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How Nigeria should address subsidy issue

How Nigeria should address subsidy issue

The recent call by the International Monetary Fund (IMF) to the Federal Government to end subsidy on petrol, followed by a sudden re-appearance of long queues at filling stations across the country, has once again put the government in a tight corner over how to deal with the matter.

The Managing Director of the IMF Christine Lagarde last week made the call, saying it was the right thing to do.

Addressing a press conference at the just concluded joint annual Spring Meetings with the World Bank in Washington DC, the IMF boss said it was important for the country to remove fuel subsidies and move available funds into improving health, education, and infrastructure, among others.

The IMF had earlier in its 2019 Article IV Consultation on Nigeria noted that phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable, would help reduce the poverty gap and free up additional fiscal space in the country.

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“If you look at our numbers from 2015, it is no less than about $5.2tn that is spent on fuel subsidies and the consequences thereof. If that was to happen, then there would be more public spending available to build hospitals, to build roads, to build schools, and to support education and health for the people,” the IMF boss added.

Shortly after Lagarde’s advice, fuel queues resurfaced in most cities in the country.

The Minister of Finance, Ms. Zainab Ahmed, in an immediate response to the IMFs recommendation, said there were no plans to remove fuel subsidy now.

Speaking during a ministerial press briefing at the IMF and World Bank Spring Meetings in Washington DC, Zainab said: “we don’t have any plan to remove fuel subsidy this time because we have not yet designed buffers that will enable us to remove subsidy and provide cushions for our people. We will be working with various groups to find out what needs to be done if we have to remove fuel subsidy. What is the alternative? We haven’t yet found viable alternatives. So, we are not at the point of removing fuel subsidy.

“We have to educate the people; we have to show Nigerians what the replacement for those subsidies will be,” she said.

Nigeria’s Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, had earlier this year admitted that the removal of subsidy on petroleum products and how to deal with the aftermath as one of the quick critical issues the government must address.

“As long as we continue to subsidise product, you are going to continue to struggle. So, we need to find a way that we would meet the product needs sufficiently for the populace and at the same time free the sector to grow,” he said but in his reaction to the IMFs call, Kachikwu said he would advise President Muhammadu Buhari on what to do.

“There is no doubt about the logic of trying to remove subsidy. However, the reality is that Nigeria has a very unique situation. You see the reaction immediately from the Nigeria Union of Petroleum and Natural Gas Workers and the Petroleum and Natural Gas Senior Staff Association,” Kachikwu said while fielding questions from journalists on the sidelines of the annual international conference of the Oil and Gas Trainers Association of Nigeria in Lagos.

“So, any president who is going to make that decision will have to weigh all the factors. I did this in 2016 when we took out what was then the subsidy because without that, the country would not have survived. But things have changed since then. So, I need to go back, sit down, look at the [IMF] advice, look at the circumstances, and advise Mr President on what I think is best for the country.”

‘Why IMF’s advice can’t work now’

In an exclusive interview with Daily Trust on Sunday, a former economic adviser to former President Olusegun Obasanjo, and chairman, Daily Trust Board of Economists, Professor Ode Ojowu, held that subsidy removal would not solve the economic and political problems that subsidy has become for Nigeria.

“What the IMF has said is correct in the short term. You can never eliminate subsidy by simply saying you are removing it because the next time it’s going to come back. Nigeria is not controlling the production of these refined products. We don’t have control over the market price that comes externally to us,” Prof. Ojowu said.

The economist said as a resource from within, if Nigeria domesticates the production and processing of crude to refined products, then the subsidy problem would be solved.

“The idea of calling for the elimination of subsidy sounds good but it does not solve the problem. Subsidy is simply explained by the fact that we are importing petroleum products and once we domesticate processing of crude oil, the issue will die,” he said.

The professor recommended that the IMF should do more by asking the Federal Government to domesticate production rather than to eliminate subsidy because as long as there is exchange rate fluctuations between the Naira and Dollar the subsidy will forever remain a subject of unnecessary controversy.

