Fuel Subsidy: Lifting Nigeria’s 50-year Economic Burden
It has taken about five decades to finally take the hard decision to remove petrol subsidy, which had constituted a heavy encumbrance on Nigeria’s economic growth. Although it has received mixed reactions from the public, Emmanuel Addeh writes that it could well be one of the most significantly impactful moves made by the new government.
Since the return of democracy, one of the most discussed matters in the public sphere has been whether or not to do away with Nigeria’s highly controversial petrol subsidy regime. Regarded as arguably one of the most entrenched absurdities in the country, while most Nigerians agree that withdrawing subsidies on the product may be expeditious, the mode of removal, timing, level of consultation, among others have been issues for public debate. Although, the discussions surrounding the withdrawal of subsidies are not new, however it has recently assumed a life of its own, especially in the Nigerian media, following recent government decision to take the bull by the horns.
A BACKGROUND
Subsidy simply refers to the practice of government paying a portion of the price that should be paid by customers in order to alleviate the burden on consumers, meaning that the government sets the price of petrol at a lower level than it should have been bought in the open market. Subsidies were initially implemented in Nigeria in the 1970s in reaction to the 1973 global oil price shock. The shock scenario caused a global spike in oil prices, requiring the government to limit local pricing for energy items. Rather than seize the gauntlet and go the whole hog, previous governments in the past, have managed to increase fuel prices in installments for various reasons, although it had received some backlash. Over the years, especially in the 90s under the Ibrahim Babangida regime, the then Head of State, he raised prices from 15.3 kobo to 70 kobo in several tranches throughout his tenure. The interim government of Ernest Shonekan on its own, hiked it from 70k to N5. But the regime of Sani Abacha reduced the price to N3.25 initially, but eventually raised it to N15 and then Abdulsalami Abubakar hiked it to N20. These increments have largely come with protests.
Under Olusegun Obasanjo, prices rose from N20 to N70 during his administration, but was reduced by N5 by Umar Yar’Adua to N65. In the same vein, under Goodluck Jonathan, the government increased the fuel pump price to N97 and eventually to N87 before the expiration of his government. However, with the Muhammadu Buhari’s government raising it from N87 to anything from N185 upwards nationwide, depending on location, the new Bola Tinubu’s administration has now fully removed the problematic subsidy which has seen rates go to anything from N488 to as high as N700 in some locations in the first instance. However, government has insisted that prices will eventually decline.
IMPACT
While subsidy payment may have a little positive effect on Nigerians, since they were able to buy at lower prices at the pumps, many Nigerians believe that the negative impact on the overall economy far outweighs the positive. Subsidy has since jumped from millions to billions and has risen unsustainably to trillions, with a heavy drawback on the public purse. The Nigeria Extractive Industries Transparency Initiative (NEITI) for instance believes that between 2005 to 2021, the country spent a whopping $74.38 billion, which translates to N13.697 trillion. According to the NEITI report, a breakdown of these figures showed that in 2005, the government paid $2.6 billion (N351 billion) as subsidy. In 2006 & 2007, it paid $1.99 billion and $2.176 billion (N257 billion and N272 billion) respectively. The report further pointed out that subsidy payments more than doubled in 2008 and 2010 and witnessed the highest increase ever in 2011 to $13.52 billion (N2.11 trillion). A sharp decline was witnessed in the years 2012, 2013, 2014 and 2015 when it dropped to $3.336 billion (N654 billion) in 2012. The decline in subsidy expenditure continued in 2016 and 2017 to as low as $473 million (N154 billion) in 2017. The reduction was short-lived as the payments skyrocketed to over $3.88 billion (N1.190 trillion) in 2018 and 2021 to $3.575 billion (N1.43 trillion). By these figures, NEITI stated that Nigeria expended an average of N805.7 billion annually, N67.1 billion monthly or N2.2 billion daily. The NEITI data, in addition, showed that the amount expended on subsidies from 2005 to 2021 was equivalent to the entire budget for health, education, agriculture and defence in the last five years.
The sum, it said, also equals the capital expenditure for 10 years between 2011-2020, thereby dwarfing allocations to all critical areas of the economy. A policy advisory by NEITI also conducted a survey of the pump price of petrol across the country outside the major cities of Lagos and Abuja during the era of petroleum subsidy.
“In the North-west, North-east and North-central states a litre of petrol averages N270.00, N265.80 and N 269.00 respectively. The southern states pay slightly lower with the South-south paying N232.50, South-east N235.20k while the South-west states pay an average of N250.00. Major marketers and prices at the state capitals stood largely between N169.90 to N190.00. NEITI’s study on the petroleum subsidy also established the prices of petroleum products across Nigeria’s borders and within the West and East African region.
“In Senegal, a litre of fuel sells for 635.91k, while in Guinea, Sierra-Leone, Togo, Cameroun and the Republic of Benin it costs N609.30k, N506.96K, N 497.78K, N449.24 and N462.23k respectively. It is on record that the supply to some of these Nigerian neighbours is largely the smuggled subsidised petroleum products from Nigeria,” the NEITI report showed.
A GROUNDSWELL OF SUPPORT
After foot-dragging for years, it would appear that many Nigerians now understand why the petroleum downstream sector should be freed of the debilitating subsidy regime. However, the new debate, it seems, is how government channels the savings from the subsidy and how it is effectively administered. Aside Labour, the usual suspects have now come around to supporting fuel subsidy removal.
From the Nigerian National Petroleum Company Limited (NNPC), which wasn’t so bullish on subsidy withdrawal in the past to oil marketers and even professionals, there seems to be a consensus that government should withdraw its funding for petrol consumers. Even the once cohesive organised labour appears to be divided on the matter.
