• Friday, December 08, 2023
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Subsidy Removal: A move with potential rewards

Subsidy Removal: A move with potential rewards

Subsidy removal. How this clause remains an enigma with regard to the downstream oil and gas sector in Nigeria must be one of the wonders of the world.

How can it be that something so glaringly and clearly the best way to go for Nigeria is not being adopted – especially when short-term fixes like subsidies and pseudo-deregulation policies have failed to make any impact?

The billions of naira Africa’s largest oil-producing country commits to subsidising petrol is no longer news, but what is more infuriating is the opportunity cost forgone in a slow-growing economy that could use more private sector investments for job creation and growth.

The situation concerning the opaque petrol subsidy is having such a negative impact on the Nigerian economy, that despite higher oil prices, every gain from oil exports is now almost entirely cancelled out by the costly subsidy regime.

Analysts have called several times for full deregulation of the downstream petroleum sector because subsidies on fuel are no longer sustainable.

Nigeria economy bleeds

While subsidy payment may have a little positive effect on Nigerians, since they were able to buy at lower prices at the pumps, many Nigerians believe that the negative impact on the overall economy far outweighs the positive.

Subsidy has since jumped from millions to billions and has risen unsustainably to trillions, with a heavy drawback on the public purse. The Nigeria Extractive Industries Transparency Initiative (NEITI) for instance believes that between 2005 to 2021, the country spent a whopping $74.38 billion, which translates to N13.697 trillion.

According to the NEITI report, a breakdown of these figures showed that in 2005, the government paid $2.6 billion (N351 billion) as subsidy. In 2006 & 2007, it paid $1.99 billion and $2.176 billion (N257 billion and N272 billion) respectively.

The report further pointed out that subsidy payments more than doubled in 2008 and 2010 and witnessed the highest increase ever in 2011 to $13.52 billion (N2.11 trillion). A sharp decline was witnessed in the years 2012, 2013, 2014 and 2015 when it dropped to $3.336 billion (N654 billion) in 2012. The decline in subsidy expenditure continued in 2016 and 2017 to as low as $473 million (N154 billion) in 2017.

The reduction was short-lived as the payments skyrocketed to over $3.88 billion (N1.190 trillion) in 2018 and 2021 to $3.575 billion (N1.43 trillion).

By these figures, NEITI stated that Nigeria expended an average of N805.7 billion annually, N67.1 billion monthly or N2.2 billion daily. The NEITI data, in addition, showed that the amount expended on subsidies from 2005 to 2021 was equivalent to the entire budget for health, education, agriculture and defence in the last five years.

Opportunity Cost Of Subsidy On The Nigerian Economy

Research as shown that subsidies have constraints with crowding effects on the resources of the country. The Nigerian economy, with a dire need for investment in basic infrastructures, has lost greatly from the subsidy. These monies spent on subsidy, if properly invested, would have been more productive and beneficial to both the economy and the people.

BusinessDay analysis revealed that the amount, N9.8 trillion, spent on subsidy in 12 years could have provided tremendous amenities. These would have spread across the whole economy, bringing dividends to the masses and improving their wellbeing.

For instance, a breakdown shows that over 328,100 Primary Health Centers (PHCs) would have been constructed across the country at the cost of N30 million each. These would have improved access to health for the people and also created jobs for an average of 10 persons per health centre.

Also, close to 10 million (9,843,000) entrepreneurs could have been made or empowered with an N1 million loan each to boost their businesses. This would have had a great impact on the lives of these persons, removing them from lack and making them comfortable. Multiply the figure by the number of persons the businesses would have employed in the process. More so, the amount of locally made goods and service that would be produced. These would have culminated to increased GDP and improved living standard for millions of Nigerians.

NMDPRA Explains

On its part, the downstream sector regulator, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has said it will no longer fix prices or release templates for petrol prices.

Farouk Ahmed, the authority’s chief executive, explained that under the liberalised market, market forces are allowed to dictate prices, but said there will be strict compliance monitoring.

“We put the regulation in place, we make sure quality control is complied with, we make sure the product is there and we give licence to a prospective importer. The market is now open for everybody that wants to import as far as they meet all the requirements.

“So, it is not about the NNPC alone. For everybody in the sector, we make sure we guide their operations whether at the depot or wherever the product is, but we will not put a cap to say this is what the price must be.

“As far as we are concerned in the NMDPRA, this is not like before when the PPPRA fixes the price. In a deregulated market, it is the market force that dictates the price.”

The NMDPRA chief also revealed that the federal government has officially scrapped petroleum equalisation as well as the national transport allowance.

He also stated that the NMDPRA and the Federal Competition and Consumer Protection Commission (FCCPC) will mount aggressive monitoring of activities in the downstream sector to prevent profiteering by petroleum marketers.

Ahmed further disclosed that marketers are now free to source their foreign exchange anywhere around the world to import petroleum products and then recover their costs without impediments.

For Price Waterhouse Coopers (PwC), it argued that fuel subsidy in Nigeria had been fraught with issues of corruption and inefficiency while palliatives had been suggested by some as a possible way to alleviate the suffering of those that will be most affected by subsidy removal.

But it said that while palliatives may help to mitigate the immediate impact of rising prices such as cash transfers, provision of buses to the Labour Union or other forms of assistance, the effectiveness of palliatives depends on several factors.

Writing on the unsustainable financial cost of subsidy, it said that according to the World Bank, Nigeria’s total revenue in 2000 was $10.8 billion, explaining that by 2010, this amount increased to $67.9 billion, yet the Nigerian government had spent over $30 billion on fuel subsidies over the past 18 years.

In addition, PwC noted that this has had a significant impact on funds available for critical infrastructure and other essential sectors such as education, health, and defence.

It maintained that fuel subsidy payments have also distorted the economy, stressing that according to a report, households in the bottom 40 per cent of the income distribution account for less than 3 per cent of all fuel purchases.

Furthermore, it is pointed out that that three-quarters of all fuel sold in Nigeria is consumed by private firms, public transportation services, government agencies, and other businesses.

Most vehicles used for carrying large numbers of people (such as molue) and goods, it said, are diesel-powered, a product that is already deregulated.

Also, it said that household kerosene which is mostly used by the poor is no longer subsidised, meaning that the poor are already to a large extent paying market prices for their fuel.

“This effectively means that the government is subsidising mostly those who can afford fuel (PMS) at market rates and not the poorest of the poor who need subsidy.

“This is one of the major problems with the way fuel subsidy is being implemented in Nigeria. For the benefit of subsidy to reach its intended recipients, the current structure will need to be reviewed and creatively restructured,” it argued.