Fuel Subsidy: What Will Buhari Administration Do Differently?

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Emmanuel Addeh writes on the issues surrounding the recent removal of subsidy on petrol by the federal government, aggregating the views of the various opposing camps on the matter that has dominated national discourse for weeks

To be sure, the debate over the retention or removal of petroleum subsidy has raged for decades, with various thought leaders taking opposing sides of the very divisive subject.

In essence, while in some other parts of the world, a decision to review the payment of fuel subsidy may be a purely economic one, in Nigeria the highly charged issue goes beyond that, it is also a political phenomenon.

Opinions differ as to when subsidy, which is generally a sum of money or a form of buffer fund granted by the state to help an industry or business keep the price of a commodity or service low, crawled into the Nigerian economic lexicon, but what is not debatable is that it has dominated conversations in every government since the late 70s.

Although the debates were not as stringent and were far less exacting in the early days of the calls for fuel subsidy removal, because according to analysts, the country had lots of cash to play around with in the 70s and early 80s, recent developments, including dipping government revenues have brought to the fore the need to rethink the country’s spending.

Subsidy in Brief

Before the recent removal of subsidy from the pump price of petrol and government’s decision to fully deregulate, the Petroleum Products Pricing Regulatory Agency (PPPRA) kept a pricing template, which detailed the components used in deriving the daily/monthly guiding products prices.

It basically employed the import parity principle, which comprised elements like landing cost, margins for the marketers, dealers, and transporters and the jetty-depot plus through-put expenses It also included lightering expenses, Nigeria Port Authority’s (NPA) charges, cost of fund, storage margin, distribution margin, taxes, among others.

These components are then computed and submitted to the federal government through its agencies which thereafter reimburses the marketers whatever differentials exist between the inbuilt costs and the pump price.

For about four decades , the federal government has paid that differential on behalf of the Nigerian people. However, it now insists that apart from the fact that government subsidies are no longer fashionable, it doesn’t have the funds to shoulder the growing financial burden.

History of Resistance

In the country’s recent history, every government has had to deal with huge resistance that followed every price increase, although government insists liberalisation does not always connote price increase.

From the military era to the advent of civilian governance, the story of pushing back on any attempt to tamper with fuel price has been the same.

Suffice to say that when the government of President Goodluck Jonathan welcomed the country into 2012 by announcing the removal of petrol subsidy, the subsequent nationwide protests that followed were not only massive, but threatened the very foundation of that government.

At the time Jonathan took the decision, the pump price of fuel was N65 against a landing cost of N139. The government therefore contributed a N73 subsidy, for an annual total of N1.2 trillion (about $7.6 billion), or 2.6 per cent of the country’s GDP at the time.

A week after the announcement of the subsidy’s removal, industrial strikes and demonstrations spread nationwide, forcing the government to bring down the new petrol price from N141/litre to N97/litre.

Former President Olusegun Obasanjo’s government was even more chaotic as the administration grappled with growing cost of fuel subsidy. On several occasions, there were strikes throughout the entire country grounding economic activities in major cities.

For instance in 2003, the industrial action was to convince the government to reinstate the entire fuel subsidy and reduce oil price from N40/litre to N26/litre.In June of that year, Obasanjo decided that the federal government would reduce the subsidy, effectively resulting in more than a 50 per cent increase in fuel price from N26 /litre to N40/litre.

He argued that the money saved from reducing the subsidy would be put towards improving national health and education services.

The Nigerian Labour Congress (NLC), then led by erstwhile national chairman of the All Progressives Congress (APC), Mr. Adams Oshiomhole, declared a “total and indefinite” general strike.

Public transportation was grounded, service sector workers, store owners, bank employees, oil workers and union members, food sellers, and air traffic controllers stayed off work.

Airlines cancelled or delayed flights, while government offices were shut as Obasanjo continued to declare the strike illegal because it violated the court order that strikers must provide the government 14-day notice of strike action.

Four persons reportedly died on the first day of the protest, including a 37-year-old man, Patrick Danjaba, who was his way home in Karu, Abuja, when police shot and killed him.

