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End of fuel subsidy era, by default

By Oseloka H. Obaze
01 June 2016   |   3:18 am
Fuel subsidy ranks high on the list of policy albatross President Muhammadu Buhari inherited. A recurring theme in Nigeria’s policy realm, subsidy removal has been debated for over three decades.


Fuel subsidy ranks high on the list of policy albatross President Muhammadu Buhari inherited. A recurring theme in Nigeria’s policy realm, subsidy removal has been debated for over three decades. Except for President Umaru Yar’Adua, every head of state since General Ibrahim Babangida had skillfully played the fuel subsidy removal game. In time, fuel subsidy, translated to an egregious policy and pilfering of trillions of Naira. Ironically, it was only Gen. Sani Abacha that used the savings from fuel subsidy effectively for national projects through the Petroleum Trust Fund (PTF), which Gen. Muhammadu Buhari managed. President Olusegun Obasanjo tackled the issue by partially removing subsidies in 2003 and creating the Petroleum Products Pricing Regulatory Agency, (PPPRA). In 2012, President Goodluck Jonathan established the Subsidy Reinvestment and Empowerment Programme (SURE-P). However, SURE-P became a conduit for rewarding political cronies at all levels.

Indubitably, the fuel subsidy regime failed Nigerians, as a source of relief, better services and better infrastructure. It was this failed system that President Buhari inherited. Information Minister Lai Mohammed, simply proclaimed that “Nigeria is Broke”; meaning that the fuel subsidy was dead. By definition, “a subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.” Whereas successive Nigerian governments harped on ending the fuel subsidy, the political will was absent. But on 12 May 2016, FGN pulled the plug by unilaterally increasing the pump price of premium motor spirit (PMS) from N86.50k to N145.00 per litre – a markup of 67.63%. The Buhari government was sufficiently concerned about the possible repercussions that characterise fuel price hike.

Just as fuel subsidy remains controversial, the merits of removing it are unequivocally strong. Fuel subsidy meant to benefit the poor, became a major source of foreign exchange revenue for select Nigerians, who had contracts to market PMS using guaranteed foreign exchange rates sourced from the Central Bank. Nigerians simply underwrote their excesses. Over time, the Federal Government could not explain “the difference between the amounts actually disbursed for subsidy and the cost borne by Nigerians. This meant that successive governments had lost the perspective on the public interest narrative on fuel subsidy. Hence to most Nigerians, the subsidy removal either marks the most courageous decision of the Buhari administration, or its utter folly. Some have argued that “it is commonsensical that the fall in price of crude oil should lead to a fall in the prices of PMS.” Others consider the subsidy removal part of President Buhari’s policy summersault.

Considering its sensitivity, fuel subsidy removal required broad consultations and ownership. However, from every indication, the present policy was implemented by subterfuge or by default. The latter seems more the case. Indisputably, there was a meeting on May 12, 2016, attended by some ranking members of the Buhari administration, and representatives of Labour led by NLC Secretary-General Dr. Peter Ozo-Eson. By Labour’s account, the meeting rose with no agreement. Soon after, the government announced a new pump price. This left Labour no choice but to allege that “The minister used deceit to market whatever policy they had brought forward” and did so “in violation of the PPPRA Act.” The Government, for its part, said the fuel hike was predicated on the shortage of foreign exchange. Vice President Yemi Osinbajo offered this insight: “Since last year, independent marketers have brought in little of no fuel because they have been unable to get foreign exchange from the CBN. The CBN simply did not have enough (in April, oil earnings dipped to $550 million. The amount required for fuel importation alone is about $225).” Translation: the fuel subsidy was ended, not as a deliberate policy option or negotiated policy settlement, but by default, compelled by force majeure. It’s noteworthy that fuel subsidy was not included in 2016 budget. Also noteworthy is how the foreign exchange shortage excuse delinked the subsidy removal from IMF prescriptions.

Labour’s split naturally strengthened government’s resolve, forcing Labour to blink first. But potentials for conflict remain. Can government regulate importers, who must sell PMS on the basis of the rate at which they sourced foreign exchange? Will this be a case of ending the subsidy yoke and embracing importers’ whimsical pricing yoke? Myths have always driven the fuel subsidy debate. In 2012, Tunde Bakare dissected government claims about the subsidy, noting that “the Federal Government of Nigeria cannot explain the difference between the amount actually disbursed for subsidy and the cost borne by Nigerians.” As such, Buhari does not enjoy the benefit of public trust on this matter, even as market forces are now the drivers compelling fuel subsidy removal. Still, the subsidy removal was never a critically-thought-out policy option evaluated for its diametric implications. Rather, the FGN faced with the inability to sustain the official foreign exchange rate used by marketers for importing PMS, conveniently capitulated.

It’s salutary that the price hike might make it unattractive to ship Nigeria’s PMS to neighbouring states. But a corollary question arises: What will the government do with the savings of $255 million a month that was outsourced to importers; and how would the savings trickle down to Nigerians? It’s also ironic that external factors ended Nigeria’s fuel subsidy, when it seemed most inopportune and least tolerable. Regardless, Nigerians are left feeling that another campaign promise was broken as Buhari’s policy summersaults continue. Overcoming such distrust remains for President Buhari, a looming challenge.
Obaze is MD/CEO of Selonnes Consult Ltd.