Fuel Subsidy: Where
we found ourselves
By Dr Ahmed Adamu
In 2016, Nigerians experienced one of the most difficult
economic situations in more than a decade following the removal of subsidy by
President Buhari. Surprisingly, there was no uprising or protests, unlike
during the President Buhari’s predecessor, who was criticized and protested
against for attempting to remove petroleum subsidy. Immediately after Buhari’s
subsidy removal, inflation kept rising from 9% till it reached 19% within a
year. Unemployment also increased from 10% to 23% in two years, and soon after
that Nigeria was ranked world poverty headquarters, and recently the 6th
most miserable country to live in. The subsidy removal has seriously created
untold hardships, and limited economic growth, and it was not surprising many
businesses became unviable, leading to economic recession in the country. These
hardships still linger, and no equivalent replacement was provided to offset
the sufferings yet.
Now, from the news coming out this week, the Nigerian
Finance Minister proclaimed that, the Buhari administration will remove
petroleum subsidy gradually. This revealed to Nigerians that, the initial
removal was not a total removal, and that they should prepare for more hardships
once the subsidy is further removed. This time around, the hardship is likely
to be the worst. Following the previous subsidy removal, we thought there would
not be further hardships, but more hardships awaits us if subsidy is to be
further removed.
The initial subsidy removal was not done properly, as long
as fuel price is controlled, there will never be deregulation. So, prices have
to be let free to float according market forces for us to have true fuel
subsidy removal. And if that is to happen, then at the moment the market pump
price in Nigerian is likely to be almost N200 per liter. Are we ready for that?
Since the initial subsidy removal, Nigerian government has
not secured legal backing to continue subsidizing petroleum consumption, but
reports showed that Nigerian Government spends N1.5 billion per day to subsidize
petroleum consumption, this figure is very high especially when computing for a
year or two. And now crude oil price is at its highest since 2013, which makes
the subsidy payment higher. The higher the crude oil price, the higher the
subsidy payment.
The recent discussion on subsidy removal is in reaction to
the IMF call for countries to totally remove petroleum subsidies. Though IMF
may not consider peculiar Nigerian context, they applied general approach. The
IMF Motive is to make fossil fuels prices volatile and high, and compel rapid
growth of renewables and alternative energies to the advantage of western
petroleum resource poor countries.
Removing petroleum subsidy is good, but Nigeria is presently
not prepared and not qualified for that. The failure of government to provide
basic infrastructures and reduce inequalities make it dangerous for Nigerian
government to further remove subsidy.
Unless there is a sufficient Public Transport System across
the country, sufficient Electricity supply, single digit inflation and adequate
Local Refineries, it will not be safe for Nigeria to further remove subsidy. There has to be adequate cushions to protect
the poor man from the resultant difficulties.
However, the government is now trapped, because subsidy is
no longer sustainable (N1billion per day at least), and there is no money to
protect the poor man from the effects of its removal. The Excess Crude Account
(ECA) would have save he country by now, but it has been eroded, as at last
December, the ECA was eroded to less than a billion dollar. The purpose of the
ECA is for rainy days like these ones, this is the time we should have used the
savings to build alternative energies and the conditional infrastructures, and
implement demand conservations measures. But, it is not there, so, Nigeria is
trapped. And, I would like to caution against further loans, the more we borrow
the more we burry ourselves. The government might also resort to taxing people,
this will not augur well too. At this stage, we should go for more injections,
not withdrawal from the circular flow of income.
Oil’s reign has started to decline, because it is a largely
a monopoly fuel in the transport sector, and now due to structural changes and
innovations, the demand for oil even in the transport sector will be more
elastic in a near future, which might bring the crude oil price down. And if
that happened, it means low revenue for Nigerian government, and which means it
will not be able to fund subsidy. So, even if subsidy is not removed today,
time will come when it will be impossible for government to pay it.
