23 Nov 2015

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There is urgent need to deregulate the downstream petroleum sector

As usual, the federal government’s delay in paying N423.363 billion to oil marketers as outstanding fuel subsidy has in the last few days instigated the habitual scarcity of petrol in service stations across the country. Consequently, in many states, a litre of the product now sells for as much as N500. The destructive economic effect can be imagined: business activities in many states have been crippled in the last few days.

Apparently worried by the development, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, recently said Nigeria would have to find a long-term solution to the problem, adding that the country could not continue on the same path. Kachikwu who also doubles as the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), stated that there are perilous systemic issues which pose challenges to unbroken supply and distribution of petrol in the country and which must be dealt with.

We completely share Kachiwu’s view. Even some hard critics of deregulation of the nation’s downstream sector, who once stated that the policy was to the ‘’fulfilment of the Western neoliberal ideals’’, are now agreeing that the country's feeble economy could no longer sustain the huge payment of subsidy on one single item that is hardly ever available to the average consumer at the subsidised price.

However, there is a challenge. President Muhammadu Buhari seems to be indisposed to removal of fuel subsidy either because he thinks the real problem is just corruption or because he is worried about the disproportionate impact of its removal on the poor and the possible political backlash. While these are legitimate concerns, they are not cogent enough for the continuation of a badly targeted and graft-ridden subsidy regime.

What the president must realise is that as long as the subsidy remains, the incentive for private and public actors to game the system will continue to be there. Besides, the poor hardly benefits from the present subsidy which is largely captured by the rich. Also, as long as there is default in subsidy payment, which is not inconceivable given the current state of our finances, supply will be constrained, which necessarily pushes pump price many times above the market price, with serious impact on cost and volume of production in the economy and untold hardship on the populace, especially the poor.

Deregulation of prices of petroleum products is clearly the way to go. This policy has been incorporated by many countries to reduce public sector domination while making sure sufficient supply of products is achieved. Nigeria can do same by following the similar narrow path.

The argument for sustaining subsidy because of the impact of subsidy removal on the poor is not borne out by contemporary realities. The truth is that it is largely in Abuja and Lagos that petrol is being sold for N87 per litre today. In other words, the subsidy regime is only beneficial to a few people, because majority of the poor live in remote areas where the product is sold at prices much higher than the official price of N87 per litre. The challenge then is how to cushion the effect of subsidy removal on the poor and how to build public support for price deregulation. Rather than clinging to a misguided policy, political will and robust communication strategies are sorely needed.

We believe this government has the goodwill and the credibility to take difficult decision and engender the support of critical stakeholders for this important reform. In the interim, the government can invest in new refineries to boost supply. But ultimately, those refineries should be sold, prices deregulated, subsidy removed, and safety nets emplaced to cushion impact of subsidy removal on the poor. ‎This is the sustainable solution not only to incessant shortages and blackmail from importers but also to a major avenue for leakages, graft and waste.

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