It seems like every few years we get into the same round of policy discussions. Should we remove fuel subsidies? What will the impact of removing fuel subsidies be? Can we afford to keep fuel subsidies? The arguments are the same this time around. The different levels of government are strapped for cash. At the same time the same government subsidizes fuel indirectly through the NNPC. The numbers are a bit hazy, but the amount spent on fuel subsidy in 2018 could be anywhere from N700bn to over N1tn depending on which exchange rates you use and how you calculate it. For context, in 2018 the federal government budgeted N650bn for education andN356bn for health. By the way, that is budgeted not actual spending. The questions are the same: should we be spending so much on fuel subsidies as opposed to other things?
The economic arguments against subsidies are simple. When you subside fuel you really subsidize those who consume more fuel. If a household has a fuel generator and three cars they tend to consume more fuel than a household with no cars and just a small generator. Subsidizing fuel therefore means you subsidize consumption for more affluent households as against the less affluent ones. Not that the poor don’t get any benefits though. They do. Removing subsidies hurt the poor too. But a lot more of the benefits go to the rich.
The main argument therefore is that money spent on subsidies can be better spent elsewhere. Spending that subsidy money on infrastructure, or education, or health is a wiser investment than spending on fuel subsidies that benefit mostly more affluent households. To deal with the effect on the poor, a portion of the subsidies can be directly targeted at the poor. There is also the benefit of incentivizing better use of fuel through more efficiency given that fuel would be more expensive. Finally, removing subsides also reduces the incentives for smuggling and corruption.
The political realities are unfortunately rarely about what makes sound economics. Politicians know that historically, removing subsides has heated up the polity in past. The most popular being the Ojota protests which some argue was a big factor towards the end of the PDP regime of Goodluck Jonathan and the birth of the APC. Politicians therefore aren’t so eager to remove them. As the popular saying goes, “they don’t want to heat up the polity”. But then the question remains, how do you move to more efficient spending on health, education, and so on and away from fuel subsidies if your politicians aren’t up to the task?
The Goodluck Jonathan administration tried a public education campaign to explain the economics behind the need to remove subsidies as well as proposals to direct the savings to a special fund for infrastructure and education. The SURE-P program as it was called. All those efforts were torpedoed when the subsidies were removed on January 1st, cue the protests. Corruption was the problem people said.
In 2016, the President Buhari admin removed fuel subsidies after very serious episodes of fuel scarcity. Scarcity so bad that telecom companies were doubting their abilities to keep masts operational. There was no education campaign on why the subsidies were to be removed and there was no specific plan for redirecting savings to other more efficient spending. Still there were no protests. People just accepted the removal perhaps because people were more aware of the economics behind it or perhaps because the aroma of corruption was not present with the Buhari administration. The morale of the story is there may be no rhyme or reason to how people respond to removal of subsides.
So, here we are again debating the same questions. The economics of why subsidies should be removed remains the same. The only question is the politics. Will the politicians find a way to get it done or will we need some more bouts of fuel scarcity to convince the politicians of the need to act? Will there be a plan to ease the pain of removal for those at the lower end of the economic ladder? Perhaps through expansion of the cash transfer programs? Or will we just go on as is, hoping that everything just works out?
Given that we are a democracy, the politicians would be wise to think about the consequences of not acting early. The best time to inflict some necessary pain on the electorate is when you are a long way from elections. Hoping that people forget about the pain and start to see some of the benefits of the policy action before they get to judge you at the ballot box. The longer the politicians wait, the less likely any policy change will happen, and the more likely things will implode shortly before election day. Then there may be no hiding place.
Oh, and we should probably stop fixing the price of fuel in the first place. That is the real source of the constant cycle of expanding fuel subsidies and arguments if they should be kept or removed. Just let prices adjust slowly like they do for goats and yams.
Nonso Obikili
Dr. Obikili is chief economist at Business Day
