• Thursday, April 25, 2024
businessday logo

BusinessDay

How Nigeria can ease subsidy removal pain

How Nigeria can ease subsidy removal pain

The Federal Government has said it is unwilling to inflict an additional burden on Nigerians as a major reason for the decision to suspend its petrol subsidy removal.

However, understanding how countries in similar situations solved the problem may provide lessons for Nigeria.

BusinessDay’s analysis of studies conducted by the International Monetary Fund (IMF) and the non-profit, Governance and Social Development Resource Centre, sheds light on strategies used by over a dozen countries to lessen the pain of subsidy removal.

Research

Some countries succeeded in convincing their people that subsidies are harmful using independent research and proactive communication.

Ghana, one of Nigeria’s neighbouring countries, ended subsidies on petroleum products in 2005, by employing Poverty and Social Impact Assessment (PSIA), a systematic approach to analysing the distributional impact of policy reforms and programmes on the welfare of different stakeholders groups.

PSIA promotes evidence-based policy choices and fosters debate on policy reform options and it’s used increasingly by governments, civil society organisations, and multilateral agencies.

Through the PSIA, Ghana found the subsidy programme was poorly targeted, with the wealthy receiving the lion’s share of the benefits. It quantified how and to what extent the poor would be affected by future deregulation.

This became an important foundation for persuasively communicating the necessity for reform and for designing policies to reduce the impacts of higher fuel prices on the poor.

The PSIA in Ghana also showed that cash transfers would be more cost-effective in reaching the poor than the existing tax exemption on kerosene and the LPG subsidy. However, it must first generate an accurate list.

These arguments are true for Nigeria as only the rich in a few states benefit the most from petrol subsidies. The government is trying to fix the decrepit refineries, counting on Dangote refineries, offering cash to the poor, and propping autogas policy without research showing whether these measures would be effective or not.

Public campaigns and education

Countries that have successfully removed petrol subsidies embarked on public campaigns to educate the people.

In Ghana, the finance and energy ministries undertook a public relations campaign, including a broadcast explaining the reason for the price hikes and announcing measures to lessen their impact.

Ghana provided transparent and readily monitored mitigation measures which included the immediate abolition of fees at government-run primary and junior secondary institutions, as well as a program to improve public transportation.

Indonesia developed a clear strategy to educate the general population about the benefits of fossil-fuel subsidy reform.

Campaigns against fuel subsidy removal have often lacked coherence and integrity. The argument for efficiency sounds hollow in the face of government waste, corruption, and inefficiency.

Read also: Nigeria faces higher budget deficit on revived subsidy

Cash transfers

Several governments that have tried to remove fuel subsidies in their respective countries have always aimed at protecting low-income households.

The Governance and Social Development Resource Centre (GSDRC), in its report titled “examples of successful fuel subsidy removal,” indicated that the Indonesian government established a cash transfer scheme in October 2005 to compensate for an average 114 percent increase in product prices, though new levels remained below international market rates.

However, this unconditional cash transfer proved to be an effective method for overcoming societal and political opposition to fuel-subsidy reform.

Public Trust

The importance of public trust in its government can never be overemphasized.

A case study is Indonesia’s administration, in January 2003, where corruption and inefficiencies of political life and bureaucracy, encountered considerable popular dissatisfaction from the public.

In furtherance, an attempt to raise fuel prices sparked popular outrage, prompting the administration to scale back much of the rise.

However, the administration in power in 2005 roughly tripled the price of kerosene and nearly doubled the price of gasoline and diesel with no protest.

“Public trust can also be improved if subsidy reform is timed with fiscal reform, establishing a more rational structure of energy taxes and improving education, health, and welfare,” the United Nations Environment Programme (UNEP) said.

Phased approaches

Many governments use this scheme to pursue a gradual approach to the removal of subsidies in order to minimise opposition from the interest groups that had benefited from the policies.

Using Brazil as a case study, the IMF stated that the transition to free-market prices in the country began with petroleum products used by a small number of people (e.g., asphalt, lubricants) and progressed to other extensively used items (e.g. gasoline, diesel, fuel oil, and LPG).

“The first items to lose subsidies were those that were commonly utilized by politically weak stakeholders, with the politically more problematic subsidies being eliminated later.

“While trade unions remained hostile to the price hikes, the general people accepted them, and there were no large-scale protests,” said the IMF.

International and Domestic Pressure

One of the solutions to the lack of political will is to apply pressure through international institutions such as the World Bank, the IMF, and Transparency International (TI).

“Loan institutions, assistance providers, and international organizations can also help developing nations design and implement subsidy reforms by transferring expertise and technology and enforcing well-reasoned lending and development aid conditions,” UNEP said.

Coherence in reform policy

This would ideally be designed with broad stakeholder support; set a timetable for implementation; include complementary policies to offset any negative effects on the poor and industry; develop a communications strategy to reassure stakeholders that their interests are being respected; create mechanisms to ensure transparency regarding subsidies and the reform process.

According to the IMF, Iran began allowing a significant increase in natural gas and electricity costs in December 2010.

“The country raised domestic energy prices by up to 20 times, becoming the first major oil-exporting country to significantly remove implicit energy subsidies.”

However, this entailed a complex and sequential process of defining objectives, legislation, lowering inflation, and establishing a cash transfer system.

Furthermore, the forum indicated that all of these processes, well-sequenced, could arguably allow the reforms to achieve a degree of success.