Again, the Petrol Subsidy Conundrum

<strong>Again, the Petrol Subsidy Conundrum</strong>

Postscript by Waziri Adio

The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, has been consistent in planting in public consciousness the need to end the wasteful, ineffective and unsustainable petrol subsidy in Nigeria.

In November 2021, she announced that the President Muhammadu Buhari administration would transfer N5,000 to 30 – 40 million poor Nigerians to cushion the effect of petrol subsidy removal. That plan was paused, after some uproar, including from the ruling party. Three weeks ago, she declared that petrol subsidy would be removed before the administration leaves on 29th May, even though there is budgetary provision for the subsidy till June 30th. On Wednesday, she disclosed that Nigeria has secured an $800 million loan from the World Bank to provide palliatives to 50 million poor Nigerians.

My sense is that this is a reform that is very dear to her—and it should be. I can also deduce that she has been battling powerful forces within the government to push through on this important issue. So, she deserves some commendation for staying the course. But petrol subsidy removal is always going to be a contentious issue in Nigeria. This should not be a reason to avoid the reform. Rather, it is an argument for the reform effort to be driven by a solid strategy and a robust communication plan, both deftly implemented. To be sure, there may be a reform strategy and a communication plan somewhere. But that is not apparent or discernible.

This must be underscored: reform, especially the contentious variant, is not just politics, it is akin to war. To be successful, those pushing and implementing reforms must not only understand this but must also be ready for pushbacks and surprises. They must constantly expand their toolkits and consciously build a constituency of support. Among others, framing, timing, negotiation and coalition-building will be critical.  

I have written many times, on this page and elsewhere, about why petrol subsidy needs to go. My position has not changed. The arguments for subsidy removal are well known and we don’t need to delay ourselves with them here. But suffice to say that petrol subsidy is a wasteful way to spend scarce resources at a time the country is in a fiscal dire strait. The World Bank had projected that Nigeria’s gross oil and gas revenue in 2022 would be N7.87 trillion, out of which petrol subsidy alone was projected to swallow N5.40 trillion. That meant petrol subsidy was projected to wipe away almost 70% of the gross oil and gas revenue for that year. Of course, there are other upfront deductions.

But what this means is that petrol subsidy was highly implicated in why the state oil company failed to remit any amount to the Federation Account for a long time and why there is little or no addition to our external reserves at a time of historically high oil prices. (Yes, oil still accounts for about 80% of our exports but the proceeds are used to basically import petrol through a somewhat barter arrangement called the Direct Sale Direct Purchase, DSDP.)

The Federal Government appropriated N4 trillion for petrol subsidy in 2022. Literally, we burned 23.12% of the N17.3 trillion amended budget for last year on just one item: petrol subsidy. In the 2023 budget, the FG budgeted 3.36 trillion on petrol subsidy for six months or N560 billion every month. For context, the FG budgeted N1.15 trillion for the health sector and N1.79 trillion for the education sector for the entire year. But the budget for petrol subsidy for six months is N3.36 trillion or again, for emphasis, N560 billion monthly.

At a time of shrinking revenue, suffocating debt service, and growing budget deficit, the economic case for petrol subsidy removal is compelling. It is wasteful and it is open to corruption and capture. It mostly benefits the rich at the expense of the poor and it crowds out needed investment in health, education, infrastructure and other areas critical to human welfare, national productivity and economic growth. And it is clearly unsustainable. It has to go, and we need to redirect the savings to more productive and welfare-enhancing areas.

In an article published in a special edition of this paper on 12th June 2022 and titled ‘The Subsidy Thing around Our Neck,’ I made some points that are worth restating. I stated that: “Without a doubt, petrol subsidy has become an ever-tightening noose around our neck. We need to throw it off. Otherwise, it will suffocate us. Removing petrol subsidy… is a frantic battle for health, for air. One that must be fought and won.” 

