Fuel Subsidy Removal: In Whose Interest?

There are speculations making the rounds that the Nigerian government may have reached an advanced level in plans towards 100 percent removal of subsidy it puts on refined petroleum products consumed by its citizens. This expensive and non-market scheme is often criticized by the Washington Consensus as opaque, corrupt, unsustainable, and a clog in the wheel rider of economic progress in Africa’s largest market, thereby sparking a debate among stakeholders whether putting an end to it will result in full and sustainable market autonomy or total economic chaos. Yange Ikyaa and Gideon Osaka examine the trend

According to the Lagos-based economic research and analysis firm, Financial Derivatives Company (FDC), the Nigerian government could end up spending as much as $5 billion in subsidy payments by the end of the year 2019.

This figure is far beyond an earlier projected amount of $3.5 billion that the Nigerian Minister of State for Petroleum Resources, Emmanuel Ibe Kachikwu, said would be used for subsidy payment within the same period under review.

While many people thought that the subsidy regime would be stooped during the first term of President Muhammadu Buhari’s government because of the “corruption” tag it carries, and rightly so, it was rather restructured and continued, with some reduction in its cost from the onset of the government but rising with time and trends in the global oil market.

For instance, with global oil prices rising from $37 per barrel since Buhari took office in 2015 to as much as $70 this year, Nigeria’s subsidy costs have also grown sharply.

Global oil prices soared over a two-month period, just as Nigeria’s expenditure on fuel subsidy grew from a daily average cost of N774 million in March 2018 to N2.4 billion per day in May of the same year, as the country grappled with fiscal deficits and rising debt levels.

The Petroleum Products Pricing Regulatory Agency (PPPR) said, without government subsidy, the price of petrol in Nigeria could be as high as N205 per litre.

The government agency further explained that the price of the fuel appreciated by 8.47 per cent from N189 per litre in April 2018 to N205 per litre in May 2018. During that period, it said, oil prices continued to soar such that the average price for Brent crude was $77.92 per barrel and Nigeria’s Bonny Light was $78.08, while West Texas Intermediate (WTI) sold at $60.27 per barrel.

In the new subsidy structure under President Buhari’s government, instead of paying subsidies to independent importers, including some IOCs, as was the case under previous administrations in Nigeria, the government’s new policy has made the national oil company, the Nigerian National Petroleum Corporation (NNPC), to become the sole importer, which is responsible for all refined fuel imports into the country.

By so doing, the NNPC swallows the difference in payments between its costs and the price at the pump back in the country, bringing home the reality that the government still pays the bill to insulate Nigerians from the full costs or prices of petrol which they consume.

The debate on subsidies has heated up due to divided opinions between those who believe in market autonomy and those who think that the government must continue to intervene in the market in order to save the poor from the power of capitalism. As expensive and unprofitable as they are, those who are in government and can decide to end the subsidies believe that such a move will be politically unpopular, since it will force consumers to pay more on essential products, notwithstanding the fact that capitalists and corporations favour the removal of subsidies and allowing market forces to decide commodity prices without government interference.

When President Goodluck Jonathan announced that he would abolish the fuel subsidy in 2012, his government faced massive street protests and he eventually backed down on how much more to cut from fuel subsidy financing.

As the price of oil rose from 2017, there were more calls and increased pressure on the Nigerian government to cut the subsidies or raise fuel prices, but that did not happen probably because either of the two options represented harmful choices to the ruling party’s chances of re-election. However now that the elections have been won, there may be a possibility that subsidies would be removed and oil prices may shoot up nationwide.

International financial instit­utions like the World Bank and the International Monetary Fund have been urging governments, including the Nigerian government, to cut costly ­national subsidies and to provide them in a targeted fashion to poor communities. The World Bank says that subsidies “impose a heavy fiscal burden and are likely not sustainable, since they are disproportionately beneficial to high-income households, and are a costly way to protect the poor.”

But one analyst, who asked not to be named, told Valuechain that “Nigerians shouldn’t pay for the irresponsibility of the country’s refinery managers. If today the refineries are working, the IMF would not be advising Nigeria on removal of subsidy. There won’t be issue of landing cost of petroleum products because we have network of pipelines connecting the production zones with our refineries.”

“If the refineries are not working, it is not the fault of Nigerians. Since the government cannot summon the courage to sack or fire those that are not doing their job to keep the refineries working, it should bear the burden of paying for subsidy instead of putting the cost on the masses in the name of deregulation, removal of subsidy, and fuel price increase.

