Nigeria's Unending Fuel Subsidy Debate

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(file photo).
24 April 2019
opinion

Obinna Chima writes on the raging debate over the fuel subsidy regime in Nigeria

The age-long debate over fuel subsidy removal in Nigeria has started reverberating.

Once more, there has been divergent views on this policy which appears to be a thorn in the flesh of successive governments in the country.

While those that advocate for fuel subsidy to remain maintain that the country cannot do without the policy until all palliatives to cushion the effects on the poor are fully in place; those who oppose it described it as a colossal waste, stressing that a country that has consistently grappled with low revenue generation cannot continue waste huge resources subsidising fuel consumption.

A leading voice in the call to end fuel subsidy in Nigeria, the International Monetary Fund (IMF) advised the Nigerian government recently to jettison the policy and expend the funds on health, education and infrastructural development.

IMF's Managing Director, Mrs. Christine Lagarde, said subsidy spending was infringing on other critical areas of capital development, hence the need for the government to refocus. The IMF chief said it was the monetary institution's general principle to discourage fossil fuel subsidies because of its consequences on other areas of life and development.

She said: "As far as Nigeria is concerned, with the low revenue mobilisation that exists in the country; in terms of tax to Gross Domestic Product (GDP), Nigeria is amongst the lowest. A real effort has to be done in order to maintain a good public finance situation for the country and in order to direct investment towards health, education, and infrastructural development."

Highlighting some of the negative impacts of fuel subsidy, Lagarde said: "If you look at our numbers from 2015, it is no less than about $5.2 trillion that are spent on fuel subsidies and the consequences thereof. And the Fiscal Affairs Department has actually identified how much would have been saved fiscally but also in terms of human life, if there had been the right price on carbon emission as of 2015. Numbers are quite staggering.

"If that was to happen, then there would be more public spending available to build hospitals, to build roads, to build schools, and to support education and health for the people.

"Now, how this is done is the more complicated path because there has to be a social protection safety net that is in place so that the most exposed in the population do not take the brunt of those removal of subsidies principle. So that is our position," she explained.

Also, a recent World Bank report showed that Nigeria spent N731 billion to subsidise petrol consumption last year. The report explained that within the year under review, Nigeria's oil sector declined in productivity, ending on 1.9 million barrels a day (mbd) production mark as against the government's hope of 2.3mbd.

Additionally, it stated that the Excess Crude Account (ECA), which provides the country some fiscal buffer, was virtually depleted even though prices of According to the Bank, most of the petrol volumes Nigeria spent money to subsidise in 2018 were inflated as daily consumption rose to 54 million litres per day (ml/d) from 40ml/d in 2017, ostensibly due partly to out-smuggling.

It had stated: "The calculations for the fuel subsidy are based on heavily inflated fuel consumption estimates, with the fiscally severely constrained Nigerian government effectively subsidising neighboring countries' petrol consumption as some of the fuel is informally re-exported through the porous borders."

But in its reaction, the Nigeria Labour Congress (NLC) cautioned the federal government against heeding the advice of the multilateral institutions, saying such a move would result in astronomical increase in the pump price of petroleum and cost of other goods and services. However, the President of NLC, Ayuba Wabba, urged the federal government to urgently revamp the country's refineries which are presently in comatose.

FG's Response

In her response, the Minister of Finance, Mrs. Zainab Ahmed, said the federal government would implement fuel subsidy removal gradually.

Ahmed said fuel subsidy cannot be removed at once.

This, was however after she had embraced an earlier advise by the multilateral institutions to completely phase out the policy.

Ahmed, who had earlier described the IMF's call on the need to remove fuel subsidy as a good advice, recanted saying: "The advice from the IMF on fuel subsidy removal was good advice but also we have to implement it in a manner that is both successful and sustainable. We are not in a situation to wake up one day and just remove subsidy. We have to educate the people; we have to show Nigerians what the replacement for those subsidies will be so we have a lot of work to do.

"We also need to understand that you don't remove large amounts of subsidy in one go, it has to be graduated and the public has to be well-informed on what you are trying to do."

According to her, the government would devise a workable formula to address the situation.

