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Nigeria’s ruinous subsidy regimes

In January of 2012, I watched with dismay as the labour unions, youth groups and civil society groups shut down the country in protest over the government’s deregulation of the downstream sector and the removal of subsidy on petrol. What started as mere protests by the youth caught fire and became a popular movement that almost brought down the government of the day. Despite the rationalisations of some of the protest leaders, it was apparent Nigerians were resolutely against the removal of the subsidy on petrol.

But I just could not see the sense in the protests/strikes.  In 2011 alone, about N1.5 trillion naira ($9.3 billion) was spent on subsidising imported refined petrol. This represented about 30 percent of Nigeria’s government’s expenditure, 4 percent of GDP and 118 percent of the capital budget. In comparison, Nigeria’s education, health and works/roads’ budget for 2011 was just a mere $2.2 billion; $1.32 billion and $680 million respectively.  This is besides the obvious fact that Nigeria was exporting its jobs and what it does not have while importing what it has.

How could any right-thinking government accept this kind of frivolous and senseless expenditure? It was quite clear to me then that the government was right in wanting to do away with the subsidy regime so as to free up such huge funds for other priority areas like education, health, infrastructure, and security among others. Besides, the removal of subsidy will ultimately lead to private investments in refineries that will obviate the need to spend hard-earned foreign exchange on importing petrol. The later revelations that the subsidy regime was riddled with fraud were all the more reason why I thought it should go.

But arguing for subsidy removal wasn’t a popular position to hold in Nigeria in January of 2012. Some of us who did were called names. Perhaps that is why thought leaders, prominent citizens and academics decided to bury their heads in the sand with some hypocritically claiming to side with the people when it was clear the people were being seduced into demonstrating against their true interest.

Much more pitiful however is the behaviour of opposition politicians at the time who saw the protests/strike only through the prism of their ambitions. They fuelled the protests by concocting figures and arguments to show that there was nothing like subsidy and petrol should actually be selling below N40/litre. No wonder some Nigerians were expecting the president to reduce the price of petrol upon coming to power.

Organised labour on its part was only interested in protecting its interests – which is better served by government regulation of the industry so it can retain the privilege of protesting and going on strike anytime an increase in the price of petrol is announced. That was how they seduced late president Yar’adua into revoking the sale of 51 percent equity stakes in the Port Harcourt and Kaduna refineries to the Bluestar Consortium Limited for a princely sum of $721 million promising him, together with the NNPC that the NNPC was capable of turning around the fortunes of the refineries to make them functional at 100 percent capacity within months.

But one could ask, why are Nigerians so used to subsidies and why is the Nigerian state so bent on providing subsidies, especially for consumption even when it is economically ruinous to do so?

The answer is rooted in the nature of the Nigerian, nay African state. Most African post-colonial regimes did not make any effort to broaden the social base of state power and had to concentrate on capital cities and urban centres where opposition to their rule is most likely to come from. They impoverish the rural areas to keep the cities happy. They impose price controls on rural farmers to keep foodstuffs cheap in the cities. They provide transportation, petrol, electricity, and foreign exchange subsidies to keep the few middle class and city population happy or calm. Also, buoyed by a sense of entitlement, Nigerians felt they should not be paying much for fuel and that it is part of the benefits they should enjoy since their country produces oil.

Well, in Nigeria, the subsidies have only grown over the years while budget allocations for health, education, infrastructure have dwindled. We could boldly make the claim that the subsidy regimes in Nigeria are responsible for the poverty, low quality of life, and the economic malaise the country faces presently. Take for instance the electricity subsidy. Despite the government privatising the electricity generation (GENCOS) and distribution (DISCOS) companies, the government still holds the sector by the neck fixing and dictating prices. Of course, the current prices fixed by the government are below the production cost for power. Is it any wonder then that there has been no major investment in the sector and Nigeria continues to wallow in darkness?

We know too well about economic carnage being caused by the fuel subsidy. Another subsidy regime that has crippled the economy of the country is the forex subsidy regime. In keeping with its gatekeeping role, the government has continued to maintain a fixed exchange rate so as to continue to provide cheap dollars for rich and middle class Nigerians to engage in conspicuous consumption of foreign goods, embark on foreign travels and send their children to foreign schools. To complete the circle, the government has been sponsoring Nigerians to pilgrimages in Saudi Arabia and Israel and when it became too expensive, now also provides subsidy in terms of cheap dollars below the exchange rate to pilgrims.

Besides the huge economic cost of the forex subsidy regime is the corruption created through arbitrage opportunities. By irrationally maintaining a dual exchange rate system where the official exchange rate is far lower than the black market or unofficial rate (currently, N360/N460) to a dollar, successive governments are not only subsidising the rich and the connected at the expense of the poor, but have also been creating a huge industry of corruption where smart politicians, businesses, and well-connected individuals game the system by obtaining dollars at the official rate and selling same at the black market and making huge profits at little or no cost.

The argument that the Central Bank is supplying cheap dollars at official rates to manufacturers is actually ridiculous. Most genuine manufacturers have no access to the CBN’s dollars. They get their dollars from the black market. Rather, those dollars go to fake manufacturers and businessmen who are adept at gaming the system, opening up fake Letters of Credits, obtaining the dollar at the official rate and selling them off at the black market. It is no wonder that the dollar has become the most profitable commodity for those lucky enough or connected to get it at the official rate.

Even for genuine manufacturers who get it at the official rate, they usually index their prices against the black market price. That explains why the economy runs on the black market exchange rate. So, whatever way it goes, the manufacturers and businesses gain and the people and country lose.

Meanwhile, genuine investors are being put off by the unpredictable environment where the government arbitrarily fixes exchange rates and where the rates could change at a flash and without regard to market fundamentals. Such investors would rather wait out the instability or better still, take their money to serious countries.

The results of the government’s subsidy regimes are: a huge industry of corruption, a damaged economy, capital flight and divestments, and lost foreign investors.

 

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