The International Monetary Fund (IMF) has said that petrol subsidies clog the wheel of Nigeria’s economic progress and should be removed. The multilateral institution says such action remains critical at a time resources are needed by the country for debt servicing and repayment. Aside from the IMF, other stakeholders have advised Nigeria to remove petrol subsidies to save more funds for critical infrastructure. The proponents argued that although subsidies are often intended to help low-income households, they have become a drain on government resources as they are available to everyone, including those who are relatively well-off.
Subsidy reform can be a tough sell because it often involves raising the prices of goods, such as petrol or food, which immediately hits consumer pocketbooks.
In Nigeria, many attempts to scale back harmful petrol subsidies have been reversed under pressure from interest groups and the public, making the government absorb avoidable costs.
In many countries, subsidies could be a temporary policy tool to correct market imperfections- that is, when competitive, private markets fail to deliver socially desirable outcomes.
But that is not the case with Nigeria, which has for years, enjoyed subsidies on petrol despite having one of the lowest revenue levels as a share of Gross Domestic Product (GDP) worldwide.
A large share of Nigeria revenues is spent on public debt service payments, leaving insufficient fiscal space for critical social and infrastructure spending and to cushion an economic downturn.
With crude oil prices now at $65 per barrel and its implication on the petrol price in the country has once more triggered discussion on petrol subsidy removal in Nigeria.
Data showed that the Federal Government spent N10.41 trillion on fuel subsidy between 2006 and 2019 on petrol subsidies, which is funds that would have been used or developmental projects.
Professor Emeritus of Petroleum Economics, Louisiana State University (LSU) Energy Studies, United States, Wumi Iledare, said the Federal Government cannot afford to not deregulate otherwise, Nigeria may end up like Venezuela and perhaps eventually like Yugoslavia.
He said that subsidising petroleum product has decimated the Nigeria economy for decades, hence now is that time to stop the practice for posterity sake
“Listen there is nowhere in West Africa where the price of petrol is less than N200 per litre. It is almost N450 per litre in Ghana at the current exchange rate. Neither is there anywhere in West Africa with Nigeria’s artificial lifestyle. But nearly everywhere in West Africa has organised electricity delivery system and sustained educational structure. I think the labour unions are living in the memory of the past and compromising a sustainable future in the process,” he told The Nation.
For Iledare, asking the government to subsidise forex and petrol at the same time is asking the government to commit suicide.
Continuing, he said: “Unfortunately, the government has itself to blame. I hate to say we told them so in 2016 not to set the pump price at N140 per litre. They did not listen. But let me suggest a pragmatic but inefficient way out because of Covid-19 pandemic,” he said.
Also speaking, Michael Stevens, an international energy consultant based in Abuja, said petrol subsidy removal will lead to the elimination of wastage, fraud in the subsidy process, savings to the government even as a whole lot of the country stands to benefit from the exercise.
He said that although prices of petrol will rise when the subsidy is removed, the economy and Nigerians will be better off with the decision in the long run as the industry stabilises and prices begin to fall.
Downstream oil sector reforms
The Federal Government had last April agreed to restructure the downstream segment of the Nigerian oil industry through the removal of fuel subsidy. The move followed a significant drop in the price of crude oil due to the coronavirus pandemic. The government insisted it would no longer be paying for under-recovery or subsidy on petrol.
Hence, the Petroleum Products Marketing Company (PPMC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC) announced that petrol prices would henceforth be determined by market forces. It had explained that the new price regime with its cost-reflective nature was expected to help to improve product availability and attract investments to the sector as marketers now have increased margin.
Since then, the Petroleum Product Pricing Regulatory Authority (PPPRA) has been giving monthly guidance on petrol prices through the price modulation method, meaning that when the crude price goes up, petrol price would go up, and when it comes down, petrol price would follow suit.
However, the policy did not go down well with the marketers expressing concerns over the government’s continuous meddlesomeness with petrol pump price, which they believed should be allowed to float. They had argued that such a model was not in tandem with the principle of market forces that takes into account, the basic market fundamentals.
So far, in 2021, crude oil prices have continued to surge largely on the back of production cuts from the Organisation of Petroleum Exporting Countries (OPEC) and its allies.
Countries with working subsidies reforms
The International Monetary Fund (IMF) says that reforming subsidies is not always easy, but many (mostly energy-producing) countries have nevertheless managed to raise domestic prices in recent years, including Angola, Egypt, India, Mexico, and Saudi Arabia.
