2 January 2016

Nigeria: Subsidy Removal and Fuel Price Increase By IMF Price Modulation

Photo: IMF
Nigerian President Muhammadu Buhari, along with Vice President Yemi Osinbajo greeting IMF Managing Director Christine Lagarde

THE new fuel subsidy removal or fuel price increase by price modulation is an updated (International Monetary Fund (IMF) strategy aimed at imposing fuel price deregulation on the Nigerian masses.

The strategy called for using the present low price regime to remove fuel subsidy and deregulate fuel prices. It recommended an automatic price change mechanism that changes price slowly.

Price modulation means that government will ensure initial slow price increases by regulating the components of fuel price, such as taxes, freight, margins, transport, storage and bridging.

The slow fuel price increase will reduce immediate mobilisation and opposition. There will be no direct government regulation of fuel prices. Rather, the marketers and traders will fix the final fuel price.

Price modulation fixes the bottom commodity price in a market by tweaking price components. Petroleum Products Pricing and Regulatory Agency (PPPRA) will fix the minimum fuel price and the fuel cabal/marketers can sell at whatever price the customer will pay.

The Nigerian fuel market is a corrupt oligopoly. The increase in fuel prices will have oligopolistic limits. Price modulation ignores corrupt practices and allows the fuel cabal to pass the cost of corruption to the masses.

In several meetings held in Abuja and Lagos between December 1 and 5, 2014, IMF staff members explained the updated strategy to Federal Government officials (IMF Country Report No. 15/84, Nigeria 2014 Article IV Consultation- Staff Report, Press Release and Statement by the Executive Director of Nigeria, February 2015).

The report of these meetings stated: "Lower oil prices provide an opportunity to phase out fuel subsidies. The recent drop in crude oil prices (and lower petrol and kerosene prices) could facilitate the completion of the subsidy reform, which started in 2012.

"Staff recommends introducing an independent price-setting mechanism to smoothly pass through international price changes to domestic prices and gradually eliminate fuel subsidies... ."

The report indicated that the federal government accepted the updated strategy. The authorities' authorities expressed their commitment to subsidy reform and indicated they were considering options, timing and modalities of implementing these reforms in light of the decline in oil prices."

Therefore, when we hear the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, talking about "price modulation" and the All Progressives Congress (APC) leadership talking about "thoughtful, but decisive subsidy phase-out," we should know that this policy is just a simple summary of an updated IMF policy.

We may conclude that President Muhammadu Buhari's fight against fuel subsidy corruption is over. Fuel subsidy corruption fought back and won. Buhari's forces are in retreat and disarray.

One of the critical constraints facing African leaders is that the amount of available resources is smaller than the amount required for the basic needs of the people and the government.

Furthermore, a large percent of the limited available resources is lost to corruption, mismanagement and other leakages. If a leader is not careful, he/she will start to mistake the echoes of IMF propaganda chanted repeatedly by his/her advisers as the voices of the people.

This is what happened to former President Goodluck Jonathan with fuel price deregulation in January 2012, and this is what is happening to Buhari with his planned January 2016 fuel price deregulation.

The IMF/fuel cabal forces have encircled Buhari and pushed him to undermine his primal policy of fighting corruption by proclaiming Premium Motor Spirit (PMS) price as N87/litre "for now."

Those two words, "for now," was all the IMF/fuel cabal price deregulation forces needed to kill his anti-corruption policy.

Speaking at the 10th memorial anniversary of Bala Usman in December last year, Alhaji Bola Ahmed Tinubu, a national leader of APC, stated: "In a perfect world, I wish we could sanitise the subsidy regime and thus continue it.

"However, I have reached the conclusion that there are too many demons in the system for this hell to be converted into good earth, let alone heaven... .

"Let us begin a process of a thoughtful, but decisive subsidy phase-out. While this is occurring, we should simultaneously phase in social programmes benefiting the poorest, most vulnerable among us.

"Programmes, such as transportation subsidies, school feeding, improved basic medical care and coverage for the poor and potable water projects are some of the things that can be done with the funds."

This sounds like the former Finance minister, Dr. Ngozi Okonjo-Iweala, promoting the IMF fuel price deregulation and SURE-P programmes policy in December 2011. The similarity is because both efforts are rooted in the IMF policy of fuel price deregulation/fuel subsidy removal.

In 2013, the IMF reviewed the lessons from the 2012 struggles against fuel price deregulation in Nigeria (IMF: Energy Subsidy Reform: Lessons and Implication, January 2013).

The report outlined six key elements for a successful fuel subsidy removal. On subsidy phase-in and social programmes, the report stated: "Appropriately phased and sequenced price increases... Phasing-in price increases and sequencing them differently across energy products may be desirable. Pace and timing of energy price increases. Too sharp an increase in energy prices can generate intense opposition to reforms, as happened with fuel subsidy reforms in Mauritania in 2008 and Nigeria in 2012.