During the rally, police arrested 88, including four journalists, in the Port Harcourt version of the protests. Two persons, Chisa Nwoko and Izuchukwu Nzenwefe, were reported to have been killed.

On July 1, the then Governor of Lagos state, Mr. Bola Tinubu, now a chieftain of the ruling APC , criticised the federal government’s decision to raise petrol prices and supported the strike as a justified action.

Tinubu spoke when 20 human rights organisations, under the United Action for Democracy (UAD), marched to his office to deliver a letter to be sent to Obasanjo over their dissatisfaction with the decision.

Nine grueling days later, the NLC announced that it would accept the government’s new proposal to set the price of fuel at N34/litre and called off the general strike, just three days before President George Bush was billed to visit the country on July 11 of that year.

How Long Can Buhari administration hold out?

“Giving subsidies is a two-edged sword. Once you give it, it’s very hard to take away subsidies. There’s a political cost to taking away subsidies” Najib Razak, former Prime Minister of Malaysia

In the coming days, the pressure on government to back down on the decision to remove subsidy will continue to mount.

Given the body language of the federal government and its existing commitment to international finance organisations like the World Bank, International Monetary Fund and other global development partners that have clearly and unmistakably maintained their position against freebies given by governments to their people, the Muhammadu Buhari is not likely to budge soon.

But as it is, international crude oil prices will continue to rise, all things being equal. But there lies the problem, which ordinarily should be a positive development, since the country’s foreign exchange earnings are expected to grow with higher prices. The snag, actually, is that if at the current price of about $45, Nigeria is buying petrol at N161, keeping other factors constant, at double that amount for the sale of crude oil in the international market, Nigerians, mostly impoverished, will be expected to shell out N322 per litre of fuel.

That is not an impossibility, considering that just a few years ago, Nigeria sold its crude for over $100 a barrel per day.

Against the pivotal essence of petroleum products in Nigerians’ daily life, the public rage over the government‘s decision will intensify. Constitutionally, the president is not allowed to seek a third term. So, he may not play to the gallery or back-track to win re-election.

That said, the administration still has roughly three years to soak the pressure that will continue to build as the effect of deregulation bites harder, at least in the short to medium term before the country becomes self-sufficient in refining. Will Buhari back down?

Lessons from Other Climes

In March of this year, the government of Angola, Africa’s second largest oil producer, behind Nigeria, said it was set to bring an end to subsidies on fuel prices, amounting to more than $3.5 every year.

The government noted that it had realised the importance of removing subsidies, due to a combination of factors, including the fact that Angolan state oil company, Sonangol, had requested a tax break, given the burden of absorbing the cost of the subsidy on its balance sheet.

In addition to the significant expenditure that would no longer be incurred because of this subsidy, the Angola government just like its Nigerian counterpart, contended that there were considerable quantities of fuels subsidised by Angolan taxpayers that are sold in neighbouring countries.

Oil makes up over 90 per cent of Angola’s exports just like Nigeria with oil sales making up 80 per cent of the government’s budget.

Again, like Nigeria, it currently imports 80 percent of its demand for refined petroleum products, including gasoline, diesel, aviation fuel and Jet B for gas turbines, oil fuel, asphalt and lubricants. Only 20 per cent of refined products is sourced locally.

For Algeria, another African country with large deposits of crude oil, the country said it will raise the price of petrol and diesel to reduce its consumption and imports as the economy comes under pressure due to a sharp fall in energy revenue, according to a revised 2020 budget plan a few months ago.

Under the new measures outlined by the cabinet, the budget will be based on an oil price of $30 a barrel, down from $50 in the previously approved plan.

Algeria is trying to diversify its economy away from oil and gas and has changed its previous plans for this year by mainly reducing public spending by 50 per cent and delaying scheduled investments in sectors including oil and gas. Overall subsidy spending, which includes also basic foodstuffs, medicine and housing, among others, accounted for 8.4 per cent of the gross domestic product.

Algeria currently produces about 30 million tonnes of refined products a year and imports large quantities to meet growing domestic demand, but aims to stop imports this year and begin exporting in 2021 after completion of the upgrades at its refineries.

