removal, economic analysts opine that it would be near impossible. They contend that the borrowed $800 million if utilised as planned by the Finance Ministry, would neither be enough to get the poor out of poverty nor alleviate the effects of removal of petrol subsidy.

Executive Director of Dairy Hills Limited, Kelvin Emmanuel posited that the social intervention programmes of the Buhari government have been calamitous and of no social relevance.

Citing how the conditional cash transfer programme, actively promoted during the 2019 general election by Vice President Yemi Osinbajo, failed to meaningfully move Nigerians living in poverty to a better living conditions, he argued that the planned conditional cash transfers to 10 million households will have zero impact in cushioning the impact of petrol deregulation.

Emmanuel tasked the Federal Government on thinking creatively before embarking on the deregulation journey.

He said: “The Federal Government is working with MSC, BUA, AXEN to fast track the development of Ibaka Sea Port and BUA refinery to increase the domestic refining capacity to between 850-900 thousand barrels daily, which will yield output for petrol of 67m litres per day, and would prove critical in removing the 27 per cent handling charge it costs to land petrol from European refineries.

“The government must develop a piped natural and compressed natural gas framework for manufacturing companies as a tool to reduce their energy cost, that would in turn pass to the cost price index of consumer goods.

“It must also redirect the savings, which will be equivalent to $18 billion annually or 31 per cent of the 2023 appropriation act, into healthcare and education. The budget for education has a factor of 2.3 times personnel to CAPEX ratio with ministry overhead at 6 per cent, while health budget has a factor of 2.7 times personnel to CAPEX budget with a 22.4 per cent overhead for ministry, in a country with an infant mortality rate of 57.4 babies, and one doctor per 10,000 Nigerians, as against the WHO standard of 2.5 doctors per 1,000 Nigerians.”

Emmanuel submitted that the social investment programmes neither improved the living standards nor created jobs in the private sector to reduce the unemployment rate in Nigeria. He contended that Buhari government’s insistence that it has succeeded is proof that the administration is not only inept, but lacks respect for economic data.

Dr Michael Uzoigwe, a natural resource governance expert, argued that while there is nothing wrong with subsidy, the administration of the scheme has been problematic.

“Of course, subsidy removal is long overdue. However, there are certain policies and activities that ought to precede its removal,” he stated.

He added: “Subsidy removal should not be sudden. People should know when it would happen well in advance. Because of how long fuel subsidy has been with us, I would advocate a minimum of three years’ notice. During the period, government efforts on the programmes to improve options for affordable transportation, healthcare, education, and the like, should be accelerated and should form part of a robust communication strategy that helps to prepare the citizenry for such a major change in policy and its potential impact.”

A consultant to Senate on petroleum matters, Dr. Francis Adigwe held that importing petrol, which is a by-product of crude oil that Nigeria produces, is an anomaly.

He maintained that obtaining a loan to finance consumption is inexcusable, adding, “On the surface of it, taking a loan to fund consumption is bad economics. It is even much worse if you are funding the refining of a product you produce as we are doing with crude oil. So, funding petroleum subsidy, especially in the long term, is bad enough, but taking a loan for that purpose is condemnable.”

While Adigwe admitted that it might look thoughtful for Buhari’s administration to seek loan to fund palliatives, such efforts ought to have been undertaken by the transition committee after a thorough discussion of the details and then develop a unified and common perspective.

Towing same line of thinking with Emmanuel, Adigwe stressed that the government’s poverty alleviation programme have not had the expected success because, as they say, you cannot build something on nothing and expect it to stand.

He added that the factors needed to make the programme effective are missing. “The most important is security, without which small and medium size businesses cannot thrive; add to this very poor electricity supply and a crazy exchange regime as well as other factors. No one is surprised that this programme is a total failure. It doesn’t really matter the scope or coverage of the programme, the entire programme is a failure. As we say in Nigeria, ‘who this programme help’? You can search the whole day for the beneficiaries and not find one, not to talk of the business they set up with the funds. I don’t want to say the programme was a fraud but its impact is virtually non-existent. The current administration must wind it up before departure.”

Dr Adigwe further pointed out that the current government has failed woefully to address subsidy in its eight years, saying the practice has become the bastion of corruption in Nigeria.

“My perspective has always been that the petroleum subsidy is bad economics. If you add the scam around it in Nigeria, then it becomes a full disaster. This subsidy has been going on so long that people have forgotten Nigeria used to be a net exporter of refined petroleum products. Various administrations has gotten used to using it as a straw or even pipe to suck the country dry. It has become an easy cash cow and conduit for successive governments. One thought the Buhari administration would make it the first victim of its anti-corruption fight. But alas, it survived and grew healthier and exponentially.”

