Care for the poor in Nigeria: Fuel subsidy test (2)

Continued from yesterday

Palliatives for the poor can be directly served to the poor via appropriations to regular agencies and institutions that directly reach the poor. For example, the poor can be directly reached in public educational institutions, public health centres and hospitals, marketplaces, rural households, urban poor communities, micro and small enterprises of the informal economy sector, etc.

Low wage and middle income earners that are currently hyper-stressed due to petrol subsidy removal induced inflation can also be directly reached through immediate substantial wage increases, provision of transport allowances, increase in duty tour allowances, interest free vehicle maintenance loans, and provision of mass transit buses. It is impressive that some states (e.g., Lagos and Oyo) have temporarily reduced fares on mass transit buses. Other government-owned mass transit outfits should immediately follow this approach.

To consolidate the gains from petrol subsidy removal, locally assembled or manufactured vehicles should be purchased for mass transit programmes. This will help stimulate production and create jobs, thus making real contribution to poverty alleviation. More importantly, caring for the poor in these very difficult times should move us to curtail our exotic and inordinate taste for foreign goods and services. More than ever before, the current economic challenge demands that we use what we produce locally and limit import of consumer goods.

While working hard to reduce the dependence of Nigeria’s industry on imported capital goods and intermediate products, local production should be boosted by demand for locally produced goods. Our leaders should reorientate the populace by glaring examples of the choices they make: use locally-made or assembled cars, SUVs, wares, attires, etc.

In democracy, leaders should be happy to move and live freely among the people. It is strange that our politicians after winning election would ride in imported bullet-proof vehicles and harass fellow Nigerians with unreasonably long stream of vehicles when moving on highways to which we all have equal rights. I plead, even if unrepentant of such move, they should ensure those streams of vehicles are made or assembled in Nigeria.

Production and use of locally-made goods and services are sure paths to alleviating poverty and refurbishing the battered milieu that once inspired the Nigerian enterprise. Macroeconomic stability is good and needful for sustainable economic growth. However, Nigeria’s economic debacle is more of a production challenge than a macroeconomic challenge. Any opportunity to address the production challenge should be promptly utilised in every sector of the economy. Doing this in the context of petrol subsidy removal is needful to pass the fuel subsidy test.

In addition, passing the fuel subsidy test will necessitate a bold demand for the return to public treasury of all funds stolen by persons and companies indicted by audit reports and reports by special investigation panels into fuel subsidy management and related matters. For example, the 2012 report by Nuhu Ribadu-led Petroleum Revenue Special Task Force should be revisited and its recommendations implemented. The return of stolen funds to public treasury should be voluntary for a moratorium period to be determined by the president. Any individual or company that fails to return stolen fund within the moratorium period should thereafter face prosecution.
Exchange rate burden

I have always been sceptical of a liberalised foreign exchange rate for Nigeria, simply because of our very weak production base. A liberalised exchange rate favours only countries with vibrant production systems that have high-quality products and services. With a relatively weak currency, such a system makes production to boom because of export demand pull, creates jobs, and in the medium to long term, the currency adjusts according to the dictates of the currency market.

For Nigeria, the main exports are crude petroleum and a few agricultural commodities. It is yet to be seen how liberalization of the foreign exchange market (aka, unification of foreign exchange windows) with its attendant serial devaluation of the Naira can result in economic gains for Nigeria. Since the harmonization of exchange rate windows by the Central Bank of Nigeria on 14 June 2023, there has been spiral devaluation of the Naira, loss of value of Naira denominated assets, inflation hype, and avoidable pressure on price of petrol. The price of petrol had to be increased after the initial price deregulation largely due to the weakened value of the Naira. The outcome has been more pains, particularly for the poor.

As a measure to foster care for the poor, it is expedient to halt the current spiral devaluation of the Naira by returning to a dual exchange rate system: one for strategic economic transactions and one largely determined by market imperatives. The real problem in managing Nigeria’s foreign exchange is lack of discipline to prevent or punish bad behaviour, notably round-tripping. China has been branded as a currency manipulator, though other very competitive economies (e.g., France, Japan, Korea, Germany, Malaysia, Singapore, Switzerland, Taiwan, Thailand) also manipulate currency or even fix exchange rates for stipulated periods.

Of course, China refused to liberalize its currency because of the grave implications for exports. China has consequently enjoyed the enviable position of world’s largest exporter of manufactured goods since 2009 and will most probably remain so for a long time, taking the benefits of its profound experience in strategic management of exchange rate regime. Nigeria should learn from China’s example, by fixing the foreign exchange rate as a strategy to calm currency volatility and inflation.

This will help reassure the poor and vulnerable groups, whose purchasing power had been substantially weakened since the removal of petrol subsidy, that the current government cares for the poor. Moreover, it will also help big businesses already in panic mode to stabilise and recover from the current shock of sudden depreciation of Naira assets.
Compensating the poor

Appropriate compensation mechanism for the poor is key to successful end to fossil fuel subsidy. This is a major fuel subsidy test that must be passed. In 2015, I led a team of researchers from NISER and GSI-IISD (Global Subsidy Initiative – International Institute for Sustainable Development) in a study that investigated prospective compensation mechanisms for petrol subsidy removal in Nigeria. The findings of the study are relevant today as ever.

The study recommended that a portfolio approach to compensating the poor would be most beneficial for addressing the impact of petrol subsidy removal. A portfolio of compensation mechanisms identified include transport vouchers; mass transit schemes; e-wallet for smallholder farmers; free school meals for school children; free health care for the vulnerable; cash transfer scheme; and vocational skills development programmes. The portfolio could be combined as appropriate for the needs and capacity of each state and the Federal Capital Territory.

The compensation measures would have to be implemented without political interference or discrimination based on ethnicity, religion, gender or any other bias. The findings of the study also indicated that creating new institution(s) to manage the compensation schemes is unnecessary. Existing relevant ministries, departments and agencies (MDAs) with mandates relevant to these programmes should urgently be repositioned and strengthened to take on these responsibilities.

The study suggested the creation of a new Directorate for Subsidy Reinvestment Monitoring (DSRM) under the Office of the Vice President of Nigeria. The DSRM may not have access to the Subsidy Reinvestment Fund but should have the mandate and resources to monitor programmes financed by the subsidy savings fund. The subsidy savings fund should be domiciled in the Office of the Vice President to assure high-level oversight of fund allocation.

Since the Vice President is the Chairman of the National Economic Council, the reports of the DSRM can easily be shared with state governors and other stakeholders in the management of the economy. Based on the findings of the study, there should be a coordinating department and principal implementing agencies for the implementation of each of the fuel subsidy removal compensating programmes. Initial funding estimates suggest that the proposed eight programmes could be implemented with a budget not exceeding USD1.2 billion at the year of inception of the programmes, while the cost should reduce in subsequent years.

Finally, under a return to dual exchange rate regime, fuel imports should benefit from the fixed exchange rate as a strategic economic transaction pending when local production of petrol is revived. Petrol and other imports that fall under strategic economic transaction rate should be monitored by new petroleum industry players that exclude extant managers of the industry. Nigeria’s economy is in dire need of a reset that will make it yield benefits for the poor. The stoppage of petrol subsidy has made a remarkable contribution to this reset. All hands should be on deck to ensure no relapse under any guise or disguise to the old order.
Concluded

Adeoti is a Professor of Development Economics, Nigerian Institute of Social and Economic Research (NISER), Ibadan, Nigeria.