“Should Nigerians always pay for the failure of the agency called the Nigerian National Petroleum Corporation (NNPC) in effectively discharging its duties or always giving excuses for its failure to do its work,” he queried.

He added that “a country that is endowed with crude oil like ours should be able to refine the crude locally, sale to its citizens at affordable prices and export both crude and refined products to foreign market to earn forex”

It would be recalled that at the just ended World Bank Spring Meeting in Washington DC, United States of America, Managing Director of the International Monetary Fund (IMF), Christine Lagarde, advised the Nigerian government to end fuel subsidy and instead expend such money it spends annually to finance the scheme on health, education and infrastructural development.

Lagarde explained that subsidy spending was infringing on other critical areas of capital development, including health, education and infrastructure, hence the need for the government to refocus.

She further explained that it is the monetary institution’s general principle to discourage fossil fuel subsidies because of its consequences on other areas of life and development.

According to her, “as far as Nigeria is concerned, with the low revenue mobilisation that exists in the country; in terms of tax to GDP, Nigeria is amongst the lowest. A real effort has to be done in order to maintain a good public finance situation for the country. And, in order to direct investment towards health, education, and infrastructural development, but if you look at our numbers from 2015, it is no less than about $5.2 trillion that are spent on fuel subsidies and the consequences thereof. And the Fiscal Affairs Department has actually identified how much would have been saved fiscally but also in terms of human life, if there had been the right price on carbon emission as of 2015. Numbers are quite staggering.”

The IMF is not an institution to be easily ignored based on monetary policy issues and for these reasons and some others, there are fears in Nigeria currently that the price of petrol may increase notwithstanding the assurance of NNPC that such will not happen anytime soon.

This fear is being reinforced on the heels of bickering between stakeholders in the oil and gas industry over supply of the product, as well as the unresolved subsidy issue.

Valuechain authoritatively gathered that there was a meeting between NNPC and stakeholders within the circles of MOMAN, or Major Oil Marketers Association of Nigeria, bordering on possible petrol price hike. It was learnt that the Petroleum Products Marketing Company (PPMC) summoned the meeting where top members of MOMAN attended to discuss with the top management of NNPC, including Dr. Maikanti Baru, the Corporation’s Group Managing Director, who was personally in attendance at the Congress Hall of the Transcorp Hilton Hotel, where concerns about subsidy removal on refined petroleum products, its possible economic benefits, as well as eventual consequences for the masses of Nigeria were discussed.

However, while some groups favour full deregulation and subsidy removal, citing market autonomy and sustainability, others fear that such a move could result in total economic chaos and should not be tried, or should be attempted only with extreme care.

Amid speculations of subsidy removal, consumers have already started engaging in panic buying, with marketers allegedly hoarding the product. Both actions can be attributed as the reasons for long queues that are building in virtually all the filling stations in the country.

NNPC had said that landing cost of fuel now stands at N180 per litre, but industry sources told Valuechain that some private depot owners are selling petrol (PMS) to marketers at between N137.50k and N139 per litre, as against the official ex-depot price of N 133.28.

According to Debo Ahmed, Chairman, Independent Petroleum Marketers Association of Nigeria (IPMAN) South West chapter, it is incumbent upon the government to intervene and save the citizenry from untold hardship.
In his words, “government should urgently arrest the situation before it goes out of hand, because they are aware of the hike in price by depot owners.

“It is not possible for marketers to buy petrol above ex-depot price and still sell it at official pump price of N145. It will definitely affect our margin. I urge DPR to stand up to its responsibility to sanction any depot owner who increases the price of petrol. “Government gave the depot owners product and they should explain why they are selling above ex-depot price; ours is to buy and sell at official price but if it is sold to us above official price, we will also sell above the pump price.

“We don’t want to sell above the official pump price and that is why we are urging government to do something about it and make the product abundantly available. “They should monitor private depot owners to make sure they don’t sell above the official ex-depot price of N133.28,’’ he said.

Sensing that the hullabaloo about depot price increase is a ploy by the government to increase the pump price by removing fuel subsidy, the Nigerian Labour Congress (NLC) has advised the government to jettison the idea.

The General Secretary of the NLC, Peter Ozo-Eson, said the position of the NLC was unambiguous on the issue of fuel subsidy, explaining that the solution to the issue was to make the nation’s refineries functioning. He added that the NLC President, Ayuba Wabba, had addressed the issue on numerous occasions.