But the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, pointed out that Nigeria's continuous subsidising of petrol consumption means the Nigerian National Petroleum Corporation (NNPC) will remain unprofitable in for a long time.

Kachikwu, also disclosed that the country's plan to exit importation of petrol by the end of 2019, was no longer feasible, stating that all the projected measures to achieve this are now off the mark.

Speaking recently on a Channels Televison programme - Hard Copy, the minister noted that with huge petrol under-recovery in the books of the NNPC, it would be difficult for the corporation to record any profit.

"It is going to be very difficult. Let me say that first, we faced this same problem when I resumed in 2015. We had accumulated over N1 trillion in subsidy - back arrears to be paid. And, as an ongoing current business model, one of the first things I did was to seek for ways to take away subsidy.

"Firstly, through efficiency and contract review, we reduced the amount that was spent every month on subsidy to about N300 million, but then it still didn't take it away and we went on to the fuel price increase to take away the subsidy element which usually arises when you have differences in landing costs and we began to have over recovery in May of 2016 all the way to late 2016 and price increase happened in 2017.

"As soon as prices went up, NNPC went into under-recovery. But can you keep them profitable while they are doing under-recovery? It is going to be a tall order. There is a N40 margin as it were in terms of under-recovery for each litre of petrol that we sell," Kachikwu, explained in response to a question on the issue.

Speaking on the country's dilapidated refineries, and how plans to leverage them to exit petrol importation failed, he stated: "I think that if there is one area where I feel sad, it is certainly the refineries because there is a huge gulf between my expectations and the pronouncements that I had made in terms of where I'd like to be and what we have been able to achieve.

"The reality is that today, we are still below - probably 15 per cent utilisation of those refineries because they need to be maintained and worked. Completely refurbished, the last Turn Around Maintenance (TEM) was close to 10 years ago and they had question marks."

Impact on Nigeria's Fiscal Burden

To analysts at the Financial Derivatives Company Limited, the country's fiscal burden would reduce by eight per cent if it stops subsidising petrol. The Lagos-based financial advisory and investment firm in a report stressed that although subsidy removal was not without its costs, the potential benefit far outweighs its cost.

It stated that subsidy savings could be utilised in the provision of essential social needs such as access to free education and quality healthcare services.

These services, according to the report, are crucial to the improvement of living standard and the quality of life of the average Nigerian.

It stated: "More importantly is the reduction in the fiscal burden by at least eight per cent. Economic prudence, which emphasises the need to be discerning and forward-looking, has been the clamour for pro-subsidy advocates like the IMF.

"The fund is now sounding like a broken record on the call for the removal of subsidies. In the last three decades, it has become a vicious cycle - IMF recommendation on subsidy removal, followed by fuel queues, adjustment and in some cases the IMF is ignored and then intended and unintended consequences that follow."

Nevertheless, while it reiterated that subsidy was not disdained in itself, it noted that its abuse and inefficient administration of the incentive, "has made it a fraud that must be checked."

The Petroleum Products Pricing Regulatory Agency (PPPRA) had disclosed that Nigeria's daily consumption increased by two million litres to 56 million litres in 2019.

This was a 22 per cent surge over 2017 daily consumption of 46 million litres.

This increase, according to the report, was largely not in line with "our consumption pattern during the time."

"There has been a drastic decline in the importation of new cars over the period due to high import duties and levies. "Similarly, the increased traction of diesel engine vehicles and other modes of transportation such as air, water and rail, also do not support the supposed rapid growth in daily fuel consumption.

"Another bane of fuel subsidy is the arbitrage and smuggling opportunities across national borders. This means the Nigerian government is indirectly subsidising the petrol consumption of some neighbouring countries and it could justify the increase in consumption over the last three years," it added.

Furthermore, the report noted that the impending expenditure cut from the removal of fuel subsidies would free up resources to embark on other social safety nets. But, it pointed out that the fact that there are no guarantees that these savings would be used to improve the quality of life of the economically vulnerable affects the case for subsidy removal.

"Reduction of other subsidies will aid fiscal consolidation. Fuel subsidy is not the only item that needs to be priced efficiently.