Though, it is important to note that if the above forecast
of low crude oil price comes to be, the landing cost will also be reduced,
which might make the pump price low. However, if prices are low and with
emergence of alternative energies, there will be less incentive for oil supply,
going by the law of supply and going by the fact that even average marginal
cost producers will not profit at certain lower oil prices. This will then
reduce the supply of oil, and later push the price up.
Whatever the situation, we should not be investing on
consumption, we should be subsidizing economic activities that add value to the
economy. The money spent in subsidizing petroleum consumption in the last 6
years is sufficient to build refinery like that of Dangote’s capacity. If
individual person can do it, then government can do it.
No foreign oil company will invest in refinery in Nigeria
willingly, their interests are not Nigerians. That’s why they rather invest in
LNG than in domestic gas pipeline or processing plants. So, we have to do it
ourselves, and the best option is to construct new refineries by ourselves.
Before total removal of subsidy, there should be a transparent
auditing and tracking of fuel consumption in Nigeria. We should not rely on
what officials tell us, they might collude to extort Nigerians. What if our
consumption is just 30 million liters a day? and now we are told we consume 66
million liters a day. This will mean the extra 36 million liters subsidy will
go to the pocket of some officials, which is N1 billion per day going to the
private pockets in the name of subsidy. So, there is need for forensic auditing
and tracking of fuel consumption to ascertain the true consumption, so as to
reduce the subsidy payment before we become qualified for its final removal.
In terms of pricing template, PPPRA has failed to
demonstrate the pricing template on their website, which gives room for
manipulation. Nigerians deserve to know the responsiveness of petroleum landing
cost to crude oil price, as well as the complete pricing template for
transparency. Without this, there will be tendency for huge corruption and
collusion.
Because 92% of our fuel consumption is imported, and refined
petroleum products are the largest items in our import basket, the value of
Naira reduces. In addition, crude oil export is not creating demand for Naira.
So, we always lose currency value for petroleum importation. Therefore, we are
trapped, naira kept depreciating and import bills becoming more expensive.
NNPC lacks the capacity to save the country, because, as at
2018, the Nigerian Petroleum Import Bill was N2.28 trillion (half of capital
investment for a refinery like that of Dangote’s), and NNPC’s expected revenue
contribution in the same year was N2.44 billion. So, no profit, what we
anticipated to generate was equivalent to what we paid for importation. So, we
are just consumers.
There are too much burdens on NNPC, being largely the sole
importer of petroleum, and struggling to maintain N145 per liter price, NNPC
will have no option but to allow marketers to sell for profit, which at the
moment may shoot price up to N200 per litter, courtesy of higher crude oil
price.
It is all evident
clear that, subsidy that we thought was totally removed, it is still being paid
in an unsustainable way. We kept leaning on a weak and collapsing pillar and we
don’t the money to construct new pillar at a dying hour.
We are lucky, Dangote might rescue us, because he can by
2020 refine up to 60 million liters per day, and until then no subsidy should
be removed. We might also have to be careful about Dangote’s monopoly tendency,
and based on his business model, he will work with expatriates and might adopt
an international refinery pricing model, which the effect of exchange rate
might affect its price.
Therefore, if this crisis has taught us anything is that, we
have to explore unconventional sources of revenue to build infrastructure,
refineries, and alternative energies. One way of doing that is by privatizing
the NNPC, so that we can generate revenue and attract investment and
competitiveness in the petroleum sector, and use the proceeds to develop
infrastructure and new economies. At the moment, the country needs more
injections into the flow of income, and this can be stimulated through
government spending and benefits, investments and exports, and there should be
less imports and more tax cuts. All these cannot be possible without
unconventional sources of revenue. So, the final verdict is fuel subsidy is not
sustainable, but don’t remove it further until all the set conditions are
fulfilled.
Dr. Ahmed Adamu
Petroleum Economist and Lecturer at
Economics Department of Nile University, Abuja.