According to Adigwe, the incoming administration has a duty to educate the public on the real truth about the petroleum subsidy regime.
WHILE the debate on subsidy removal or not remain contentious, organised labour has insisted that government must not tamper with the subsidy.

Labour gave a condition that before subsidy is removed, the government should fix the nation’s refineries and make them functional to ensure that Nigeria does not only depend on importation of petroleum products.

The present administration in 2015 campaigned that it would remove the subsidy if elected into power. Eight years down the line, the situation has remained the same.

A recent Nigerian Extractive Industry Transparency Initiative (NEITI) report submitted to the House of Representatives ad hoc committee investigating the fuel subsidy regime from 2013 to 2022, showed that fuel subsidy has jumped from N316.7 billion in 2015 to well over N2.565tn in 2023.

For the 2023 budget, the Buhari administration provided N3.6 trillion for subsidy from January to June when it is expected to be removed.

Fuel Pump PHOTO: istock

But Nigeria has struggled with rising budget deficits driven mainly by rising fuel subsidy figures. President Muhammadu, while presenting the 2023 budget to the National Assembly last year, said that the subsidy regime must cease for the country’s economy to blossom. He warned that the subsidy regime must stop to save the nation’s economy from avoidable bleedings on yearly basis.

The government was, however, clever to fix the terminal date of the subsidy regime for June 2023, a month after it would have handed over to another administration.

“There’s a provision (of the Petroleum Industry Act) that says 18 months after the effectiveness of the PIA that all petroleum products must be deregulated. That 18 months takes us to June 2023.”

“Also, when we were working on the 2023 Medium Term Expenditure Framework and the Appropriation Act, we made that provision to enable us exit fuel subsidy by June 2023.

“We’re on course, we’re having different stakeholder engagements, we’ve secured some funding from the World Bank, that is the first tranche of palliatives that will enable us give cash transfers to the most vulnerable in our society that have now been registered in a national social register,” Finance minister told journalists while disclosing FG’s plan to take care of 50 million Nigerians.

An aide of the Minister of Humanitarian Affairs, Disaster Management and Social Development, who pleaded anonymity, explained that the Humanitarian minister might not have been briefed on the modalities for the disbursement of the post-petroleum subsidy palliatives to Nigerians.

In a reaction to the planned disbursement of post-petroleum subsidy palliatives, human rights activist, Emmanuel Onwubiko described the decision as an unprecedented crime against economy. He said it is wrong for an outgoing government to collect credit from the multilateral body, start disbursement, then shift implementation to the next administration.

Founder/CEO of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf also opined that the Buhari administration has no business disbursing any fund as palliatives for the removal of fuel subsidy.

According to him, “The whole idea of palliatives should be left for the new administration to handle. If we say it is the new administration that will remove the subsidy, let them come on board with their own framework for removing the subsidy.”

He said this is because there is no way the new administration will come on May 29 and announce subsidy removal. “It is not possible. They have to sit down, look at the numbers for the palliatives and all of that, and also engage as a new administration. This is not something you do in a week or two, you need some time to be able to do them and lay down how you want to transit from the current policy regime that you met.”

Dr. Yusuf said the new administration cannot use the current social investment framework because there has been a lot of credibility problems around the social investment programme. “Even the register they are talking about, there is a whole lot of question marks around the register, how transparent is the register, what is the spread, is it equitable, how did they come about the so-called households? These are issues to be sorted out.

“They should just allow the new administration to handle the matter. I hear they have already got the money, I don’t think it is proper for them to disburse it. How many more weeks do they have, why the rush?”

For Professor Jonathan Aremu, an economist, it is not about taking a loan or giving money to people, the question should be about how the money given to the people would improve productivity in the economy. Will it not increase the national debt? If you cannot determine the level of productivity it will bring to the economy or the welfare implications, then there is a question mark there.

Reacting, Professor Akpan Ekpo Akpan told The Guardian that the government has no need to go borrowing anymore because the nation’s debt profile is no longer sustainable. He stressed that there is also urgent need for government to get the refineries working before bringing up any subsidy issues.

According to Akpan, once the refineries are working, then government can put the issues of subsidy removal on the front burner.

The nation, he noted, must also know its consumption levels before talking further about subsidy removal because when you remove subsidy, there would be lots of hardship for the very poor in society.

In his contribution, Professor Omo-Ogun Ajayi, a Prof. of Agricultural Economics at the University of Calabar, Cross River State stressed that such borrowing should not be used to uplift the lives of the ordinary man in the streets.

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