"The government also needs to allow for efficient resource allocation in the power sector and foreign exchange market. "Resource allocation through the interplay of market forces (demand and supply) limits market distortions. The adoption of cost reflective electricity tariffs will help address the power sector's liquidity issues, improve the capacity of players across the power value chain and eventually output.

"Similarly, the gradual convergence of exchange rates will also ease pressure on external reserves, improve transparency and bolster confidence in the forex market.

"The reality is that petrol subsidies are being abused and ripping off the people who are the victims of inefficiency and fraud.

"Therefore, it is necessary to change the template and tie it to parameters - mainly the price of crude oil, the exchange rate and other costs metrics," it added

Call for Dialogue

To the Manufacturers Association of Nigeria (MAN), there is need for a dialogue between the federal government and other relevant stakeholders on the matter. MAN stressed that if no efforts were made to carry Nigerians along on such a national issue, any other moves by the government would end up as a recipe for national disaster in the near future.

The Director-General of MAN, Mr. Segun Ajayi-Kadir said: "Now the consideration of fuel subsidy, even though an economic issue and requires deep circumspection and far sightedness, has been infested with social and political considerations.

"Whether you retain or remove the subsidy, there are economic, social and political consequences. So government needs to engage in frank and strategic conversation with the relevant stakeholders in the value chain and be ready to inform the people and carry them along on the choices we have before us as a nation.

"We must be interested in the future, the young and future generation. No nation can afford to live for the now, because the future is actually rushing at us."

He added: "There has to be a plan, with timelines and milestones that must not be missed on the road to removal of fuel subsidy because it is simply unsustainable in the medium to long term."

On his part, the Director-General of the Nigerian Employers Consultative Association (NECA), Mr. Timothy Olawale said, "it will continue to be a recurring problem of wastage and systemic opportunistic stealing as long as at lasts."

The Lagos Chamber of Commerce and Industry (LCCI) described fuel subsidy as the biggest fiscal burden that currently hamstring the growth of the Nigerian economy.

The Director-General, LCCI, Mr. Muda Yusuf said: "Perhaps the biggest fiscal burden on the economy today is the petroleum subsidy regime. It is a big hole in the finances of government.

"It puts tremendous pressure on the foreign reserves and the foreign exchange market, just as it exerts immense stress on the nation's treasury.

"It remains a cause for concern that the subsidy regime had subsisted, especially at a time when the economy is facing unprecedented fiscal challenges; at a time when productivity in the economy is constrained by acute infrastructure deficit; at a time when public institutions are finding it hard to fund their basic obligations. There cannot be a better example of resource misapplication."

Additionally, the Nigerian Association of Energy Economists (NAEE) expressed support for the country to end the practice of petrol subsidy.

The association argued that fuel subsidy only benefits the elites in the country.

NAEE's outgoing President, Prof. Wumi Iledare, explained that Nigeria cannot continue with the practice of subsiding petrol.

Iledare maintained that the practice was wasteful and often done to the detriment of other key sectors of the country such as infrastructure, health and education.

According to him: "The benefits of petroleum subsidy is far less than the cost of petroleum subsidy. Anytime a government has a policy, there is need for it to be reviewed to see whether the benefits that come from the policy is more than the cost, and all you need to do is look around: the roads are bad, schools are bad, hospitals and infrastructure are bad or not there.

"I have not added it together but do a check, when you look at the budget for health, education and defence (they) are not up to the petroleum subsidy in 2018. Is it not time for the government to look at it?"

He said he understood the government may be scared of a public uproar if it decides to end petrol subsidy, but said there was the need to take a bold step.

He stressed that most recipients of the scheme were elites that could afford petrol at market-based prices.

"I understand the social unrest is scary but it will be for a while especially if there is enough public education on the subsidy. We are losing the capacity that we have because we are actually giving the elites who are capable of paying for their petrol to drive their car, at a giveaway price," added Iledare.

The foregoing shows removing fuel subsidy will be a tough decision for government to make. But clearly, the Nigeria which is weighed down by rising debt service cost and low revenue cannot continue to subsidise the consumption of imported petroleum products and rent-seekers. Indeed, this policy which is not sustainable has dire consequences on the economy in the long-run and must be phased out. The rising spending on fuel subsidy also means that any shock to government revenue today will have severe impact on the economy.

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