Nigeria: Fuel Subsidy Now Reaches Boiling Point
Nigeria: Fuel Subsidy Now Reaches Boiling Point

Nigeria: Fuel Subsidy Now Reaches Boiling Point

The Nigerian government’s proposal to end its fuel subsidy regime at the beginning of next year has been generating heated debate among Nigerians.

Nigerians may soon brace up for major industrial unrest, following President Goodluck Jonathan’s administration’s decision to phase out the controversial fuel subsidy regime from January 2012. The Nigeria Labour Congress (NLC), the Conference of Nigerian Political Parties (CNPP), a coalition of all opposition political parties, and social activists, have vowed to resist the policy, which they say would impoverish Nigerians.

They contend that removal of fuel subsidy would lead to a more than 100% increase in the prices of petroleum products, so a litre of petrol currently sold at N65 ($0.43), could rise to N150 ($1). This would lead to an astronomical increase in the prices of goods and services and impoverishment of the ordinary Nigerian, living on less than $1 a day.

The announcement was not unexpected. The government’s justification that ending the subsidy would help free up resources, saving about N1.2 trillion ($8bn) annually to be invested in infrastructure, failed to convince sceptical Nigerians.

The CNPP explains why it is up in arms. CNPP’s spokesman, Osita Okechukwu said: “We are not unaware that the fuel subsidy is bleeding our national treasury. However, it is our considered view that the People’s Democratic Party-led Federal government lacks the moral high ground, credibility and indeed the political will to prudently utilise the savings to provide critical infrastructure.”

Similarly, the NLC kicked against the policy, warning that it would lead to a sharp drop in living standards. The President, NLC, Abdulwaheed Omar said: “Every effort will be put in place by the masses to scuttle the planned removal. It is unacceptable and we Nigerians must resist such a move.”

The government introduced a subsidy regime some years ago to cushion the effect of the periodic rise in fuel price. But like other laudable policies, it has been abused and become subject of criticism. In many parts of the country, consumers still pay above the approved price of N65 ($0.43) per litre for petrol, defeating the original purpose.

How fuel subsidy works
Under the subsidy regime, the government-owned Petroleum Products Pricing and Regulatory Agency (PPPRA), allocates quarterly import quotas to the Nigerian National Petroleum Corporation (NNPC) and distributors of petroleum products, and pays both parties the differential between the landed cost and the official pump prices. The whole idea is to keep pump prices at manageable levels. According to information from the PPPRA, the Federal government spent N621.5bn ($4bn) last year on fuel subsidy.

However, unscrupulous middlemen have turned the well-intentioned policy into a scam, fleecing the government of billions of dollars annually. Though the government regulates the prices of petroleum and kerosene, since they are predominantly used by the masses, it deregulated the pump price of diesel, giving distributors the liberty to control the volume of imports and fix ‘appropriate’ prices to enable them to recoup their costs.

Again, some have abused this policy, ripping off hapless Nigerians. Since there is no subsidy on diesel, the current price per litre ranges between N150 ($1) and N170 ($1.13). This is far above the recommended pump price of about N120 ($0.8) per litre.

Unlike petrol, which the government allows marketers to import, kerosene is exclusively imported and heavily subsidised because it is used by the majority of Nigerians, who live in rural areas. But even the price of this essential commodity, which goes for about N50 ($0.3) per litre officially has gone out of reach because of scarcity.  

Traders have a virtual monopoly in the importation of aviation fuel, which is also deregulated. Analysts have accused them of being responsible for its current high cost.

Another factor is the smuggling of petroleum products across the nation’s porous borders – a profitable venture for smugglers who sell the products at exorbitant prices to ready buyers in neighbouring countries.

Writing on the wall
All these abuses compelled the administration of President Goodluck Jonathan to consider its removal, despite the mounting pressure for the government to retain it in the interest of the masses.

Dr Olusegun Aganga, Nigeria’s Minister for Trade and Investment and immediate past Finance Minister, hinted last year that the country would stop fuel subsidies before the end of 2011.

Aganga said the government would invest in a mass transit system to reduce the burden on the ordinary Nigerian. It has earmarked N10bn (about $70m) for the purchase of buses. Jonathan had warned Nigerians to expect tough economic decisions from his administration. The imminent removal of fuel subsidy may be one of them.

A big fraud?
The Nigerian Governors’ Forum (NGF), an association of the 36 state governors, has been particularly vociferous in demanding an end to fuel subsidy, which it describes as a monumental fraud.

The immediate past governor of Nigeria’s North Central Kwara State and currently a Senator, Dr Bukola Saraki, argues that fuel subsidy has robbed the nation of huge revenue over the years and as such should be scrapped.

Saraki said: “That money can better be used to impact positively on the lives of the majority of Nigerians. Presently, the country spends about $4bn yearly on fuel subsidy. That means if shared among Nigerians, everyone will have N4m per year.”

The Senator, who notes that fuel subsidy is supposed to be a palliative measure to help Nigerians, insists that it has not met this objective as most of the money ends up in the pockets of a few corrupt individuals. He warned that it will be worse this year as kerosene is being subsidised to the tune of $6bn – almost the country’s capital expenditure for the year.

The Governors’ Forum, which also backed the move, had given this as a precondition for payment of the new national minimum wage of N18,000 ($120) signed into law by the President this year.

Their argument was that the removal of fuel subsidy would increase their monthly allocations from the Federation Account and enable them to pay the new minimum wage.

Governor Rotimi Amaechi of Rivers State and current Chairman of the NGF explains that the governors took the position on subsidy removal because Nigerians are not getting the benefits. Outside Lagos, Rivers and Abuja, he argues, the subsidy is not effective because a litre of fuel goes for as much as N150 ($1), which is more than double the recommended pump price of N65 ($0.43) per litre.

Though he admits there would be pains at the initial stage, he says they would disappear slowly when new refineries, which will help to create jobs for the people, come up. According to him, investors have been unable to build refineries due to the current subsidy policy, which he notes is a disincentive.

The way forward
Clearly, there are two camps in the subsidy issue. Those against fuel subsidy say it discourages investment in the building of more refineries because investors shy away from a situation where they might experience high costs of production, which they cannot pass on to the consumer because the law requires them to maintain low prices.

The anti-subsidy group point out that the envisaged upward swing in the rate of inflation arising from fuel subsidy removal can be considerably mitigated with a conservative fiscal policy regime put in place by the government. They share the view that more investment in transportation and electricity sectors would substantially reduce prices in the long term.

They also believe that as new refineries come on stream, prices would begin to follow a natural downward trajectory, just as in the telecommunications sector where cut-throat competition after the entry of new players in the industry, dramatically crashed the cost of SIM cards by more than 80%.

The advocates of fuel subsidy argue that in Nigeria, where an estimated 70% of the population lives on less than $1 a day, the policy would escalate poverty levels and further impoverish the poor.

It is indeed a paradox that Nigeria, Africa’s biggest oil producer, imports more than 80% of its domestic fuel due to the absence of functional local refineries. Despite billions of naira that the NNPC has sunk into the turnaround maintenance (TAM) of the nation’s three refineries situated in Warri, Port Harcourt and Kaduna over the years, it has not stopped the importation of the refined products into the country.

The only way out of this logjam, the government insists, is total exclusion of the fuel subsidy to encourage both local and foreign investors to set up new refineries in the country. It also believes subsidy removal will eliminate sharp practices currently prevalent in the importation of petroleum products as well as curtail smuggling of fuel.  

For now, it seems, no side is winning the argument.

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Written by African Business Magazine

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