Back to the Petrol Subsidy Question

Postscript by Waziri Adio

The rare consensus on petrol subsidy removal among the three leading presidential candidates in the 2023 election cycle and the absence of a major pushback when President Bola Tinubu terminated the subsidy regime in his inaugural speech could have led some to think that removing subsidy on petrol is a settled issue in Nigeria. It is not.

To start with, many Nigerians still believe that petrol subsidy was about the only tangible thing that they enjoyed from their country and that it should not have been taken away from them. Two, the pressure that petrol subsidy exerted on the country’s finances was not visible to or the business of all, and when acknowledged, that pressure was adjudged tolerable but for corruption and mismanagement. Equally obscured from public view, even when all the signs were there, was how close Nigeria was to an economic collapse in 2023 which made petrol subsidy removal one of the inevitable measures needed to steer the country away from the edge of the precipice. However, as an averted collapse does not have the same resonance as an actual crash, the danger that Nigeria faced in 2023 and its ramifications remain at best conceptual or appear as simply scaremongering to many.  

Most importantly, there was the legitimate worry about the immediate and potentially lingering impact of petrol subsidy removal on the costs of energy, transportation and food, which would disproportionately affect the poor who happen to be a significant segment of our population. That worry became poignantly prophetic post-June 2023. The cost-of-living crisis that swiftly followed the removal of petrol subsidy and the devaluation of the national currency put the contention about subsidy removal actively in play.

The Tinubu administration has also contributed to keeping the subsidy issue active. There is no coordinated and faithfully implemented plan for cushioning the well-anticipated harsh effects of the reform, especially on the poor. The cash transfer of a meager N75,000 in total to 15 million households has been poorly and shamefully implemented. The commitment to lowering food prices has been half-hearted. A presidential directive on temporary removal of duties on some imported food items was subjected to debate even in government after the presidential order and was not implemented immediately. Official response to the need to use some of the of the windfall from the war in Iran and other fiscal measures to mitigate the pass through of the global energy shock was appallingly cold when compared to what was done by other countries like Indonesia, Brazil, Malaysia and India that did not experience the very recent domestic shocks we were still recovering from.  

All these factors combine to make the contention over petrol subsidy a live debate and a potential electoral issue.  

This is exactly what Alhaji Atiku Abubakar, the presidential candidate of the African Democratic Congress (ADC), has tapped into. “If elected, I will bring back the oil subsidy,” Atiku declared in Hausa in a live session on Facebook on Wednesday. This is a major shift, as Atiku had always canvassed for and promised to implement the removal of petrol subsidy. Some members of his team have been hard at work, filling in the blanks and providing clarifications. He is not reviving the old subsidy regime but proposing a sanitised one, they have said. They have deployed a lot of fancy words, but the summary of it all is that Atiku intends to give discounted crude oil to Nigerian refineries so that petrol can be sold to consumers in Nigeria at a lower price than it presently is. He did not say he is returning petrol to N185 per litre or to any other price. He also plans to pre-screen and monitor the refineries, to pre-determine how much the country can afford to spend on subsidy, and to remove the subsidy totally at some point (though he did not say exactly when).

“The principle is simple: the subsidy will follow the barrel,” Atiku is reported to have stated in his economic recovery plan that hopefully would be shared with the public soon. “We will move subsidy from importation to production, from middlemen to Nigerian refineries, and from unverifiable claims to verifiable barrels… Crude allocation, refinery intake, production yields, inventories and domestic deliveries would be reconciled, ensuring that every subsidised barrel can be followed from allocation through refining to the Nigerian consumer…Our objective is not permanent subsidy. It is to use temporary and disciplined support to build a refining industry strong enough eventually not to need subsidy.”