A political consensus seems to be emerging on the need for petrol subsidy to go. For the first time in our electoral history, the top three candidates promised to yank it off. Finally, it seems the issue has been ripened for reform by dire economic realities. This is as good as it will ever get. But that doesn’t mean that petrol subsidy removal will still be a walk in the park. Petrol subsidy is not purely about economics. In Nigeria, subsidised petrol has been imbued with the toga of a political good.

Make no mistake about this: there are entrenched ideological constituencies and deeply ingrained sense of entitlement that will always burst to the surface when either this administration or the incoming one takes the concrete step to remove petrol subsidy. Add to this the fact that some of those who previously supported subsidy removal will opportunistically oppose it, especially in this unbearably toxic post-election environment. Then, add extra wrinkles: inflation, especially food inflation, is above 20%; and most Nigerians are still reeling from the gratuitous pain inflicted on them through the Naira redesign fiasco.

Does this mean that the removal of petrol subsidy should be abandoned? No. But it important not to bungle the reform before it even takes off. Every unsuccessful move strengthens resistance and further sets back the chance of successful implementation. This is why it is very important to proceed after adequate groundwork has been done and a robust coalition has been built. From the outset, it will be necessary to undertake proper dimensioning of the issues (including the emotional ones) and to carefully map the stakeholders who have some sort of veto powers, and surface their potential allies, their concerns, their modes of resistance and develop countervailing measures, if needed.   

The $800 million loan from the World Bank is a good starting point. Unlike some analysts and commentators, I actually think it is a good gesture that acknowledges one of the valid concerns of those bothered about subsidy removal: the need to cushion the potential impact of subsidy removal on the most vulnerable. No one should be under any illusion that the poor will not be negatively impacted by full deregulation, especially through the initial increase in the costs of transportation and food, two items that the poor spend a disproportionate portion of their incomes on.

Also, this is not as terribly high an amount as some commentators make it sound. $800 million is about N350 billion at official rate and about N600 billion at black market rate. Currently, we spend about N560 billion per month on petrol subsidy. Basically, it amounts to spending what we burn monthly on petrol subsidy as a one-off transfer to the poor to end the subsidy. We can argue about whether this is enough to cushion the expected inflationary impact on the poor. But that is different matter.

Additionally, it is a concessional loan, with low interest rate, a moratorium, and a long tenor. In the grand scheme of things, a concessional loan of $800 million to provide direct support to the poorest of the poor is not what will compound our debt situation. Rather, it puts money in the hand of the poor and gives policy makers some fiscal head-room at a time of acute fiscal stress. The 50 million Nigerians are those already captured in the National Social Register put together over the time with the help of the World Bank. Instead of quibbling over this, we should insist on a transparent and accountable implementation to ensure that the money goes to the appropriate people, and that the intervention is not turned to another avenue for political patronage or corruption.

That said, words matter. Calling the transfers palliatives reminds people of what happened to COVID-19 palliatives. It sends very wrong vibes. Also, dropping details casually on people will only arouse suspicion and prepare grounds for pushbacks. But most importantly, the transfers should be part of a well-thought-out programme that should have been sold to and agreed with critical stakeholders, including the unions and civil society on what to do with the savings from subsidy removal and how. These stakeholders in turn would have consulted with and secured the buy-in of their various constituencies. Strategic engagement is critical.

As the World Bank recommended in the last issue of the Nigeria Development Update, the Nigerian government needs to develop and implement a compact with Nigerians on petrol subsidy removal and channel some of the savings into visible and impactful national, state and local priorities and investments in areas that will additionally benefit the youths, women and the poor. Such is necessary because Nigerians, including those not benefiting from it, have a strong attachment to petrol subsidy and they do not trust their government to do right by them.

This is why the compact has to be developed in inclusive manner and through a comprehensive process that prioritises trust-building. It will take some work, and some of the negotiations will be noisy. Petrol subsidy removal is not one of those stroke-of-the-pen reforms. Yet it is existential for Nigeria, and it is urgent. It must be done. But if the goal is success, not just attempt, it must be done well.


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