Zainab Usman tells us why Buhari must phase out Nigeria’s petrol subsidy. Zainab is a doctoral candidate in International Development at the University of Oxford. She tweets via @msszeeusman.
Democratic governments are likely to face two interrelated problems in implementing difficult economic reforms. The first is the unpopularity of these measures among citizens who are likely to shoulder the most burden. The second is the difficulty of employing a practical approach to implementation. Reforming Nigeria’s money-guzzling fuel subsidy regime, now an urgent matter in the context of dwindling government revenues since 2014, presents both of these difficulties: fuel subsidies are popular and the practicalities of its reformation are yet to be fleshed out.
Fuel subsidies are considered inefficient in standard economistic thinking, as a drain on resources that could best be allocated to an activity with higher returns. As former Central Bank Governor, now Emir Muhammad Sanusi II argued, they only serve to ‘subsidise consumption’. Instead of providing subsidies, governments could allocate resources to infrastructure, education and health, activities that yield dividends as public goods, or even to emulate the United States and China by subsidising production in agriculture or export-oriented manufacturing, respectively. Despite its inherent ‘wastefulness’, many governments in developing countries subsidise energy consumption because it quickly and powerfully generates electoral support from the political powerful middle class, which disproportionately benefits from them. Similarly, subsidies continue because their removal draws the ire of this vocal section of the citizenry, as it has from Egypt to Indonesia.
In Nigeria, the insidious dependency on fuel subsidies is even more widespread. Not only are they favoured by an increasingly empowered middle class, which can vote out governments that dare tinker with them, they are crucial to the livelihoods of broader population. Two of the most obvious factors being the economy’s virtual reliance on petroleum- and diesel-powered generators due to intense power shortages, and a reliance upon petroleum for road transportation due to a lack of reliable mass public transportation systems, especially rail. Therefore, increasing, reducing or removing subsidies affects the functioning of social services from schools to operating theatres and the economy’s 37 million-strong SMEs, but also transportation costs of food, medicine, and other consumer goods, a situation further compounded by the country’s disproportionate reliance on imports. The multiplier effects of fuel prices in general are immense in the Nigerian context, which makes subsidies politically a powerful tool for mass mobilisation by unions and civil society. Attempts by former President Jonathan to remove petroleum subsidy in 2012 led to one of the largest mass protests in the country’s history.
The elephant in the room, of course, is the pervasive corruption that led to the scandalous N2.5 trillion expenditure on fuel subsidy in 2011 – over 90% of which was extra-budgetary – strengthening calls for the government to stem the haemorrhaging of scarce petro-dollars. Governments have historically revisited attempts at downstream deregulation when global oil prices collapse, yet the public backlash typically forces the government to forces a backdown. This leads to the second problem, finding a practical approach to implementation, how best to tow this route without losing popular support at the polls and how to effectively utilise freed-up funds.
President Buhari is currently in this conundrum, a situation made more difficult because unlike his predecessors he is confronted with rapidly declining revenue, faces immense expectations, and has been placed under unprecedented scrutiny by an increasingly politically empowered citizenry. While former president Obasanjo was able to reduce subsidies despite vociferous opposition by labour and trade unions in his characteristic overbearing style, the antecedents of former president Goodluck Jonathan’s SURE-P and its absurd duplication of projects in works and housing, health, transportation, and other government ministries in investing subsidy funds have all exacerbated the low levels of trust in the political class. As the chorus of voices grows louder for both subsidy removal and retention and the government enjoys immense domestic and international goodwill, I advocate a phased approach to easing Nigeria out of the subsidy regime taking into consideration three key factors.
Firstly, we need data, data, and data! Nothing serious will be achieved without having fairly accurate figures to replace the wildly divergent guesstimates for everything from actual crude oil production and fuel consumption, to the number of oil marketers and the actual amount spent on subsidies. The argument for replacing subsidies with social safety nets for ‘the poor’ becomes utterly ludicrous when no one knows the actual number of these potential beneficiaries, and thus effective ways of targeting them. One of the rare redeeming features of the train-wreck known as SURE-P was its experiment with conditional cash transfers to a few thousand pregnant women to increase utilisation of health services. Can the current government build on this? Can it expedite the process of issuing National IDs that was commenced along with existing biometric data from banks, telecommunications companies, and INEC? Te truth is that until we know the numbers, no sustainable decision on managing subsidy funds will be made, citizens will continue being distrustful, the government will continue muddling-through, and so goes the vicious cycle.
Secondly, we need to think about sequencing and synchronisation, locating subsidy removal within the broader context of incremental deregulation of the sector, and synchronising it with other critical initiatives coming on board soon. For instance, subsidy removal can be synchronised with the full distribution of all 4,500MW of power now being generated and transmitted by the government or with the commencement of full operations of the Independent Power Projects (IPPs) in regional hubs like Lagos, Kano and Rivers, and other milestones in the power sector reforms. Importantly, the country’s refineries set to resume operations this month will provide 19 of the 40 million litres of Nigeria’s daily petroleum consumption, while Aliko Dangote’s 500,000 barrels-per-day refinery scheduled to be commissioned in early 2018 will supply the remaining 21 million litres. This means that the petroleum subsidy can realistically be phased out before the next election cycle with minimal pain for the country’s citizens.
Third, there must be transparency in making the numbers available to the public, streamlining the number of marketers and government agencies involved to cut inefficiencies, but also consistency in the anti-corruption drive in the sector. Addressing the notorious opacity in the oil sector is crucial. In midstream refining operations specifically, reviewing, revoking and re-awarding refinery licenses given to individuals without entrepreneurial acumen is necessary. A concerted effort to prosecute those identified by the Ribadu, Lawan, and other reports on subsidy fraud is one of the low-hanging fruits that can restore citizens’ trust and investor confidence.
Clearly, spending billions of naira on fuel subsidies is no longer sustainable, but the country’s dependency on them needs to be addressed first. This is why phasing them out within the context of incremental deregulation is the best route forward, allowing time for the government to put in place systems and structures to cushion the effect of withdrawal on most people, ensure that the funds are effectively and transparently reinvested, and enable the government to do all this with minimum political backlash. A competitive midstream and downstream oil sector is desirable but making the process of subsidy removal as painless as possible to ordinary Nigerians is the optimal scenario.