Time to Eliminate Fuel Subsidy

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Obinna Chima writes on the need for the federal government to muster the courage to end the country’s fuel subsidy regime where a huge chunk of its spending is devoted to

In the past few days, the age-long debate over the removal or continued retention of the subsidy on premium motor spirit (PMS) also known as petrol, which encourages wastage, corruption and hamstrings the economy, has reemerged.

While the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, other top government officials, governors and even the World Bank have raised the alarm that the country cannot continue with the fuel subsidy regime, members of the organised labour appear to be thinking otherwise.

Indeed, the removal of the subsidy on petrol remains a critical free-market reform and it would be beneficial to the finances of the government and the overall economy.

Many believe it would boost investments in the downstream sector of the oil and gas industry and free revenues for the government to provide essential services.

Considering the burden of removing N250 billion monthly from the federation account, in a country that is presently faced with a major revenue shortfall, Kyari warned that going forward, “the NNPC may have to start invoicing the federation to be able to maintain subsidy.”

He pointed out that while all over the world, subsidies are introduced to bring cost control and less pains to citizens, in Nigeria, the fuel subsidy regime has become a major fiscal burden that must be eliminated.

The NNPC boss explained: “Today, we are evacuating about 60 million litres of gasoline from all the depots in the country. It is not national consumption and it is very understandable because of issues such as cross-border smuggling.

“As long as you have arbitrage, traders don’t see it as a crime, they just take advantage of that and exploit it. What we are dealing with is about N243 billion of fuel subsidy monthly. So, there is no magic around that.

“This is the reality that we are facing. Going forward in 2022, we simply cannot afford this, we just don’t have the resources. As a matter of fact, the NNPC may have to start invoicing the federation to be able to maintain subsidy.

“When you take out N243 billion from your total income every month, you are not able to fund your operations and so you can’t meet your other fiscal obligations. Clearly, there is a challenge in the ability to pay. So, there is a reform going on, particular in the energy sector and no one can stop.”

According to Kyari, fuel subsidy should be removed, and the funds deployed to areas of the economy particularly road infrastructure and education that need funds.

He stressed that the policy remains a misallocation of resources and it benefits mainly people who don’t need it – the rich.
“What we need is investment that upgrades the general good of the society and provide access and opportunity for social mobility for the poor.

The savings would be better deployed to education or upgrade of the critical infrastructure in the country,” the NNPC boss added.

More so, the World Bank has warned that further delay in removing the fuel subsidy which had been described as a major drain on the economy could see the federal and state governments unable to pay salaries from 2022.

The Lead Economist, Nigeria Country office of the World Bank, Marco Antonio Hernandez, painted a gloomy picture of Nigeria if the country decides to continue with the controversial fuel subsidy.

Therefore, Hernandez urged Nigeria to remove subsidy on PMS in February 2022, as prescribed by the Petroleum Industry Act (PIA), saying further delay could worsen the precarious revenue situation confronting the country.

He further warned during the recent unveiling of the Nigeria Development Update, that the present fiscal condition of the sub-national governments would take a turn for the worse in 2022 with 35 of the 36 states unable to meet their financial obligations.

Hernandez stated that a situation where about N250 billion goes into fuel subsidy monthly was unsustainable as the paucity of revenue confronts the country, especially the sub-national governments.

Hernandez who provided insights into the report of the World Bank, titled “Time for Business Unusual,” stated that should the current revenue challenge continue till 2022, only Lagos State would be able to meet its financial obligations.

The report pointed to mounting fiscal pressures due to lower-than-expected revenues in 2021 and the rising cost of PMS subsidy.

According to the report, in contrast to past periods of high oil prices, the Nigerian government has this time not been able to fully benefit from the oil boom because oil production has fallen below Nigeria’s estimated capacity and the Organisation of Petroleum Countries (OPEC) quota due in part to rising insecurity and the higher cost of the PMS subsidy.

It stated: “In 2022 the federal government plans to spend about N3,000 ($7) per person for health, while the cost of the PMS subsidy for next year could reach N13,000 ($32) per person. Not only is the PMS subsidy costly, but it mainly benefits richer households.

“Nigeria has the opportunity to establish a “compact” with citizens that eliminates the subsidy and uses the savings to provide targeted cash transfers to lower-income-households, invest in job-creating programs, and improve its fiscal position.”

It stated that the insufficient supply of foreign exchange (FX) issues related to the predictability of exchange rate management, the unsustainable subsidy on premium motor spirit (PMS), burdensome trade restrictions, and the sizeable fiscal deficit financing by the Central Bank of Nigeria (CBN) are undermining the business environment, compounding underlying constraints on domestic revenue mobilisation, foreign investment, human capital development, and the delivery of public services.

The report noted that despite a strong initial recovery and resurgent global oil prices, Nigeria’s pre-crisis challenges were threatening its post-crisis recovery, highlighting the need to depart from business-as-usual policies.

“Even though Nigeria’s economy exited a pandemic-induced recession, several challenges persist including double-digit inflation, declining incomes, and rising insecurity.

“While the government took bold policy measures to mitigate the impacts of the COVID-19 crisis, the reform momentum has slowed which hinders Nigeria’s ability to reach its growth potential,” World Bank Country Director for Nigeria, Shubham Chaudhuri said.

