Imperatives of making fuel subsidy removal work 

After many years of procrastination and proclamations about fuel subsidy, the decision by President Bola Tinubu announcing Nigeria’s departure from fuel subsidy cannot be timelier. This is more so against the backdrop of the big issues surrounding the subsidy regime; and the ultimate pointer that this particular subsidy has probably caused more harm than good for the generality of Nigerians.

Among the issues is, of course, the huge and rising debt profile of the country, which is clearly unsustainable. While the Nigerian economy has been subsidised in various ways for many years through petroleum products, education, electricity, foreign exchange, the decision by Tinubu to bite the bullet and damn the consequences is commendable.

Having been able to secure people’s trust on subsidy removal despite the consequent hardship the removal has put Nigerians through, it behoves on this administration to ensure subsidy is gone forever. Working Nigerians are hurting and their livelihoods are in danger. They want to know that the government has a credible plan for the post-subsidy era.

With 36.9 billion barrels of proven oil reserves, Nigeria has the second-largest reserves in Africa (after Libya), and used to be the continent’s largest oil producer until operational challenges undermine production. Yet Nigeria is the only member of the Organisation of Petroleum Exporting Countries (OPEC) that imports refined fuel, and often suffers scarcity despite the importation monopoly of the Nigerian National Petroleum Corporation Limited (NNPCL). 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.

Nearly 70 years after the discovery of crude oil in commercial quantities in Nigeria, the country’s oil and gas downstream sector is yet to develop to the desired levels or its full potential, despite the recent enactment of the Petroleum Industry Act (PIA). The downstream sector of the oil and gas industry had the least foreign direct investment compared to the midstream and upstream sectors, and the reason for this is not far-fetched. The subsidy regime and the legal framework of the downstream sector generally discourage investments.

Prior to Tinubu’s confirmation that “fuel subsidy is gone,” Nigeria’s price peg of N195 per litre was not only hurting investments, it was creating a boom for smugglers. Several efforts to check the smuggling of petrol from Nigeria have failed because the illicit activity involved highly placed Nigerians including government officials, security agencies such as the Nigeria Customs Service and even officials of the NNPCL.

According to NNPC’s own admission, over 20 million litres of petrol is smuggled outside Nigeria daily. The sale of smuggled petrol across the West African sub-region oils black markets and distorts the price mechanisms of these countries. It also fuels corruption in the NNPC and serves as a convenient excuse to explain away outrageous subsidy claims. This has made it impossible to determine Nigeria’s exact consumaption. With the removal of subsidy, videos have emerged depicting complaints from Nigeria’s neighbours as regards the high cost of petrol. Indeed, Nigeria has been subsidising petrol in other countries.

According to a report by PricewaterhouseCoopers in Nigeria (PwC) titled Fuel Subsidy in Nigeria – Issues, Challenges and the Way Forward, the price of petrol is considered as a major driver of the cost of living as it is used by all, including small businesses and many households, given the unstable electricity supply. Therefore, any increase in fuel price could directly and immediately impact the prices of goods and services across the country.

The report also posits that there is a psychological impact the subsidy removal tends to have because of the strong sentiment attached to cheap and affordable petrol. When petrol prices increase, small businesses tend to raise their prices to cover the increased cost of operation, which can lead to higher prices for consumers. This can make it more difficult for people to afford basic necessities, leading to a decrease in the standard of living and contributing to poverty and inequality. The report noted that while petrol price deregulation could contribute to higher costs of living and inflation, the impact could be moderated if complemented with effective policies and well thought out implementation strategy.

Indeed, the experience of Nigerians with palliatives managed by government officials is unpalatable. Crises and national show of shame that rocked the disbursement of the COVID-19 palliatives are still fresh in the memory of Nigerians.

The verdict of the civic advocacy group, BudgIT on the COVID-19 palliative saga was damning. In its report of April 21, 2021, the organisation wrote: “Per our finding, the continuous mismanagement of palliatives items and funds earmarked for the COVID-19 response has created a wider gap between the rich and the poor where the vulnerable and marginalised are denied access to the palliative items that rightly belong to them.”

A similar verdict of failure is attached to the conditional cash transfer programme, actively promoted during the 2019 general elections by former Vice President Yemi Osinbajo, as the impact of the programme to meaningfully move Nigerians living in poverty to a better living could not be measured realistically till date.

Of course, fuel subsidy removal is long due. But what economists find inexcusable is obtaining a loan ($800 million) to finance consumption. Taking a loan to fund consumption is not only bad economics, it is even much worse if you are funding the refining of a product you produce as the government is doing with crude oil.

While there is unanimity on the heavy burden of the subsidy, rancour, and confusion reign over the solution. Government compounds this dilemma by holding on to its four state-owned refineries that process no products but endlessly receive cash for phantom turnaround maintenance. Indeed, the hope the Dangote refinery brings is refreshing but relying on a single project to rescue the oil and gas sector of the world’s 13th-largest crude producer points to the height of systemic and institutional failure, years of neglect that has riddled the sector and its growing weakness.

Already, Nigerians are developing coping mechanisms amidst the rising costs of transportation and the struggle to cope with inflation and meagre earnings. Many firms and government institutions are embracing new work practices in a bid to reduce the hardship and cut costs. Many are also investing in alternative energy sources like solar panels, inverters, or batteries. These can provide electricity and reduce reliance on fuel-powered generators.

As Nigerians cautiously trust the government on subsidy removal, they are hopeful that the president maintains his composure under pressure, accepts the situation like others before him did, and not just push the problem down the road. There are also questions as to the president’s plan to deregulate the downstream industry that goes beyond price adjustments and into complete, proper, and competitive deregulation. What and how does he intend to use the anticipated pain associated with the elimination of the petrol subsidy as well as part or all of the savings and gains? Updating Nigerians on all these issues will make a realistic decision on fuel subsidy removal attainable.