Averting Risk of Social, Economic Backlash in Subsidies Removal

Economy

Bowing to pressure from the International Monetary Fund (IMF), Nigeria is set to end subsidy regimes in fuel and electricity sectors but analysts have challenged the relevant stakeholders to come up with a policy transition strategy that is sustainable, realistic, and pragmatic, reports Festus Akanbi

If there is anything on the minds of ordinary Nigerians today, it is the anxiety over the planned removal of fuel and electricity subsidies.

While the former is billed to commence in the first quarter of next year, the latter is expected to take effect from December this year.

Both plans were parts of the recommendations of the International Monetary Fund (IMF) and according to the multilateral body, the earlier Nigeria accepts the reality the better for the country.

In its preliminary findings at the end of its official staff visit to the country under the Article IV Mission, IMF also called for reforms in the fiscal, exchange rate, trade, and governance aspects of Nigeria.

This, it said, was necessary “to alter the long-running lacklustre growth path.”

The Minister of Finance, Budget, and National Planning, Zainab Ahmed had disclosed that the federal government will remove fuel subsidy and replace it with a monthly N5000 transport grant to poor Nigerians.

The minister said the transport grant will target about 30 to 40 million Nigerians who make up the poorest population of the country.

Bowing to the overwhelming complaints from the human rights societies, the federal government had hatched the plan to remove fuel subsidy by the first half of next year. The subsidy removal has been on the front burner for a long time as a result of the undue pressure the programme was bringing into the nation’s foreign exchange market. The subsidy regime has also been vulnerable to corrupt practices which have left Nigerians shortchanged at the end of the day.

IMF, therefore, stressed the need for Nigeria to fully remove fuel subsidy and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act (PIA) while making case for adequate compensation for the poor.

Pressure on Fuel and Electricity Subsidies

The IMF, in its 2021 Article IV Mission statement released last week also projected that despite high oil prices, Nigeria’s fiscal deficit would widen in 2021 to 6.3 per cent of Gross Domestic Product (GDP).

The fiscal deficit is projected at 3.93 per cent and 3.39 per cent of GDP in Nigeria’s 2021 and 2022 budgets respectively.

Consequently, the IMF called for the immediate removal of fuel subsidy and electricity subsidies.

“The complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor. The mission stressed the need to fully remove fuel subsidies and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act.

“In addition, the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed. Well-targeted social assistance will be needed to cushion any negative impacts on the poor particularly in light of still elevated inflation.

According to the IMF, over the medium term, without bold revenue mobilisation efforts, fiscal deficits are projected to stay elevated above the pre-pandemic levels with public debt increasing to 43 per cent in 2026.

It stated: “With the emergence of fuel subsidies and slow progress on revenue mobilisation, the fiscal outlook faces significant risks. Continued reliance on administrative measures to address persistent foreign exchange shortages is negatively impacting confidence.

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The Fear

Although a majority of Nigerians agree that the removal of fuel subsidy is long overdue, the fear is that full removal of subsidy, which is programmed to come at the same time with the removal of subsidy on electricity will worsen the feeling of uncertainty among the Nigerian workers.

Already, the Nigerian National Petroleum Company (NNPC) has hinted that a litre of fuel may sell between N320 and N340 in 2022. Economic affairs watchers said when one factor in the planned increase in electricity tariff, the hardship will be too much for Nigerians to bear.

Nigerians are today battling with prohibitive costs of commodities, food items, and services. Analysts said it easy to imagine the ripple effects of subsidy removal on the cost of livings, prompting some analysts to call for caution.

This is just as the federal government is contemplating the replacement of fuel subsidy with a monthly N5,000 fuel grant to the nation’s most vulnerable citizens.

Group Managing Director, NNPC, Malam Mele Kyari, revealed this at the launch of the World Bank Nigeria Development Update (NDU) November 2021 edition, entitled, ‘Time for Business Unusual’, in Abuja on Tuesday.

According to Kyari, the new Petroleum Industry Act (PIA) provides that by the end of February 2022, Nigeria should be out of the subsidy regime.

“There will be no provision for it legally in our system, but I am also sure you will appre¬ciate that government has a bigger social responsibility to cater for the ordinary and therefore engage in a process that will ensure that we exit in the most subtle and easy man¬ner,” he said.

Kyari gave assurances that fuel subsidy removal would “definitely” be achieved in 2022 as it is now fully backed by law and that the price of the product may range between N320 and N340 per litre. At the moment, petrol (PMS) in Nigeria sells for N165.

Managing Transition to Full Deregulation

An economist and Chief Executive Officer, Centre for the Promotion of Private Enterprises, Dr. Muda Yusuf warned that there is the need to creatively manage the transition from the current pricing regime to a fully deregulated arrangement.

Yusuf, a former Director-General of Lagos Chamber of Commerce of Industry (LCCI) said “It is a tricky issue which could pose a serious challenge to the government if not tactically managed. The reality is that the sentiments among the citizenry are not favourable to the deregulation of petroleum product pricing or petroleum subsidy removal. Even some elites are curiously not persuaded on the justification for the subsidy removal,”

According to him, “If the policy transition is not properly managed, the risk of a social and political backlash could be quite high.

He maintained that “No doubt there is a sound economic and business case in favour of fuel subsidy removal,” noting however that the social and political contexts are equally critical.

“Certainly, the subsidy is not sustainable, which is why there is a need to accelerate engagement with the relevant stakeholders to come up with a policy transition strategy that is sustainable, realistic and pragmatic,” advising that conversation should not only be economic but also social and political.

Speaking on electricity subsidy, the economist stated that the subsidy argument is slightly different in the case of electricity.

He stated that “Already some progress has been made towards a market-driven electricity framework. We already have the willing buyer willing seller policy. There is also a market segmentation model that has been adopted by the DISCOs. Different pricing applies to different segments. This is also a move towards a purely market-driven electricity market. It is true that to sustain private investment in the electricity sector, the subsidy should be discontinued. But the transition needs to be strategically managed because of the political and social contexts.”

The Time is Now

In her response, Chief Economist and Head of Research, Middle East & Africa, Standard Chartered Bank, Razia Khan, said the anticipated pain to the people notwithstanding, now is the time to fully deregulate the Nigerian oil sector. She nevertheless shared the fear that being a year to the next general election, there is the tendency for the federal government to develop cold feet as far as fuel subsidy removal is concerned.

She said, “History has demonstrated that there has never been a politically convenient time to address fuel subsidies in Nigeria. However, the economic cost of the subsidy, which is deeply regressive, is now so large that it does require urgent reform if Nigeria is to safeguard its fiscal space for development priorities.

“The move to safeguard the poorest Nigerians from the impact of the subsidy removal, with a cash transfer, is sound policymaking. Most likely the subsidy removal is planned for H2-2022 in order to allow time to get the systems in place. Observers might be concerned that the closer we get to elections, the less certainty there is that fuel subsidies will be removed. From this perspective, the sooner subsidies are removed, the better.”

Having established the urgency of the need to end the subsidy regime, we must also not lose sight of the need to ensure the implementation of such a programme doesn’t drive the citizens to a social crisis.