Fuel subsidies need not be forever

The 2013 budget, which the president approved on February 26, allocates close to N1trn for fuel subsidies. We should welcome the attempted deregulation last year and the halving of the fiscal cost from N2.19trn ($14bn) in 2011, yet we should not expect the FGN to complete its mission in the next two years. The arguments in favour of the status quo were shallow but they prevailed because of the government’s credibility gap. The alliance of organised labour, sections of civil society and vested interests generated the protest that led the FGN to abandon the removal of the subsidy and instead raise the retail price of premium motor spirit (PMS) from N65 per litre (l) to N97/l in January 2012.

In vain did the FGN set up the Subsidy Reinvestment and Empowerment Programme (SURE-P) to channel the savings from the subsidy reduction into good works as a way of overcoming the alliance. It appointed a respected panel to manage the programme. Last month, it announced that it had set aside N180bn in 2012, of which N105bn had been disbursed. It added that administrative costs had been contained to N1bn: if this lean management was maintained, it would compare positively with household names among international charities. The 2013 budget projects expenditure of N274bn on the programme, including the unspent balance from last year.

The FGN is not alone in its struggles. The Islamist government in Egypt currently has the choice between accepting the IMF conditionality within an international support package of $14.5bn or a balance of payments crisis and run on its currency. One of the conditions would be a sharp reduction in its annual fuel subsidy bill of about $15bn.

Perhaps a closer parallel with Nigeria is to be found in Indonesia where the leading government ministries and all reformers are calling for fuel price deregulation. The alliance against change argues that the subsidies are somehow “pro-poor”, although a recent World Bank study on the ground showed that the poorest 10 percent of the population consumed no more than 1 percent of subsidised fuel. The imports of refined fuel products create pressure on the current account and on the local currency. The petrol is even cheaper than in Nigeria, costing the equivalent of 46 US cents per litre rather than 61 US cents at the official price. We like the parallel with Indonesia because it is due to hold elections in 2014.

Fuel subsidies are not set in stone, however, and the unlikely example of Iran shows one way forward. In December 2010 the president in Tehran announced economic “surgery” in the form of new tariffs for liquid fuels, water and some food products. The increases removed up to $60bn in annual product subsidies. The government had wisely prepared for its reform: before the tariffs were raised, almost 80 percent of the Iranian population had received compensatory payments in specially created bank accounts. Over a period of 12 months, the savings from the subsidy reduction were balanced by about $30bn in compensatory payments and by up to $15bn in government support for businesses investing in energy efficiency.

The Iranian government’s reform was underpinned by its use of public relations. It pushed hard the argument that the regime of product subsidies was not “pro-poor”, and persuaded academics, representatives of the business sector, the social media and the mosques to lend their support. Their point was that subsidies were not harmful if targeted on low-income households but that they were wasteful if attached indiscriminately to products such as liquid fuels and bread. We can see the success of this strategy in the fact that its opponents did not question the merit of the reform but claimed that the government would be unable to deliver. The central bank also had a role in that it pledged to provide the necessary liquidity for the commercial banks.

We can hear reasons why the FGN would have difficulties in following the Iranian example. For example, we could highlight the limited coverage of the banks across the country and claim that it would not be able to make the compensatory payments to reassure the population. In reply, we could point to the potential of mobile money, which is now beginning to take off. More than three times the number of Nigerians have mobiles than bank accounts, so it should be possible before too long to make the payments.

The removal of blanket fuel subsidies is a challenge which has defeated both civilian and military governments in Nigeria in the past. Yet the example of Iran demonstrates that the challenge can be overcome with advance planning, judicious use of public relations and support from independent groups to push the argument. There is a sizeable credibility gap in Nigeria: many people do not trust the government and have to be convinced over time. There is a case for targeted subsidies for certain households such as were put in place with the “cost reflective” electricity tariff introduced in July 2012. In our view, there is no case for product subsidies, and we hope that the government formed after the elections in 2015 will move to deregulation and sit out the expected protest.

GREGORY KRONSTEN