Atiku has been criticised by the presidency and others for his flip-flop on petrol subsidy. I don’t have any issue with people changing their positions. Everyone has a fundamental right to change their mind, including presidential candidates. What name people call such candidates is also not my concern. My issue is that I don’t think the Atiku plan is the genius idea that its promoters think it is. It may have electoral value (especially in certain constituencies) but when placed against different plans to adjust or remove petrol subsidies in more than four decades in the country, the Atiku plan is not novel, not practical, and not helpful for the economy. I think it will set the country back and, ultimately, put at greater risk the poor that he appears to be appealing to.  

The plan is based on many ill-digested ideas and shaky assumptions that reveal limited knowledge of the current operations of the oil sector. One, the plan assumes that the Federation has enough of unpledged barrels of crude oil to meet domestic petrol needs. With the Petroleum Industry Act 2021, the idea of Federation crude as we used to know it has been altered. Joint venture assets have been transferred to the national oil company as its working capital in exchange for dividends to the Federation. Yes, the Federation (as the sole shareholder of NNPCL through MOPI and MOFI) can direct the company to use its unpledged barrels for a strategic purpose. The owner here is the Federation and not just the Federal Government. But it would be good to know how many unpledged barrels NNPCL has and be mindful of how this plan may impact the company’s ability to meet its other obligations to the Federation and its capacity to invest for its operations.

Even with the PIA, the Federation still gets crude oil from profit oil, tax oil and royalty oil from Production Sharing Contracts (PSCs) because these statutory payments are supposed to be made in-kind (paid with oil). Total Federation take from these sources keeps swinging, and may not be significant enough, as some of it have been pledged for commodity-backed loans. The in-kind payments are also expected to be monetised based on a recent executive order. Assuming, for the sake of illustration, that the Federation and its company do not have enough crude for domestic consumption, what then happens to Atiku’s plan to swap discounted crude for subsidised petrol?

Does it mean the government (meaning, the Federation and not just FG) would buy crude at market price and sell to the refineries at a lower price? Yes, there is a domestic crude supply obligation requirement for oil-producing companies under Section 109 of the PIA. But can the government force private oil companies to sell crude oil at a discounted price to refineries or government will buy the crude from them at premium and sell at discount to the refineries? Or that the refineries, which are private entities (and not government corporations or companies), would buy crude at market price and apply to be reimbursed by the government? And if so, are you sure this is the kind of business that refineries want to do?

Or does it mean that we will have a dual-pricing regime for petrol if refineries are combining discounted and premium barrels of crude oil to meet domestic petrol needs. By the way, we once had a two-tier price for petrol. This was in 1989 when petrol was sold to commercial vehicles at 42 Kobo and to private ones for 60 Kobo. The arrangement collapsed swiftly, and it does not take a genius to figure out why.

Relatedly, what Atiku is proposing is a form of swap of crude oil for petrol that would be sold at a discount. We have had different iterations of swaps, and none worked optimally or eliminated the fiscal pressures, even under the military. Atiku seems to think that policing the process would make the difference. He appears to assume that the state capacity for such policing exists and seems to think that even if such exists deploying it to police just one product is sensible. He also appears to be suggesting that what makes the difference in whether the subsidy is gamed or not is whether it is production or consumption that is being subsidised. Indeed!

The Atiku plan also assumes that private refineries have the incentive to embrace his proposal and in return will be comfortable to have intrusive government officials all over their operations just because they are going to get some of their crude oil at a preferential price and which may not positively impact their bottom-line. This is equally a big assumption to make. So, what happens if a major refiner declines to participate in the scheme because it does not align with its business strategy? You will close them down?

The plan promises to use “disciplined support to build a refining industry strong enough eventually not to need subsidy.” The logic here is mind-blowing: local refining capacity is weak and uncompetitive because crude oil is not available to local refiners at a discount, therefore providing discounted crude for some time to the refineries would strengthen them and eventually make subsidy unnecessary at some point. Elementary logic teaches that when the premise is flawed, the conclusion cannot be sound.