As for Egypt, another major oil producer in Africa, its spending on fuel subsidies dropped by about 65 per cent to 21 billion Egyptian pounds ($1.34 billion) in July-March, 2020.

Egypt spent 60.1 billion Egyptian pounds on fuel subsidies in the same period a year earlier. Over the past three years, Egypt has phased out subsidies on most fuel products as part of an IMF-backed economic reform programme.

Mid last year, the country announced applying the fifth and final tranche of fuel subsidies. From then, it noted that the cost of fuel production on the prices was variable and not fixed as it relates to the global market.

Since 2014, the state also committed to lifting energy subsidies gradually over five years, before it clinched a $12 billion loan from the IMF.

FG, Officials Defend Subsidy Removal

The NNPC has come out to defend the federal government’s decision to remove the subsidy on petrol, insisting that allowing market forces determine prices was in the overall interest of the poor.

Group Managing Director of the corporation, Mallam Mele Kyari, posited that the practice was corruption-ridden and only served the interest of the elite.

Kyari said the move to deregulate the market took a long while, because it was difficult convincing President Muhammadu Buhari to sign off on the move because he (Buhari) was worried that the poor would be negatively affected by higher prices.

He said: “Petroleum subsidy has been a big issue for over 20 years. Every corruption you are aware of in the downstream sector of the industry is in one way or the other connected to fuel subsidy.

“Several licences were given to people to build refineries across the country and none could deliver, maybe only just a few. The reason is very simple, because people are not sure when you produce petroleum products what price they are going to sell.

“Because we know that those prices are not market determined and there will be a subsidy element in it, everybody failed to deliver on it. The end result is that this burden is left to the NNPC and the government as a whole.”

The NNPC boss argued that the anger being expressed by the people due to the growing prices of the product might be justified, but noted that it was grossly misplaced.

“Government has to provide that gap that exists. It’s easy for people to get angry that prices have gone up. Just like other commodities because there can be challenges that people will naturally face,” he opined.

According to him, the brunt of the sleaze in the subsidy system was borne by the poor who he said are being misguided by the elite who are gaining from it.

“Subsidy is an elitist thing. Only the elite have three, four, five cars. They have many cars in their houses and fill their tanks. The ordinary man loses in infrastructure, hospitals are not built, schools are not built. Ultimately, the brunt of the corruption is borne by the ordinary man.

“The outburst is understandable, but misplaced because Nigerians are not aware of the opportunities lost” he said.

For the PPPRA, its future non-involvement in the fixing of the pump price of petrol, was to allow the interplay of market forces prevail.

The agency noted, however, that it will continue to monitor the operators in the downstream petroleum sector to ensure that marketers do not abuse the freedom that has come with the deregulation of the pump price of petrol.

Executive Secretary of the PPPRA, Mr. Abdulkadir Saidu, explained that as it stands, the job of the agency henceforth is to ‘police’ the marketers and prevent profiteering at the expense of consumers.

“The government pronouncement that the sector is deregulated means that prices strictly obey the forces of demand and supply. You could have a regulator that will always stand as a watchdog to see how these forces play out and how the interest of both operators and consumers will be protected” he said.

The PPPRA boss posited that its function henceforth is to ensure that operators in the downstream play fairly and consumers of petrol in the country are not short-changed.

Saidu said that the confusion on the role of the PPPRA stemmed from the fact that this is a transition period, noting that very soon Nigerians will enjoy the choices that accrue from a liberalised market, even with the PPMC as a marketer like some private operators.

As for the Minister of State, Petroleum Resources, Chief Timipre Sylva, the removal of subsidy was an inevitable decision which was taken by the federal government in the long-term interest of Nigerians.

He said that successive governments in the country had all desired to achieve deregulation, but lacked the political will.

“At other times, the time was not very appropriate because the product you are talking about is very sensitive to the price of crude oil,” he added.

“We must understand that this was an inevitable policy direction especially at this time of COVID-19. COVID-19 saw oil prices at the zero zone, something that has never happened before.

“Some countries had to pay people to evacuate their crude oil, meaning they were selling their crude oil at minus.