As a first step, Prof. Ojowu said, Nigeria should establish exactly the extent of subsidy, which is the amount of government is spending on above the cost of production.

He said the main crisis is that Nigeria has failed to domesticate the processing of crude into refined products and because Nigeria is importing, the cost of importation is influenced by many factors, the dominant being the Naira-Dollar exchange rate, insurance cover from the point of export and the method by which Nigerians use small boats to evacuate the refined products from the high seas to the land.

“All these have become issues of concern; particularly the whole method of evacuating the product from the high seas to the land has become major business for those who are connected. If truly we want to eliminate this so-called subsidy, we must domesticate the processing of crude oil into refined products,” he said.

He said the domestication will eliminate the impact of exchange rate movement, eliminate the cost of insurance and provide the benefit of the employment that it will generate within the economy and the multiplier effect of processing locally.

“I can assure you that if we domesticate even as much as putting existing refineries to work, the issue of subsidy will die naturally. People are making a kill out of Nigerians from subsidy and as long as government does not take the necessary step to domesticate the processing of crude oil into refined products, the issue of subsidy will remain both an economic and political problem,” he said.

‘Why it must be heeded’

Other energy experts who have joined the call by the IMF on the government to do away with subsidy on petrol hinged their reasons on the fact that the subsidy has continued to gulp billions of dollars of government fund.

The President of the Nigerian Association for Energy Economics (NAEE) Prof. Wumi Iledare, said the benefit of petroleum subsidy was far less than the cost.

“Anytime a government has a policy, there is need for it to be reviewed to see whether the benefit that comes from the policy is more than the cost or they are about equivalent.

All you need to do is to look around, the roads are bad, the schools, the hospitals are bad and infrastructures are not even there. Look at the budget for health, education, defence and add them up and you will see that it is not up to petroleum subsidy in 2018. Is it not time for the government to look at it?”

A Principal Consultant at DeltR Energy Ltd, Ronke Onadeko, in a recent contribution to Daily Trust on Sunday on subsidy said the government cannot continue to bear the subsidy burden because the beneficiaries of the subsidy were not being impacted.

“Instead of Nigerians benefitting, the whole of West Africa, smugglers and brisk business contractors are smiling to the bank,” she added.

The Director Institute for Oil, Gas, Energy, Environment and Sustainable Development (OGEES Institute) Afe Babalola University, Prof. Damilola S. Olawuyi also in a recent emailed response on the matter, said there could be no better time to end subsidy on fuel than now.

“Plunging crude oil prices, and the corresponding cheaper pump prices of petrol, can alleviate the threat of public unrest and popular opposition, which has been one of the main obstacles to subsidy reform in Nigeria,” he said, adding that “The economic impact of subsidy removal is less severe for the common citizen under current low crude oil prices, as petrol cost will remain relatively low.”

“Furthermore, economic actors that have perennially benefitted from fuel subsidies generally benefit less when crude oil prices decrease. This could generally reduce the appetite for such groups to mobilize against a comprehensive and well communicated subsidy reform program by the government. This means that the public and political opposition to subsidy reforms may be relatively less intense when oil prices are lower,” Olawuyi said.

Labour unions kick

As anticipated, the Nigeria Labour Congress (NLC), the umbrella organization for trade unions in Nigeria, cautioned the Federal Government against implementing the recommendation of the IMF.

NLC President Mr. Ayuba Wabba at a news conference said as long as the value of the Naira was left to market forces, the issue of subsidy would continue in the country.

The labour leader said: “As President of the International Trade Union Confederation (ITUC), I recently led organised labour across the world to a meeting with the IMF and the World Bank. I told them point blank that their one-stop recommendation on subsidy removal and other sundry policy recommendations to the Third World are not working and will not work,” he said, adding that there was no country in the world where IMF’s recommendations had worked or are working.