It is good to “accelerate” local refining capacity for many reasons, including creating jobs, boosting energy security, and saving and earning foreign exchange etc. But increased local refining will only have marginal impact on the price of petrol and other refined products, as the core determinant of the price of refined petroleum products remains the price of crude oil, over which Nigeria does not have any control. Atiku also promises to sunset the petrol subsidy he is planning to restore. Basically, he is saying he intends to reintroduce petrol subsidy, then remove it. This easily gives away the game, and puts the promise in the same league as the now fashionable pledges by some presidential candidates to spend only one term in office if elected. Once petrol subsidy is returned, you strengthen the social and political constituency for it, and it will be difficult to remove it again.

Restoring petrol subsidy will return the country to some of the fiscal pressures it has been wrestling with for four decades. The seductive line about transferring the subsidy from importation to production and from middlemen to refineries assumes that the fiscal pressure and distortions are recent. In 1986, General Ibrahim Babaginda effected a 97% increase in the price of petrol, citing fiscal pressures. In 1986, petrol was being refined in Nigeria by government-owned refineries. When you sell petrol at a price significantly lower than your neighbouring countries, you incentivise smuggling. Even the military, with near absolute control over security, could not stop smuggling. This means that the promise to cap what we spend on subsidy is just glib talk. We will soon return to subsidising the West African subregion, and the subsidy bill will keep expanding.

The removal of petrol subsidy, alongside other reforms, has expanded the fiscal space for the three tiers of government. Accruals to the Federation Account have ballooned in nominal terms in the last three years. For example, N5.15 trillion accrued as gross FAAC revenue for the month of July 2026 alone, which represents about 42% of the gross revenue of N12.36 trillion for the whole of 2022. Look at that again: the gross revenue for one month, admittedly in nominal terms, is more than 40% of the gross revenue for an entire year. The revenue boon means that all tiers of government can meet their expanding obligations, including the increase in their wage bills due to the more than doubling of the minimum wage after the removal of petrol subsidy.

The Atiku subsidy has to be paid for and returning petrol subsidy will necessarily reduce what is available at FAAC without reducing the obligations of the Federal Government, states and LGAs. Workers will not agree to a reduction in minimum wage just because you are restoring petrol subsidy. You are likely to go back to the time when governments across the board were struggling to pay salaries and to meet their other obligations. You are likely to return to using more than 90% of FG’s revenue to service debt and relying on ways and means (which got to almost N30 trillion at some point) to keep up the illusion. You may even get back to rationing dollars and disguising your external reserves to sustain the lie. And you may return to that era in the early 1980s when citizens had to queue up to buy essential commodities like soap and milk because we were short of dollars to import final and intermediate goods.

Nigeria’s fiscal health is much better than it was in 2022 (when, by the way, we spent $10 billion on just petrol subsidy alone). The recovery is still fragile, and should not be subjected to the kind of experimentation that Atiku is promising. Besides, the proposed reversal will likely send a wrong signal to investors and may set off a chain of adverse reactions. This does not mean that subsidy by itself is bad. However, Nigeria’s experience of more than five decades shows that subsidising petrol is regressive, wasteful and an inefficient way for using scarce public resources. This also does not mean that the Tinubu administration could not have handled things better or that there are no alternatives to its approach.

There are many things to do to cushion the effects of high energy prices on households and businesses and to provide meaningful support to the poor who disproportionately shoulder the burden of petrol subsidy removal. Taking social protection more seriously, subsidising mass transit and removing duties on imported food items come readily to mind. There is also the need to make the gains of subsidy removal more visible and better felt by the populace.

This could be through earmarked investments in human and physical infrastructure delivered through either a centralised structure like PTF or a decentralised arrangement where each tier of government will allocate a portion of its extra allocation from the Federation Account to areas that will provide clear and meaningful reliefs to citizens. Increase in FAAC revenues and improvement in macro-economic indicators cannot continue to be the only answer to concerns about the undeniable pains of reforms. But the answer also cannot be to just restore petrol subsidy as Atiku is proposing.