Petrol Subsidy Removal : Matters Arising
Petrol Subsidy Removal : Matters Arising
Boniface Chizea
The debate is on as should be expected following the recent announcement that the Federal Government will remove the subsidy on pump price of fuel in 2022. The reality of the situation is that we have been on the issue of appropriate pricing of petrol for decades on end! As should be expected there have been staccato of voices on the exact date of the proposed removal of subsidy, its practicality and most importantly the timing in a high inflation environment. The Honourable Minister of Finance dutifully informed the nation that there is no provision in 2022 Budget for subsidy in the second half of the year.
The pump price of fuel is expected upon the removal of the subsidy to go as high as N 340/litre from the current price of N 164/litre; a proposed increase of over 100%! The received wisdom about this increase is that it is a recommendation by State governors Committee headed by that gadfly; Governor Nashiru El’ Rufia of Kaduna State. What is rather worrisome is that if the importation of fuel is deregulated now as desirable as it is, Nigerians will be in for excruciating future indeed. The reality of the situation is that the pump price will increase as the price of crude petrol in the International oil market increases; a very likely scenario if left to OPEC alone. It would also be dependent on the prevalent rate of exchange. The one safe bet about the exchange rate is that it will continue to depreciate for the obvious reason that the economy has an export base driven by essentially primary products with little or no local value addition.
But the position of the country with regard to subsidy provision is damning if not utterly scandalous. Let’s look at the following information provided by the World Bank. 1) Nigeria is the only country in the world today that still grants universal petroleum subsidy. 2) Nigeria has the worst Revenue/GDP ratio, even worse than Haiti. 3) As at October, 2021 the pump price of fuel in Nigeria is the 7th lowest amongst 168 countries. 4) In 2022, government plans to spend N 3,000 per person in one year on health care but subsidy will cost the equivalent of N 13,000 per person in one year. It then proposed the urgent removal of the subsidy backed by some transport costs relief to cover between 25 to 50% of the poor segment of the population. You now have an insight as to what informed the recent proposal by the fiscal authorities.
The proposal to undertake monthly cash transfer of the equivalent of N 5,000 to the target population estimated at 40 million as proposed has been estimated to cost N 2.4 trn, the equivalent of 80% of estimated annual subsidy. But we have also been informed that there is no such provision in Budget 2022 even if that should not constitute any meaningful obstacle as a supplementary budget can always be prepared and approval sought.
Labour has served notice of industrial action should subsidy be removed. Students Union has also added its voice of opposition and readiness for protests. But to continue to carry the burden of subsidy payments against the background of the fragile and precarious state of the Nigerian economy is no longer a sustainable option.
The local Refineries are undergoing turnaround maintenance as we discuss and the earliest relief could be expected from the refineries is in two years time! The Dangote Refinery is projected to come on stream in the first quarter of next year. But from the look of things that is not a realistic expectation.
It is also a fallacy to claim that subsidy removal will not hurt the poor. Subsidy removal will stoke such massive inflationary pressure that what we are witnessing today would be a far cry. And the misery index in the land already elevated because of a high cost environment due to quantitative easing and the sharp depreciation in the exchange rate will worsen sharply that we risk civil insurrection.
We are therefore most certainly in a cul-de-sac and there is the urgent need to think outside the box as the proposal on ground presents a scary scenario with potential unpalatable circumstances. What of exporting our crude to neighbouring countries with surplus refinery capacity to be refined and re-exported back to us. Let’s search for more options outside the current arrangements for the procurement of refined products as the experience with deregulated diesel and gas markets leaves much to be desired.
Another important consideration will be how to locate the political will to push this proposal through as the backlash will badly hurt the party that dares. So, the chicken of not taking prompt decisions when they were opportune has now come to roost.
Dr. Boniface Chizea, an economist and consultant contributed this piece from Lagos