Two of the most influential unions in the oil sector, the Nigeria Union of Petroleum and Natural Gas Workers (NUPENG) and the Petroleum and Natural Gas Senior Staff Association (PENGASSAN) described as poisonous the IMFs advice to the Federal Government on fuel subsidy.

The two unions said the advice had created panic in Nigeria, leading to the hoarding of petroleum products, panic buying, sky-rocketed increase in prices of goods and services in the country.

The statement further read: “It is quite bewildering and baffling that the IMF is not considering the pains and agonies Nigerians went through even to achieve the acknowledged gains of 2018, with almost two-thirds of the world’s hungriest people among Nigerians.

“One wonders why the IMF is still callously and wickedly advising the government to inflict more pains and harm on the people.”

The oil workers said stringent reforms such as removal of fuel subsidy and increase in Value Added Tax would be an attempt to destabilise the nation.

The call by the IMF followed by experiences of Nigerians at fuel stations in recent week have also drawn mixed reactions by industry experts.

Subsidy’s rise and rise

Between 2006 and 2016, Nigeria spent N9 trillion on fuel subsidies paid to private oil marketers and the NNPC, according data obtained from the Petroleum Products Pricing and Regulatory Agency (PPPRA).

The fraud and corruption that trailed the subsidy regime prompted the Federal Government under President Buhari to remove subsidy on petrol in May 2016, pegging the pump price at N145 per litre.

However, due to shortage of foreign exchange and increase in crude prices, private fuel marketers who imported most of the petrol consumed in the country, stopped importation leaving the NNPC to import petrol since 2017, at a huge cost to the government treasury.

NNPC now classifies the losses as under-recovery instead of outright subsidy.

The corporation has severally explained that under-recoveries in the importation and sale of Premium Motor Spirit (PMS) was a burden categorized as business losses which the Act establishing the NNPC recognizes.

The losses, from the PMS imports, according to the corporation, could not be classified as subsidy since it was not appropriated for by the National Assembly.

The corporation’s operations report for 2017 showed that it spent over N144.53 billion, translating to an average of N366 million per day as under recoveries on the PMS that year. The under recovery amount represented 16.85 per cent of the N857.36 billion remitted to the Federation account in the whole of 2017.

Between January and November 2018, the NNPC documents presented by the corporation to the Federation Account Allocation Committee (FAAC), showed that a total N623.16bn was incurred as under-recovery in 11 months.

For several months in 2018, FAAC meetings were deadlocked over low revenue remittances by the NNPC but sources in the corporation said the cost borne by the corporation in the course of petrol importation was a major contributor to NNPCs dwindling remittance to FAAC.

The NNPC said in 2018 it initiated the move to raise a revolving fund of $1.05billion, since the corporation was, and still is, the sole importer and supplier of white products in the country.

The fund, dubbed the National Fuel Support Fund, had been jointly managed by the NNPC, the Central Bank of Nigeria (CBN), the Federal Ministry of Finance, the Petroleum Products Pricing Regulatory Agency (PPPRA), Office of the Accountant General of the Federation (OGF), the Department of Petroleum Resources (DPR) and the Petroleum Equalization Fund (PEF).

This year, the federal government has earmarked in the 2019 budget N305 billion equivalent to $1 billion for under-recovery by the NNPC, an amount which is higher than what the government plans to spend on critical capital projects for education (N47.29bn), health (N50.15bn), water resources (N73.58bn) and agriculture (N80.29) put together in 2019.

While the debate continued, the NNPC at the weekend reaffirmed its readiness to ensure adequate supply of petroleum products in all the nooks and crannies of the country.

The Group Managing Director of the NNPC, Dr. Maikanti Baru, who gave this commitment during the conferment on him of the Distinguished Merit Award by the Association of Business Managers and Administrators of Nigeria in Abuja at the weekend, said the corporation currently had 1.7 billion litres of petrol in stock, equivalent to 35 days sufficiency without adding a drop.

A statement by spokesman of the NNPC, Mr. Ndu Ughamadu, said plans were afoot to increase it to 2.4 billion litres by the end of the month.

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