Removal of subsidy – semantics, half-truths, and dithering

I will open with two quotes:

“Between 1974 and 1975, most service stations nationwide were characterised by long queues due to frequent severe shortages of petroleum products, compounded by the haphazard way marketers price the products on the basis of transportation by them”.  Following this, as usual in government, a committee was set up. Then:

“The committee observed that the only variable element in the provision and the sale of petroleum products at uniform price nationwide was the transportation cost. It therefore blamed the limited local refining capacity and inadequate distribution facilities for the problem”.

These quotes are from the website of the Petroleum Equalisation Fund (PEF), explaining the motivation for its establishment in 1975, which is to ensure uniform pricing of petroleum products across the country. This objective has never been met for a single day in Nigeria, and it is such arrangements that the Nigerian Labour Congress (NLC), following its threat last week, wants to protect. The NLC argued that the increase in the price of petrol was “unilateral, insensitive, and criminal”. I think what is criminal is people working and retiring at an organisation and not meeting the objective of that organisation for a single day.

I will return to this argument later.

In the meantime, through separate press releases by the Vice President, Prof. 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’s 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 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 means 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 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.

Therefore, if this is no dithering, there is more to do. Nigerians need to begin to see the dismantling of the expensive and unnecessary administrative organisations set up for the purpose of regulating subsidy, which their existence actually drive up the prices of petroleum products, and only serves to expand the state in the sector. The two major ones are the PPPRA and PEF. Both agencies were established to monitor and regulate the supply and distribution, and determine the prices of petroleum products in Nigeria, and ensure uniform prices across the country, respectively. My own interpretation is that they are set up to put a clog in the wheel of progress and given licenses to look after themselves (interpret that as you wish), because those objectives have never been met, even for a day.

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 being 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. I thank you.

Ogho Okiti