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Why Buhari Should Not Remove Petroleum Subsidy Now

The World Bank lately advised President Muhammadu Buhari’s administration to remove the subsidy on Premium Motor Spirit (popularly known in Nigeria as petrol), claiming this period that the country is struggling with fiscal adjustment to lower oil price is the best time to take the decision. Although the World Bank has always advised against fuel subsidy, it now identifies a particular time that is best suited for its implementation. But, there is no bad time to take a good decision. Neither is there a good time to take a bad decision.

For a long time, the World Bank had refused to acknowledge fuel subsidy benefits the poor. But now it says through its Lead Economist, John Litwack, that “The fuel subsidy appears to have vast modest benefits for the majority of citizens.” Nevertheless, he counsels President Buhari to remove the subsidy.

The stance of the Bank against this and some other subsidies, is in part responsible for the lack of credibility for its policies in developing countries. Successive partial removal of (petrol) subsidy in Nigeria has been inflationary. Therefore, complete removal of the subsidy can be hyper-inflationary. Since the country lacks the means to counter this inflationary expectation, the consequent deterioration of macroeconomic indicators may remain for a long time after removing the subsidy.

In financial terms, the poor benefit disproportionately less than the rich from the price subsidy. What is also true is that the poor are less able to bear the burden of price increases. With higher prices, the poor face the threat of further restrictions in accessing important services, such as transportation and healthcare. Those who already travel long distances to access the closest healthcare facility may no longer be able to afford it. And higher cost of transportation can even deny access to the market, exacerbating productivity losses.

Even though poor people derive less financial benefit from the subsidy, they would actually suffer more than the rich from removal of subsidy. However, removing a programme that benefits the rich will have wider ramifications, extending to citizens of lower social class. Every additional naira the ‘rich’ spends on petrol can cut back their charitable giving – arguably the most effective social protection in a country where the government lacks the will and knowhow to deliver social security. Besides, not-so-rich Nigerians use petrol to run their businesses that employ the poor. If higher petrol price drives those businesses out of operation, the jobs will evaporate in an environment that is already characterised by high unemployment.

It is shocking that the World Bank is disconnecting a major economic decision from the political context it would be taken. Even if President Buhari discountenances the foregoing points of economic argument, the only reason he might feel compelled to remove the fuel subsidy, in a little more than six months into his administration, is if he had campaigned for subsidy removal. But he did no such thing. Therefore, he risks a backlash of destabilising protests from Nigerians whether or not they voted.

In any case, Nigerians have set certain conditions under which fuel subsidy may be removed. We want domestic refineries to supply nearly total local consumption needs. We also demand real progress in the fight against corruption. These demands were upheld by the “Nigeria Rising” worldwide demonstrations against subsidy removal in January 2012. The strength of the objection to subsidy removal, when these stated conditions have not been met, should not be tested in the streets and at the parks by a new administration that is still learning the ropes on multiple fronts.

President Buhari has a better anticorruption reputation than any of his predecessors since 1999. But as he most certainly knows, this reputation is now on the line. But he has shilly-shallied on probing past allegations of corruption. Changing from his initial promise of not probing past administrations, he threatened to bring all past corrupt officials to justice. But he now seems to zero in on the immediate past administration. Yet, he has in his cabinet some individuals who allegedly committed acts of monumental corruption in their immediate past public offices. President Buhari himself has not answered inquisitions of how his party funded a massive local and international campaign that put then-ruling party on the back foot. So, he is nowhere yet in satisfying the anticorruption requirement.

With regard to domestic refining capacity, the country remains far off the mark. The state-owned refineries are operating way below installed capacities. Even if the government decides now to privatise the refineries, the execution would take months, if not a few years. But, as with the recently privatised public power assets, the sale of the refineries would not extricate the government from the requirements of domestic refining capacity and protection of citizens from price-gouging by private operators. As the new private owners bid for time to deliver, even so would the public align with the same timing for possible subsidy removal. In which case, we may be more than two years away from subsidy removal on satisfying the requirement of domestic refining, with the help of Dangote refinery.

The salient point, therefore, is for government to rid itself of its inefficiency. It can do so by transferring state assets to private investors. But that would only meet one part of the bargain. The other part is to rein in corruption. Financial corruption correctly riles Nigerians that are excluded from it. But the corrosive effect of corruption on productivity, through vices and outright incompetence of state officials and civil servants is, perhaps, more serious. It is the reason the state-owned refineries are hopelessly decrepit.

The humongous subsidy figures since 2012 reveal the scale of the inefficiency in government. As such, removing the subsidy in order to apply its savings in other areas, as has been canvassed, would just be tantamount to shifting the frontier of government’s inefficiency.

Some argue that it is wrong to subsidise consumption. The World Bank has unabashedly pushed this argument too, in developing countries. But consumption subsidy is massive in the welfare programmes of many developed countries, including the United States, and the World Bank is less strident against it. What is different and harmful with the Nigerian fuel subsidy is that it is for imported products. The U.S. subsidises its food industry at both production and consumption sides to meet domestic demand and to export.

It is not unreasonable to expect that subsidy might remain necessary even when Nigeria achieves self-sufficiency with the supply of its fuel needs. The difference would then be that individual and corporate Nigerians are the substantial beneficiaries, in contradistinction to foreign economies as the main beneficiaries of Nigeria’s fuel subsidy, because of product importation. Moreover, boosting consumption with subsidy can help drive economies of scale locally.

Back to the pressing matter of the current fallen oil price that suggests fuel subsidy is unsustainable. Well, it should continue to bite the government and its rent-seeking private sector acolytes. If it bites hard enough, they might start to learn the right behaviours.

Abundant oil money has ensured non-oil industries are little-developed and non-oil taxes hardly collected. Subsidy during a long oil-price slump might finally help us start making the more helpful adjustment in economic governance. Since we didn’t make the structural adjustment the easier way during oil price boom, we now have to make it the harder way during the current slump — which is likely to remain for some time. The easy, but futile, adjustment is subsidy removal. Once oil price recovers, we would easily reinvent wasteful programmes to spend oil windfalls.

It is said in development circle: never allow a crisis to go to waste. The current low oil price provides the opportunity for the country to make the more fundamental adjustment, which is structural transformation of the economy. The process is best aided by fiscal federalism.

If removal of subsidy is the way the Buhari administration responds to the immediate need for fiscal adjustment, the benefit would be short-lived. However, the more pertinent adjustment would be more painful if it is made in the foreseeable future when oil falls below $30 a barrel, as the supply glut worsens and renewable, clean energy sources become readily available globally.

Mr Akintunde, CEO, Financial Nigeria, published this in in 2015

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