Head or tail, Nigeria loses

Fuel subsidy

The following piece is not new. It is a combination of two of my previous articles. The first was written May 2016, after the government increased the price of petroleum products from N85 to N145. The second section was written in December of the same year.


In May 2016, I wrote: “In the meantime, through separate press releases by the Vice President, Yemi Osinbajo and the Minister of State for petroleum resources, Ibe Kachikwu, and other government officials not tainted by past statements and error of judgments, the government has continued to argue that the price increase is not “a removal of subsidy”. Rather, the price changes are related to the price modulation template announced at the start of the year, and this is particularly driven by the inability of independent marketers to source their foreign exchange requirements from the Central Bank of Nigeria (CBN). In other words, this is interbank market exchange rate price adjustment.


Time will tell whether it is semantics, half-truth or dithering. But let us examine what these variants mean one after the other. If it is semantics, it means the government has removed the subsidy but does not want to publicly admit it. For instance, what is the meaning of subsidy if the Nigerian government shifts all price changes, including that relating to exchange rates, crude oil, transports and all other related costs in its template and transferred that to consumers, and says in its statement that it had not removed subsidy? English and mathematics graduates, up to you, because I thought subsidy means that the government bears some of the cost to the Nigerian consumer.


It could be half –truth because, as I mentioned last week, the government has not made provision for subsidy in the 2016 budget. It thus mean that except it wants to spend outside of the law or present a supplementary budget at a later date, there is no plan to make any subsidy payment this year. If provision has not been made and all the costs are passed on to Nigerians, I do not understand what it means to say, “this is not a removal of subsidy”.


The dithering variant is potentially the worst of all, and this should be the focus of millions of Nigerians, such as myself, that are excited that the government has done the right thing (though it did not look that way, I wanted to believe we finally made progress) and ended this folly subsidy arrangement once and for all. However, our policy victory will be short-lived if what actually looks like a removal of subsidy for good, is a dithering attempt until oil prices trajectory looks good. This argument is important because removal of subsidy actually means different things to different people.


In that context, let me tell you what it means to me: the removal of government control on price and supply, and the dismantling of administrative establishments set up to regulate subsidy. When the government says that “any entity can now import, subject to existing specifications”, if it refers to just quality specifications, it meets, in calculus fashion, the first order condition for the removal of subsidy. However, Kachikwu went further to say “according to Petroleum Products Pricing Regulatory Agency (PPPRA) price template”. This does not meet, also in calculus fashion, the second order condition for the removal of subsidy. These conditions are important because there is a sense in which the government hopes that oil price will not rise because of subsidy but wants it up because of the revenue it badly needs. But as in the past, if subsidy is back because oil prices have gone up and Nigerians would have to pay more without subsidy, the government may be forced to support, and this will quickly erode any fiscal gains from increases in oil prices.


In conclusion therefore, if all the government has achieved in the last week is an increase in the price of petrol, it is tantamount to “kicking the can down the road”. As the opening paragraph shows, not only has this problem been with us for forty years, the symptoms remain the same, and the only solution that has eluded us is the complete removal of the control on price and supply. Any semblance or something close to it will not suffice. Whether we like it or not, it is better for President Buhari to succeed in removing the subsidy (never minding the semantics at the moment), just as it would have been better then for President Jonathan to have succeeded in 2012. And as for the convenient explanations by those that opposed the proposals in 2012 but now support it in 2016 on the differences between then and now, they are explanations shrouded in political nuances. It was not sustainable then and it is not sustainable now, and may I argue that it will never be sustainable”.


In December 2016, I wrote the following:


“In May this year, when the government increased the price of fuel at the pumps, many, including myself, see it as a policy victory. I have gone back to the article I wrote following the price increase on the 18th of May, and it appears my worries will be realised. Two key elements were bound to alter the equation. Once price starts to trend higher than the US $50 level, the dynamics of the already settled “subsidy removal will change”. The other is the exchange rate of the Naira to the dollar.


What is interesting is how all these are linked. And there are two supply conditions that need to change for the government preferences to succeed. If oil price rise, government revenue also rises. However, in the past, subsidy figures eat deep into these rises, partially because there is no domestic production of petroleum products.


It is becoming increasingly obvious that oil, for which reason we have abandoned all sense and forms of reason is not done with us yet. With any increases in the international price of oil, we may yet start another round of rigmarole of subsidy, no subsidies and the erosion of any gains that the increases should confer on us”.


Now, in the last two weeks, we are back to the debate on fuel subsidies, especially highlighted by the spring meeting of the International Monetary Fund and the World Bank. But what is very clear from the analysis is that whether oil price is up or down, Nigeria loses.


I thank you.


Ogho Okiti


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