Before the petrol subsidy is removed

LONG canvassed by some and vehemently opposed by others, the Federal Government’s resolution to finally end petrol subsidies by June 2022 excites relief and trepidation in equal measure. While most economists and global partners are relieved that the huge outlay on the subsidy and the accompanying monumental corruption and inefficiencies will stop choking the economy, sceptics fear yet another last-minute change, higher prices and inflation and supply shortfalls arising from it. To avoid creating a greater problem, the government must take strong, resolute measures to guarantee adequate domestic refining capacity, a competitive market, and a commitment to channel the savings to critical social sectors.

The Minister of Finance, Budget and National Planning, Zainab Ahmed, explained that the government would stop subsidising petrol from next July, as it looks to “complete deregulation” to save foreign exchange and “potentially earn more from the oil and gas industry.” There was an immediate endorsement from the World Bank Country Director, Shubham Chaudhuri, who at the same venue – a panel session during the 27th National Economic Summit in Abuja – deplored the N2.9 trillion the government is incurring this year.

Likening Nigeria to a malnourished person, he said the country urgently needed to channel the huge subsidy to primary health care, basic education, and rural roads while the states needed more revenue for basic services. Other experts maintained that the subsidy is unsustainable and had been legally barred by the new Petroleum Industry Act.

Labour unions have however always opposed subsidy removal because the resulting inflationary pressure will provoke higher costs, layoffs and further impoverish workers and the vulnerable.

Petrol subsidies have taken a heavy toll on public finances, fostered monumental corruption while failing to deliver appreciable benefits to the economy. Currently, it costs N8.3 billion per day given the prevailing crude oil price and the naira exchange rate. BudgIT, a social advocacy firm, calculated that over N10 trillion was spent on the subsidy between 2006 and 2018. Absurdly, $10.85 billion was transferred from the Excess Crude Account buffer between 2011 and 2014 for subsidy payment. The influential Financial Times of London puts the average annual subsidy expenditure at $3.9 billion, double the annual expenditure on health.

In many countries, say scholars, “fuel subsidies are regarded as part of an implicit social contract between the citizens and the state,” to improve social welfare and alleviate poverty. Indeed, the International Energy Agency said fuel consumption subsidies rose globally from $325 billion in 2015 to over $400 billion in 2018.

While studies have shown fuel subsidies everywhere to favour the richer segment of society, encouraged greater use of environment-degrading fossil fuel, bred inefficiencies and fuelled corruption, these negatives are multiplied in Nigeria. In 2011, officials, politicians, and marketers brazenly pocketed N1.7 trillion above the approved subsidy vote. Lamido Sanusi, a former Governor of the Central Bank of Nigeria, recently raised the fraud issue by querying how fuel imports averaging 30 million litres per day in 2016 shot up to 59 million litres per day in 2019 even when crude prices had spiked, and the economy shrank. The 55.79 million litres per day the Nigerian National Petroleum Corporation claimed to have been supplied in April do not correspond with the reality of a contracting economy. Over-invoicing, fictitious imports, and massive diversion across the porous borders by smugglers make nonsense of the subsidy. The doubts have not cleared despite the NNPC being the sole importer for four years now.

Today, with 90 per cent of all public revenues going into debt servicing, the federal and state governments borrowing to pay salaries and run the bureaucracy, subsidy needs a review.

A petrol attendant in a filling station.

However, this review must examine what informed the subsidy in the first place, its nature and the impact of removing it when local refining is absent and the country depends on imports for almost all its refined petroleum needs. Introduced when the economy was doing better, prices low and local refining significant, the payment has become complex. The subsidy is justified today primarily because Nigeria is not refining. The four state-owned refineries with a combined nameplate capacity to refine 445,000 barrels of crude per day are comatose. An ongoing rehabilitation claim by the NNPC is suspect; billions have been spent on such claims for over three decades with no tangible results. All hope of domestic self-sufficiency lies with the 650,000bpd Dangote Refinery in Lekki that has suffered innumerable cost overruns and take-off delays. Some modular refineries coming up are too few and too small to take up the slack.

Before removing the subsidy completely, therefore, there must be adequate refining in place to substantially meet domestic demand. Extraordinary incentives should be given on merit to refiners and selected importers to prepare their pipelines, depots, and tank farms. To instil competition and avoid replacing a state monopoly on refining and importation with a private one, licensed refiners must be incentivised to compete with the Dangote behemoth. Monopoly, especially in an essential commodity like petrol, is dangerous. It leads to price manipulation, inferior services and discourages innovation, says Investopedia.

The market can never be efficient when the government plays in the downstream. It is anomalous for the government to be both a player in the market and a regulator. Failure to privatise the refineries, depots, retail outlets and pipelines guarantees a lopsided market; in-bred inefficiencies, corruption and unfair competition are what drove private investors out of the refining and importing business. The President, Major General Muhammadu Buhari (retd.), is headed for another potential monumental blunder if he does not privatise the refineries before removing the subsidies.

Since prices rise across the board when energy prices rise, as they are bound to with subsidy removal, it is, therefore, better to phase the programme. First, eliminate the bridging or so-called “equalisation” by which government pays the transportation costs of lifting fuel from the coasts inland to achieve the same price nationwide. This is ridiculous; no one “equalises” the prices of fish, yams, or cattle nationwide. Deregulated, the power distribution companies now charge different rates depending on regional costs, demand, and consumption; petrol should not be different.

Later, when local domestic refining is sufficiently in place and the NNPC’s refineries are sold, subsidy on “landing” costs should then be eliminated.

Ultimately, two things are essential; the political will to remove the subsidy in a pre-election year, and achieving significant domestic refining. Finally, there should be a strong commitment that savings would be channelled into education, health, water, sanitation, SMEs, and poverty alleviation.

Source: The Punch

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