“Here in Nigeria, the price of our crude went down to less than $10. At that time our earnings were not able to support such, so it became inevitable because subsidy itself is a very tricky thing.

“We were subsidising at two ends, it’s like we were burning our candles at both ends. You are subsidising at the pump and subsidising the foreign exchange that is used to import this product. So, if you put all the subsidies together, it came to more than N1 trillion every year,” Sylva noted.

What are the Alternatives?

On this, the Department of Petroleum Resources (DPR), says that in furtherance of the federal government’s plan to expand alternatives to petrol, it is intensifying the deployment of gas dispensing facilities all over the country.

“The Department of Petroleum Resources (DPR) has issued directives to deepen the utilisation of domestic LPG CNG, LNG and auto-gas as alternative fuels for Nigerians.

“The directives are in furtherance of the federal government’s aspirations to provide affordable fuels and ensure domestic gas penetration and expansion in Nigeria while entrenching price freedom for Nigerians,” the DPR Director, Mr. Sarki Auwalu, said.

He added that the DPR had carried out a nationwide audit of all retail outlets and categorised them into three groups with a view to ascertaining their readiness for the deployment of add-on facilities for gas products.

The DPR boss noted that about 9,000 retail outlets which represent 27 per cent of total number of retails outlets in Nigeria are in category 1 and have been identified as suitable for immediate integration of add-on facilities based on robust safety assessment and technical considerations by the agency.

On her part, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, explained that all the decisions were geared towards weathering the current headwinds posed by the COVID-19 pandemic.

“Our country Nigeria is going through a difficult economic period because of the crisis of the covid-19 pandemic. This same crisis has also given us the opportunity to undertake some reforms that have been very difficult to carry out in the past.

“In general, we have developed a fiscal stimulus package of N2.3 trillion, about $5.9 multi-sectorial economic plan. The design is to be able to minimise the impact on the economy, to prevent contraction of the economy and prevent businesses from collapsing and also to protect the poor and vulnerable.

“Specifically, in relation to the extractive industry, we took the opportunity to remove fuel subsidy that has been a significant drain on our resources and on the economy.

“This we have been able to do by adopting a price modulation mechanism and government has removed fuel subsidy provision from its revised 2020 budget and also from the Medium Term Economic Framework (MTEF) for 2021-2023. We don’t have plans to incur any expenditure on fuel subsidy.

“What that means is that the price of refined products PMS (petrol) will be determined by the global price of crude oil, so the price will keep changing according to how the global market operates” she said.

Feeble Opposition

Although it’s still early days yet, the opposition to the increase in the pump price of petrol has been largely subdued with a handful of pro-labour civil society organisations, largely faulting the government’s position on the removal.

The CSOs in collaboration with the Trade Union Congress (TUC), said the ruling party had during its campaign in 2015, said fuel should not sell for more than N34 per litre, wondering why the government is hiding under the umbrella of subsidy.

Secretary of Joint Action Front (JAF) one of the groups, Abiodun Aremu, said: “This regime, like previous regimes since 1999, is an agent of international capital. The regime by its pronouncement that over N10 trillion was spent on fuel subsidy must be exposed for its lies and atrocities.”

‘’We should no longer go on with this unjust system of exploitative rule.

The regime was not elected by Nigerians on the basis of private looters but for public interest. Nigerians must be prepared for a long drawn struggle to end the unjust rule of exploitation and dehumanisation,” he said.

TUC, on its part, described subsidy as the height of deceit by the federal government.

Its President, Quadri Olaleye, expressed surprise that in the build-up to 2015 general elections, Nigerians were told that there was nothing like subsidy by this same government.

“We were further told that fuel should not cost more than N34.50 per litre. It was one of their cardinal campaign promises that the refineries would be fixed,” he argued.

The opposition Peoples Democratic Party (PDP) also accused the federal government of pushing Nigerians to the wall.

“It’s arrogant display of insensitivity and total disregard to the demands by the citizens,” a statement issued by its spokesman, Kola Ologbondiyan, said.

From the look of things, the Buhari administration doesn’t appear like it’s about to review its position on the removal of subsidy.However, a recurring fear has always been whether the savings therefrom will get to the poor as trumpeted by the current government.