Also, the Governor of Kaduna State, Mallam Nasir El-Rufai wondered why the country would continue to allocate more monies to fuel subsidy compared with the allocations to education, roads and the health sectors.

“Is subsidising petrol more important than our health as even in a year we spent significant amount on health due to the pandemic, the budget for subsidy was still higher? Does it make sense?

“Is subsidising petrol about thrice as educating our children and preparing them for the future more important? The capital budget for roads is five times less than our budget for subsidy. We have to ask ourselves as Nigerians whether this makes sense at all,” he added.

According to El-Rufai, “this is the first time in Nigeria that oil prices are rising globally, yet, there is no windfall. In fact, we are getting less. Why? Because according to Kyari, subsidy is taking N250 billion per month.”

He disclosed that this month, what the NNPC paid to the federation account, as part of its contribution to the amount to be shared by the Federation Account Allocation Committee (FAAC), was only N14 billion as against the N120 billion stipulated in the budget, and, “with the threat that next month they would ask the federation account to give them a cheque to cover subsidy.”

“So, we have to ask ourselves if this subsidy still makes sense. Who is benefiting from it other than the smugglers and neighbouring African countries and some rich people? We have to stop this thing that will bring Nigeria to its knees,” the state governor added.

Expressing support for the federal government’s plan to phase out the fuel subsidy regime, about 82 Civil Society Organisations (CSOs) under the aegis of Civil Society Coalition for Economic Development (CED) advised President Muhammadu Buhari to forge ahead with the plan.

The coalition gave the commendation in a seven-point communique issued at the end of a conference of the coalition in Abuja at the weekend.

In the communique by the convener, Yusuf Dan Maitama and the Secretary, Badaru Ayewoh, the coalition said it was a right step in the right direction.
The coalition noted that the subsidy regime was unsustainable, saying the best way to tackle the problem was to remove subsidy.

According to the communique, the conference, titled: “Fuel Subsidy Removal in Nigeria”, was deliberately chosen in view of the realities of the times.

He said if the money being paid as cost of fuel subsidy was channeled into provision of infrastructure and other social sectors of the economy, there would be growth and development.

They further recommended that fuel subsidy regime be stopped from January 2022, saying the subsidy regime was a major challenge forcing the federal government into external borrowing.

“The fuel subsidy regime was a capitalist and elitist policy that services only the top-heavy, hence, successive governments found it difficult to implement their economic policies,” the communique added.

They pleaded with the organised labour not to embark on strike on account of ending subsidies.
The urged the federal government to forward a budget for N5000 grants to be disbursed to citizens to cushion the effect of fuel subsidy removal in 2022.

“The federal government should end fuel subsidy regime effect from January 1, 2022 in order the save N250 billion monthly as the economy of Nigeria has become very fragile given the financial burden orchestrated by the subsidy regime.
“That Nigeria is a monolithic economy as such, revenue earnings must be jealously guarded and which should be channelled into road construction, power, education, health and development of its youth.

“The organised labour should be considerate and not to embark on strike action in the circumstance that the Federal government has ended fuel subsidy regime, given the reversal of huge resources back into the federal government coffers.

“The federal government, private and public sectors should embark on sensitisation of Nigerians on the need for immediate removal of fuel subsidy in order to save the nation from further financial hemorrhage.

“The federal government should forward the budgetary provision of N5, 000 grant to citizens to cushion the effect of fuel subsidy removal to the two arms of the National Assembly for legislative debate before the passage of 2022 budget.
“The civil society coalition commends the Group Managing Director of Nigeria National Petroleum Corporation (NNPC) Limited for his commitment to the stability of the oil and gas industry in Nigeria,” it added.

However, Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, expressed optimism that recent developments in the oil sector, such as the Petroleum PIA 2021, the full reactivation of the four public refineries in the country, and the completion and coming on stream of the three private refineries under construction in 2022, would significantly boost contribution from the sector to economic growth.

According to her, subsidies’ regime in the sector remained unsustainable and economically disingenuous.

She disclosed that ahead of the date set aside to completely eliminate fuel subsidy, the government was working with its partners on measures to cushion potential negative impact of the removal of the subsidies on the most vulnerable at the bottom, which she estimated to be 40 per cent of the population.

“One of such measures would be to institute a monthly transport subsidy in the form of cash transfer of N5,000 to between 30 – 40 million deserving Nigerians.

“As a government, we remain committed to our broad objectives of stimulating broad-based growth through diversification and the active participation of the private sector to ensure that our growth is inclusive.

“We will continue to prioritise investment in critical infrastructure needed to unlock production and supply constraints, to create adequate productive employment and preserve jobs, and to ensure macroeconomic stability and promote poverty reduction and equity.

From the foregoing, there is need for members of the labour unions and other stakeholders to see the dangers ahead and support the federal government in its resolve to scrap the fuel subsidy as prescribed in the PIA which had been described as a game-changer for the country. Ending the fuel subsidy regime will ultimately create the right environment for private sector participation in the refining business, bring transparency in the pricing of petroleum products and free up funds for the development of basic social amenities.