Case for petroleum subsidy removal in Nigeria (2)

The outgoing government has borrowed heavily this year (N473 billion out of the N882 billion in the approved budget) and issued Sovereign Debt Notes in order to keep afloat. But the nation can no longer afford to pile up subsidy-related debts, a part of which may not be genuine. Deregulation of petroleum product prices and eliminating subsidy will free the government of this burden. The macroeconomic impact may even be far less than that of the recent massive devaluations of the naira which people appear to have accepted with equanimity.

Very importantly, the outgoing government has been engulfed in a fiscal crisis, the immediate cause of which is the collapse of crude oil prices in the world market. Consequent upon this, the Federal Government has reported a sharp drop in revenue inflow to the tune of about 50 percent. In light of this, capital expenditure has been crippled while the government is struggling to meet recurrent commitments. Debts are being accumulated.

At the sub-national government level, the situation appears to be worse to the extent that public sector workers are being owed salary arrears that are up to six months. The situation could have been less precarious if the governments were not profligate in the past. They squandered the reserves in the Excess Crude Account and depleted the foreign exchange reserves (to the level of only about 7 months imports) that could have served as fiscal buffers in difficult times as the country is currently in. Thus, the in-coming government is going to be bequeathed with an economy that is in a shambles and suffering from a very severe fiscal crisis in the face of heavy expenditure commitments and excessive cost of governance. Under the circumstances, the Nigerian people need to help the incoming government to effectively take off, otherwise it may be a lame duck from day one. We need to cooperate with the government and allow it to take some hard decisions that will be beneficial to the people in the medium-long term.

Remove subsidy and deregulate petroleum product prices and marketing

One of the crucial decisions that the incoming government should consider taking relates to deregulating petroleum product prices and eliminating subsidies payment. Deregulation will result in three key benefits. One, billions, if not trillions, of naira hitherto paid as subsidy on petroleum products will be freed and can be used in an area of development that has visible and long-term impact, e.g., electricity supply. Second is that deregulation, with an enabling environment, should encourage private sector investment in refineries. Third, when private sector refining capacity is available in the country, importation of refined petroleum products will reduce significantly and huge savings made in foreign exchange expenditure on imports.

For a long time, prospective investors have seen the regulation of petroleum product prices by government as an obstacle to their investment in refining capacity. In the past, up to 20 companies had been issued licences to establish refineries but they were reluctant to do so because of what was perceived as a disenabling environment and uncertainties. These companies are uncertain about the certainty of government’s policy stance, pricing of petroleum products and availability of crude oil. Under deregulation, the investors should be guaranteed supply of crude oil to their refineries at reasonable prices and decontrol of the product prices. If private investors come into the industry, the highly inefficient government refineries will experience the same fate that befell the defunct NITEL and MTEL telecommunication outfits. Even with the oligopolistic structure of the mobile telephone system in the country, there has been some competition which has brought the tariffs down drastically from their levels at the beginning. Similarly, a deregulated petroleum refining industry is likely to be beneficial to consumers. This will even be more so if the government sells crude oil to the private refineries at prices that are lower than the international prices.

A few years ago, I had canvassed the view that one way to encourage private companies to set up refineries is for the government to give assurance to make crude oil regularly available to domestic refineries at an agreed price that is related to the cost of production by an acceptable margin. On this basis, the refineries will refine crude and sell products to consumers at deregulated prices which may even be far less than the current regulated prices. And the macroeconomic impact in terms of prices would be tolerable. Once the responses to establish refineries are encouraging, the government should double the quantity of crude for domestic refining with a view to targeting some refineries as export refineries. In this way, the country should target supplying the refined products needs of neighbouring ECOWAS countries officially. This is important in relation to the issue of smuggling of petroleum products across the nation’s borders which has been used by successive governments as an argument to remove subsidy. The issue of smuggling can be addressed when Nigeria officially supplies refined products to the neighbouring countries.

One thing though is that development of private refining capacity cannot be accomplished overnight. Therefore, in the interim, to protect the consumers from exploitative practices of oligopolistic marketers, the importation of fuel should be liberalised and made competitive. Companies that have adequate storage capacity should be encouraged to import fuel. Importantly, there has to be a complementary anti-monopoly commission to deregulation. This will help to promote competition and check exploitative practices in the deregulated downstream petroleum sector.

Conclusion

Overall, the current realities require the incoming government to seek the cooperation of the Nigerian people in removing subsidy from petroleum products, and hence free the country from corruption in subsidy administration and the hostage of oil marketers. The resources freed from subsidy payment can be dedicated to the development of electric power. Private sector investors will be encouraged to establish refineries, but the government should consider making adequate crude oil available to them at prices that are a margin above production cost, and not international prices. In light of this, the refineries will be able to sell refined products to consumers at prices far lower than even the current deregulated prices.

In the past, people did not trust the government to use the nation’s resources prudently. And so, when the government talked about using the money to be freed from removing subsidy for development purposes, it attracted a contemptuous response from the citizens. But the political direction has changed. The Nigerian people seem to repose confidence in the president-elect. Therefore, we should display understanding of the policy that may be aimed at mobilizing funds for development and cutting off one veritable channel of corruption.

Mike I. Obadan