Ozo-Eson said that “on this issue, we are already on the public domain. We are opposed to the removal of fuel subsidy. What needed to be done is for the refineries to be fixed. If Nigeria stops the continuous importation of fuel, this matter will be addressed. But clearly, we are opposed to the removal of fuel subsidy. NLC President has also made clear statements about this matter.”

Although the speculations about subsidy removal still lingers, the timeline about when likely to completely deregulate the downstream sector of the Nigerian petroleum economy is still unknown.

While the IMF called for urgent action on this matter, the federal government and the global financial institution differed on timelines.

The Nigerian Minister of Finance, Mrs. Zainab Ahmed, recently refuted media reports that the Federal Government had agreed with the International Monetary Fund’s (IMF) advice on the removal of fuel subsidy.

The Minister stated this when she fielded questions from State House correspondents after the meeting of the Federal Executive Council (FEC) which was chaired by President Muhammadu Buhari.

She said that the government could only remove subsidy on fuel after having enough buffers to cushion the negative effects of the removal on ordinary citizens.

“Let me say that last week when we had the IMF/World Bank meeting, there was just one interactive session with Nigerian journalists.

“We didn’t have any session to discuss subsidy. It was in an interview that someone raised a question based on the Article 4 Report of the IMF.

“What they asked was whether we were going to remove fuel subsidy and whether we agreed with the IMF’s conclusion on subsidy removal.

“So, let me say that everywhere in the world where IMF does its review, it will always give advice because that’s the purpose of the review.

“And their advice is when you give subsidy – whether it is fuel or power, their advice is always ‘look at how you can exit doing that’. And that’s the same advice they gave Nigeria.

“So, when I was asked, I said we agreed with that advice. We need to find how we can exit fuel subsidy. But how do we do that?

“We do that only when we have enough buffers to cushion the effects of the removal for our people.

“It is up to the Executive in support with the legislature to agree on what those buffers are,’’ she added.

The minister maintained that even though the government periodically discussed the issue of subsidy under the Economic Management Team, it never contemplated removing the subsidy.

“We should not be contemplating removing the subsidy because, indeed when we do, there will be people that will suffer. So, we are not yet there.

“We discussed this periodically under the Economic Management Team. But we still haven’t found a formula that works for Nigeria. And you know that Nigeria is unique. What works for Ghana might not work here.

One industry expert, who spoke with Valuechain on the condition of anonymity, stated that if fully deregulated, the price of petrol in Nigeria will not be less than N230 per litre, although latest figures from PPPRA put the possible fully deregulated price of petrol in Nigeria at N205 per litre.

Valuechain learnt that after the signing of the Minimum Wage bill into law by President Muhammadu Buhari, plans were underway to fully deregulate the price of petrol or PMS.

But the number of people covered by government work or salaries in Nigeria is far less than 50 percent of the entire population.

According to the Nigerian Bureau of Statistics (NBS), the retirement savings account (RSA) membership distribution data for Q4 2016, which covers both the public and private sectors, has just over 69 million people.

The data show that 7,348,028 workers are registered under the pension scheme out of a total working population of 69,470,091 as at Q4 2016, representing 10.8% of the total working population.

This is not surprising given the largely informal structure of the Nigerian labor force, with about 50% of the current workforce engaged in subsistence agriculture and informal trading. Micro businesses, for example, account for over 90% of total Micro, Small and Medium Scale Enterprises in Nigeria.

According to data available to Valuechain which was sourced from Federal Road Safety Corps, about 60 to 65 percent of vehicles plying the Nigerian roads are for commercial purposes. Government has been known to previously intervene in expanding its transport sector’s capacity through mass transit schemes involving the deployment of buses, using public-private partnerships, to ease transportation costs and promote freer movement for business and economic expansion.

Through the Federal Urban Mass Transit Agency (FUMTA), SURE-P and other schemes, the government has tried in alleviating the suffering of its masses in the past.

However, it is not clear whether these options are being considered at the moment, as the issue of complete subsidy removal on PMS and its full price deregulation progressively gains traction and attention and assumes center stage.

With the speculations of possible fuel price increase upon full price deregulation, fuel stations are being crowded by motorists due to long queues often associated with product hoarding by filling station owners and panic buying by motorists, thus portending an imminent energy crisis across Nigeria.