Recall that the latest round of debates followed the announcement by Tinubu during his inaugural address on May 29 that fuel subsidy was ‘gone’. Tinubu promised to re-channel the savings to education, health and other sectors. But according to the NNPC, the company had been funding subsidies to the tune of N400 billion monthly. Last Tuesday, the Group Chief Executive Officer of the NNPC, Kyari disclosed that the federal government was still owing the firm the sum of N2.8 trillion spent on petrol subsidy.
The GCEO lamented that since the provision of the N6 trillion in 2022, and N3.7 trillion in 2023, the national oil firm had not received any payment whatsoever from the federation, disclosing that the NNPC made the petrol subsidy payments from its cash flow.
“That means the federal government is unable to pay and we have continued to support this subsidy from the cash flow of the NNPC. That is, when we net off our fiscal obligations of taxes and royalties, there is still a balance that we are funding from our cash flow. And that has become very difficult and it is affecting our other operations,” he said.
In another forum, Kyari disclosed that with the subsidy removal policy now being fully implemented, Nigeria may witness a 30 per cent crash in daily petroleum consumption figure soon.
But while not opposed to subsidy removal, the Nigerian Employers’ Consultative Association (NECA) has called on the federal government to approach the removal of petrol subsidy strategically to avoid the escalation of inflation and further worsen the already bad socio-economic indicators like employment, poverty per capital income, among others.
“While it is desirable to remove the fuel subsidy, which in real terms is subsidising inefficiency and corruption, it is important that the removal is systematically and strategically done in order not to further impoverish and worsen the already bad socio-economic indicators such as employment, poverty per capital income and many more,” the Director General of NECA, Mr. Adewale-Smatt Oyerinde, said.
On its part, the Major Oil Marketers Association of Nigeria (MOMAN), has advised Nigerians to adjust themselves to the new reality for the good of the country’s economy.
The Executive Secretary of MOMAN, Mr. Clement Isong, who spoke with THISDAY, explained that with the new petrol marketing regime in the country, MOMAN members would be selling their products based on their cost of purchasing products.
He urged Nigerians to embrace the new petrol marketing regime and reduce their fuel consumption, saying the government should put in place appropriate palliatives to cushion the effect on the most vulnerable citizens.
The executive secretary also called on Nigerians to be empathetic at this time and try to help one another, pointing out that the situation might not be easy but was necessary for the growth of the economy of the country.
He argued that other countries around Nigeria do not have petrol subsidy despite the fact that they have crude oil like Nigeria, adding that those countries were not being ‘pampered’ with subsidy.
Isong further said: “Now that this is the situation that government cannot afford subsidy anymore, we will pay the same price just as our neighbours who have crude oil are paying the same price,” he added.
NMDPRA EXPLAINS
On its part, the downstream sector regulator, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has said it will no longer fix prices or release templates for petrol prices.
The Authority Chief Executive (ACE), Farouk Ahmed, explained that under the liberalised market, market forces are allowed to dictate prices, but said there will be strict compliance monitoring.
“We put the regulation in place, we make sure quality control is complied with, we make sure the product is there and we give licence to a prospective importer. The market is now open for everybody that wants to import as far as they meet all the requirements.
“So, it is not about the NNPC alone. For everybody in the sector, we make sure we guide their operations whether at the depot or wherever the product is, but we will not put a cap to say this is what the price must be.
“As far as we are concerned in the NMDPRA, this is not like before when the PPPRA fixes the price. In a deregulated market, it is the market force that dictates the price.”
The NMDPRA chief also revealed that the federal government has officially scrapped petroleum equalisation as well as the national transport allowance.
He also stated that the NMDPRA and the Federal Competition and Consumer Protection Commission (FCCPC) will mount aggressive monitoring of activities in the downstream sector to prevent profiteering by petroleum marketers.
Ahmed further disclosed that marketers are now free to source their foreign exchange anywhere around the world to import petroleum products and then recover their costs without impediments.
For Price Waterhouse Coopers (PwC), it argued that fuel subsidy in Nigeria had been fraught with issues of corruption and inefficiency while palliatives had been suggested by some as a possible way to alleviate the suffering of those that will be most affected by subsidy removal.
But it said that while palliatives may help to mitigate the immediate impact of rising prices such as cash transfers, provision of buses to the Labour Union or other forms of assistance, the effectiveness of palliatives depends on several factors.
Writing on the unsustainable financial cost of subsidy, it said that according to the World Bank, Nigeria’s total revenue in 2000 was $10.8 billion, explaining that by 2010, this amount increased to $67.9 billion, yet the Nigerian government had spent over $30 billion on fuel subsidies over the past 18 years.
In addition, PwC noted that this has had a significant impact on funds available for critical infrastructure and other essential sectors such as education, health, and defence.
It maintained that fuel subsidy payments have also distorted the economy, stressing that according to a report, households in the bottom 40 per cent of the income distribution account for less than 3 per cent of all fuel purchases.
Furthermore, it is pointed out that that three-quarters of all fuel sold in Nigeria is consumed by private firms, public transportation services, government agencies, and other businesses.
Most vehicles used for carrying large numbers of people (such as molue) and goods, it said, are diesel-powered, a product that is already deregulated.
Also, it said that household kerosene which is mostly used by the poor is no longer subsidised, meaning that the poor are already to a large extent paying market prices for their fuel.
“This effectively means that the government is subsidising mostly those who can afford fuel (PMS) at market rates and not the poorest of the poor who need subsidy.
“This is one of the major problems with the way fuel subsidy is being implemented in Nigeria. For the benefit of subsidy to reach its intended recipients, the current structure will need to be reviewed and creatively restructured,” it argued.