“Reforms need to go a lot further, however, particularly in reflecting environmental costs in fuel prices, which should be a key component of countries’ strategies to implement the pledges made in 2015 under the Paris Climate Change agreement to reduce carbon emissions,” it said.
The Fund said Nigeria needs a comprehensive and detailed reform strategy that specifies clear long-term objectives for future price paths and the use of revenues.
“A far-reaching communications strategy is also needed to show how subsidies crowd out more efficient and equitable public spending. A gradual approach to reform, allowing consumers and firms time to adjust, can help. Measures such as cash transfers to protect vulnerable households and retraining for displaced workers are often essential to overcome opposition,” the IMF said.
Other stakeholders speak
An economist and Chief Executive Officer of Financial Derivatives Company Limited, Bismarck Rewane, said petrol subsidy removal presents a good opportunity for fresh investments in the downstream oil sector.
He said Brent is now trading above $65 per barrel and generating decent revenues for the Federal Government as production is stalled at 1.45mbp. These revenues are now beginning to yield a positive impact on the excess crude account which is now at a paltry $77 million on the one hand and keeping Nigeria’s external Reserves ($35.28 billion) from dropping sharply on the other. The outlook is for oil to trade steady above $60 per barrel in March 2021.
According to him, a petrol subsidy would free revenues for the government to provide essential services and at the same time boost investments in the downstream sector.
Also, the Chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Adetunji Oyebanji, said fuel subsidy removal would allow operators to recover their costs, adding that it would, in the long run, encourage investment and create jobs.
Also speaking, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, said the Federal Government saved over $400 million following the removal of its fuel subsidy policy in 2020.
The NNPC boss said he does not expect that the policy which had over the years drained the country’s scarce resources would be returned even when crude oil price rebounds.
According to Kyari, the Federal Government would deploy the amount saved to the development of critical infrastructure in the country.
“As you are aware, the Minister of State for Petroleum Resources has made a policy statement based on presidential directives on the issue of fuel subsidy. Also, the PPPRA has issued guidelines on the process for monitoring the pricing of petroleum products in the domestic market going forward.
“My personal view is that subsidy should be removed, and the funds deployed to areas of the economy particularly road infrastructure and education that need funds. Fuel subsidy is a misallocation of resources and it benefits mainly people who don’t need it; the rich.”
He said the NNPC has continued to support initiatives towards the actualisation of zero import of refined products by 2024, adding that the corporation has adopted a three-pronged strategy. This includes – revamp, restructure and encourage.
Revenue mobilisation options for govt
The IMF said that what Nigeria needs at the moment is mobilizing revenues through efficiency-enhancing and progressive measures, including petrol subsidies removal.
According to the Fund, revisiting tax exemptions and customs duty waivers, increasing and broadening the base for excise taxes, developing a high-integrity taxpayer register, enhancing digital infrastructure, and improving on-time filing and payment are important measures.
It added that Nigeria’s export structure has not fundamentally changed over the decades, with hydrocarbon products still accounting for 90 per cent of the country’s exports today as they did in the 1970s.
“Successful economic diversification requires trade openness and competitive discipline. The experience of Malaysia, Indonesia, and to some extent India has shown that a shift toward export-oriented industrialisation can boost GDP. The limited gains from inward-oriented policies in terms of creating jobs and improving living standards suggest that Nigeria needs to change course,” it stated.
To accommodate a growing number of young people entering the labour market, Nigeria will need to create at least five million new jobs each year over the next decade. Based on the experience of other countries, embracing more open trade and competition policies would help diversify the economy and reinvigorate growth, particularly as the African Continental Free Trade Area takes effect.
Transparency measures by the government
The Federal Government had also adopted measures to facilitate tracking and reporting of emergency spending. The government has created new budget lines with monthly expenditure information on emergency funding, which are posted on the Ministry of Finance’s Transparency Portal although users have found it difficult to access the data.
The Bureau of Public Procurement has issued guidelines on COVID-19 emergency fund use, and the Nigeria Open Contracting Portal has been publishing-related procurement contracts, although some contract details on beneficiary ownership are yet to be completed.
Stakeholders called for more transparency reforms by expanding the monitoring and reporting of all public spending, as well as ensuring easy public access to spending data.
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