The subsidy conundrum

The Federal Government walked into the current subsidy brouhaha and the attendant fuel scarcity which has made life difficult for Nigerians with its eyes wide open. This is an avoidable situation which the myopic approach to governance in the country made inevitable. In 2016, the Federal Government had said it would discontinue payment of subsidy on Premium Motor Spirit (PMS), otherwise known as petrol. While announcing this decision, Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, said, “In order to increase and stabilise the supply of the product, any Nigerian entity is now free to import the product, subject to existing quality specifications and other guidelines issued by regulatory agencies.”

Kachikwu added that “Pursuant to this, PPPRA has informed me that it will be announcing a new price band effective today, 11th May, 2016 and that the new price for PMS will not be above N145 per litre. We expect that this new policy will lead to improved supply and competition and eventually drive down pump prices, as we have experienced with diesel. In addition, this will also lead to increased product availability and encourage investments in refineries and other parts of the downstream sector. It will also prevent diversion of petroleum products and set a stable environment for the downstream sector.”

That should have provided the government with the opportunity to completely hands off the issue of fixing fuel prices, and leave that to market forces. But the government failed to achieve that major milestone; it lost the opportunity to completely inter the demon of subsidy when it allowed petrol to still be sold at N145 per litre despite the fall of the prices of crude oil in the world market and the crash of dollar exchange rate from N520/dollar to N305. Having failed to give the people the benefit of low crude oil prices, the government cannot in good conscience pass the burden of high crude oil prices to Nigerians, hence the return of the subsidy regime.

According to the NNPC Group Managing Director, Dr Maikanti Baru, the landing cost of PMS in December 2017 was N171 per litre. So, selling a litre at N145 is tantamount to paying N26 as subsidy on every litre of PMS. Given the fact that Nigeria consumes 35 million litre daily, that is over N3.3 trillion a year as fuel subsidy. Such money could have gone into education development, road construction, healthcare provision, power generation and general improvement of the country. Although the government has insisted that it would not subsidise oil marketers but rather give them tax concession, the fact is that one way or the other, the government loses revenue to mitigating high fuel prices.

The argument for subsidy is that the poor suffer when the price of fuel soars. But that argument falls in the face of reason. The irrefutable truth is that the rich benefit more from a subsidy regime than the poor. Subsidy helps the rich more than it does the poor. It is the rich who keep fleets of cars and run many generators. So, when the per capita benefit of the subsidy regime is computed, the pendulum swings more in favour of the rich than the poor. But worse than that is that subsidising PMS in Nigeria is to the advantage of the neighbouring countries. Petrol is costlier in all the neighbouring countries than it is in Nigeria. So, when subsidy is in place in Nigeria, petroleum products are smuggled out of Nigeria to those neighbouring countries. What this means is that the Nigerian government subsidises fuel consumption in Niger, Chad, Cameroon and the Republic of Benin. Nigeria’s loss is the gain of the citizens and governments of these countries.

We are of the strong view that the subsidy regime should be done away with because it is a strategy for perpetuating underdevelopment. But we are also constrained by the effects of high fuel prices on the poor many of whom are already pushed far below poverty line by the inclement economic conditions in the country. In fact, life is nasty and brutish in Nigeria and the government made it so. We, therefore, call on the government to find a way of refining crude oil locally so that availability and affordability of petroleum products can be guaranteed. Losing avoidable N3.3 trillion yearly is not the way to go for a country with underdeveloped infrastructure.