"A phased approach to reforms permits both households and enterprises time to adjust and permits the country time to build credibility by showing that subsidy savings are being put to good use."

So, we can see that the IMF updated fuel subsidy removal strategy is the source of Tinubu's subsidy phased-out proclamation.

Furthermore, Tinubu declared that the demons of corruption in the fuel subsidy system are unbeatable on earth and in heaven. This was an open surrender by the APC; a public proclamation of the superiority of the corrupt fuel cabal forces.

The Ministry of Petroleum Resources emphasised Buhari's N87/litre "for now" statement and plan to begin the implementation of the updated IMF strategy this month.

Kachikwu is reported to have said: "So, for the first time, people will understand that the pricing modulation I was talking about is not a gimmick. It is for real... .

"The objective is that one, we cannot afford to continue to subsidise... We can't even understand where those subsidies were going to. There are a lot of fraud elements in it, so we need to cut that off...

"At today's price, there is no subsidy and this why I have gone away from the use of the word 'subsidy' and have continuously said that I am more on the page of price modulation.

"How do we look to fluctuate the market to reflect market dynamics?"

This sounds like the former Petroleum Resources Minister, Mrs. Diezani Alison-Madueke, promoting the IMF fuel price deregulation policy in December 2011. The similarity is because both efforts are rooted in the IMF policy of fuel price deregulation/fuel subsidy removal.

The IMF explained why an automatic, pseudo-independent mechanism or price template is essential to the updated strategy of price modulation or phase-in (The Unequal Benefits of Fuel Subsidies Revisited: Evidence for Developing Countries. IMF Working Paper WP/15/250 November 2015).

The report stated: "Depoliticise energy pricing. Successful and durable reforms require a depoliticised mechanism for setting energy prices. Establishing an automatic pricing formula for fuel products that links domestic energy prices to international energy prices can help distance the government from the pricing of energy and make it clearer that domestic price changes reflect changes in international prices that are outside the government's control."

So, we can see that the IMF updated fuel subsidy removal strategy is the source of Kachikwu's price modulation or subsidy phased-out proclamations.

It does not matter whether they call it fuel subsidy removal, fuel price deregulation, phase-in, phase-out, price modulation, price adjustment, price liberalisation, automatic pricing mechanism, sequential pricing or any other fancy name; it is an IMF arrangement. A rose, by any other name, is still a rose.

Furthermore, Kachikwu declared that the Ministry could not understand how the fuel cabal operates the process of fuel subsidy corruption. The Ministry gave up on the fight against corruption, just as it has given up on controlling the PMS and kerosene prices at the pump.

On December 27, last year, the PPPRA PMS pricing template put the expected open market price (OMP) at N93.45 a litre for a "fuel subsidy" of N5.45/litre.

At the top of the template was the declaration that the template was "based on average Platts Prices for December 24, last year."

The template starts with the C+F or product cost. This is the monthly moving average cost of PMS for North West Europe (NWE). Thus, the foundation of the PPPRA PMS price is determined by a foreign firm/market.

Labour is a commodity, like crude oil, PMS, diesel and kerosene. Using the PPPRA template as a model, the Nigeria Labour Congress (NLC) and Trade Union Congress (TUC) can develop a wage template based on a European monthly moving wage average (national minimum wage of 6.70 Pound Sterling per hour or N314096 per month) as quoted by HMRC (Her Majesty Revenue and Customs) in London.

The template can start with this European national minimum wage as C+F or labour cost. Future national minimum wage negotiation could use such an import-parity wage template.

No Nigerian family of six can live on N18, 000 per month with import-parity priced fuel.

Platts Oil is interested in providing information for profit and not in the development of Nigeria. In September last year, Platts lunched two new assessments specifically to determine prices of PMS import from Rotterdam (NWE) to West Africa.

These were the West Africa Gasoline FOB Northwest Europe and the West Africa Gasoline CIF West Africa.

Platts stated: "West Africa is a significant producer of crude oil, yet due to pressures on its refinery system and increasing car ownership, the region remains a very large importer of refined products. Of those products, gasoline is the most significant. The region's largest country, Nigeria, consumes more than 40 million liters of gasoline each day...

"Due to a surplus of refining capacity and specifically a surplus of gasoline production, Northwest Europe continues to provide the bulk of gasoline imports into West Africa.

"The new Platts CIF West Africa assessment is to be calculated as a freight net-forward from the FOB Northwest European assessment, using a basket of two Worldscale flat rates; Amsterdam-Lome and Amsterdam-Lagos."

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