Valuechain learnt from eyewitnesses that the filling stations along the Lagos-Ibadan Expressway are hoarding fuel against the expected removal of fuel subsidy.

In the Nigerian capital city of Abuja, hundreds of motorists were found forming long queues in front of filling stations starting from April 7, 2019 to buy petrol, as Premium Motor Spirit (PMS), is popularly called in the country.

IMF’s recent report to deregulate the nation’s oil market was based on its assumptions that the country needs more money to put into the development critical infrastructure, such as railways, pipelines, refineries, roads, storage facilities, and many others that serve as the backbone of economic development.

Nigeria has sought capital from many sources for these projects, including a loan from China, to build the rail system in the country but the IMF has been known to criticize this deal, describing it as a debt trap.

However, the Chairman of Heir Holdings, Tony Elumelu has asked the International Monetary Fund (IMF) to provide other alternatives, following its warning to Nigeria to avoid loans from China.

Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, Mr. Tobias Adrian, during the launch of the Global Financial Stability Report for April in this month at the IMF/World Bank meetings in Washington D.C, United states of America warned countries to make sure that when they borrow from abroad the terms are favourable.

“In particular, we recommend that loans to countries should conform to Paris Club arrangements and that is not always the case of loans from China,” the IMF chief said.

But Elumelu disagreed with IMF advice, saying nature abhors vacuum and so the IMF, World Bank and other development partners to provide alternatives that will create jobs.

Elumelu, who was on a private visit to the State House, said “my position is that nature abhors vacuum.

“If you do not want Nigeria to take China loan, provide the alternative. Like I keep saying they should also support the development of entrepreneurs, they should look at ways to help us eradicate poverty in a manner that is sustainable.

“For me, one of the surest ways to eradicate poverty is to ensure that our youths are gainfully employed through entrepreneurship.

“Also to make sure that development agencies – IMF, World Bank and co help and support Nigeria to improve on her infrastructure, road transportation, access to electricity.

“These are things that will help us improve on security in Nigeria. These are things that will help us increase prosperity through employment which is the most important thing. So, the advice is good but nature abhors vacuum.”

The leadership of the Nigeria Union of Petroleum and Natural Gas Workers (NUPENG) and the Petroleum and Natural Gas Senior Staff Association (PENGASSAN) also said it read with serious concerns and worries the reported statement made by the International Monetary Fund (IMF) official on the state of the Nigerian economy and the unsolicited poisonous advice on further recovery of the nation’s economy.

In a statement signed by Comrade Afolabi Olawale, General Secretary of NUPENG, and Comrade Okungbawa Lumumba, General Secretary of PENGASSAN, the two unions said the statement of IMF has created panic in the country with associated hoarding of petroleum products, panic buying, skyrocketed prices of goods and services in the country.

They claimed that clearly, IMF is speaking from the two sides of its mouth, in one breath, as it praises the significant progress the nation has made in terms of its Gross Domestic Product (GDP) that increased by 1.9% in 2018 from 0.8% in 2017 on the back of improvement in manufacturing and other economic policies of the government, while on the other hand, offering poisonous advice on further economic recovery.

“It is quite bewildering and baffling that 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 the Nigerians.

“One wonders why IMF is still callously and wickedly advising the government to inflict more pains and harms on the people? Imposing more stringent reforms in domestic revenue mobilization including amongst other increase in VAT and securing more domestic oil revenues through subsidy removal at this time is clearly an attempt to destabilize the nation.

“This statement is embellished and loaded with poison, considering the antecedents of IMF in our economic challenges and struggles over decades of our nationhood. The various devaluation of our currency on the strength of advice of same IMF has been a very big burden on our nation for several years now.

“The leadership of NUPENG and PENGASSAN are aware of what Nigerians are going through, we empathize with them and will not turn blind eyes to any further attempt to increase their pains and impoverish them further.

“May we put it clearly here, that we profoundly appreciate the efforts, commitment and determination of the government of President Muhammadu Buhari to put Nigeria in the right economic stead after several years of economic maladministration and mismanagement? It is really heartwarming that these efforts are being widely acknowledged at home as demonstrated with his re-election for 2nd term in office and globally, even by the IMF.

“Nevertheless, we earnestly plead with President Muhammadu Buhari to constantly put in mind the current hardship Nigerians are going through in our collective journey to economic recovery.

Be it known that any economic policy that is devoid of human feelings could lead to more social dislocations and upheavals which, in the long run, could become counterproductive as we are currently experiencing”.