Nigeria's leading finance and market intelligence news report.

Fuel subsidies have been bad for Nigeria – dump them for good

In her classic song, I Will Survive, Gloria Gaynor sings about a bad relationship that just won’t go away. It’s not far off Nigeria’s experiences with fuel subsidies. And the government might want to bear in mind Gaynor’s advice for how to move on: “I should have changed that stupid lock—I should have made you leave your key—if I’d have known for just one second you’d be back to bother me”.

Because it’s hard to believe the recent announcement from NNPC Group Managing Director Mele Kyari that “It is zero subsidy forever”. Does NNPC, as a government entity for oil business, have the authority to make this profound policy commitment? Why has the Federal Ministry of Petroleum Resources and the Petroleum Products Pricing and Regulatory Authority remained rather silent?

History does not inspire confidence. President Buhari already attempted to reform fuel subsidies back in 2016. At the time, it was supposed to be a permanent removal, yet subsidies were back in under two years. Indeed, since the 1970s, 11 out of 12 of Nigeria’s heads of state have attempted to reform fuel subsidies, with no long-term success.

Read also: COVID-19: NNPC Commences Construction of 200-Bed Infectious Diseases Hospital in Yenagoa

If almost everyone wants to get rid of subsidies, why do they keep coming back? The government knows well why they are a problem. The biggest benefits go to people who own vehicles, which is a small share of the population. Fuel companies can’t charge prices that cover their costs, which has repeatedly crippled supply. In 2018, survey research found that 15 percent of people couldn’t buy fuel at all, and a further 18 percent paid black-market prices far above the official subsidised price. Subsidies also waste scarce resources. Since 2006, fuel subsidy expenditure has been higher than budgets for far more important state functions, including education, health, defence and infrastructure.

In the end, fuel subsidies come back because it takes more to get rid of a bad relationship than just saying that it’s over. You need to change the locks, throw away the key—and move on.

The “locks” part of this is to just stop fixing fuel prices. The government has already tried to implement a price adjustment formula. It doesn’t work because it requires constant political commitment when world oil prices rise. At this point in time, it looks like full deregulation may be the only realistic way to cut the cord. That means letting anyone import and sell fuel, so prices are decided by the costs of supply and competition. It also means real, measurable government action to implement change responsibly—a lot more than just words. This includes competition law and empowering a regulator to transparently monitor prices, enforce rules and respond to complaints.

The “moving on” part is that Nigeria needs a better way to help citizens cope with economic shocks. Never has this been clearer than now, when the country is suffering a joint health and economic crisis in which millions will be unable to meet their essential needs, potentially leading to a humanitarian disaster. Nigeria lacks tools to effectively support people on issues like income, food, jobs and health. In fact, one of its recent moves was to go back to what it knows, and just reduce fuel prices…which has been shown in study after study to largely benefit the better off and prevent investments in something better.

This underscores just how much the fuel subsidy relationship has been abusive. Nigeria goes back to fuel subsidies because it doesn’t have better ways to help people; but it doesn’t have better ways to help people because it’s been wasting money on fuel subsidies. The Nigerian Institute for Social and Economic Research estimates that the budget for fuel subsidies in 2019 was sufficient to have enrolled the entire population of Nigeria in the National Health Insurance Scheme (NHIS)—a shocking fact in a year where tens of millions of Nigerians are scared in a health crisis with grossly inadequate support and poor health infrastructure. Since 2006, fuel subsidies have taken up over N10 trillion of resources.

We need to break this cycle with meaningful, effective policies to help the poorest and most vulnerable—again, not just more words. This will take resources in a year with no resources. But over the last decade, Nigeria has had no problem maintaining costly fuel subsidies while running enormous deficits. For there to be change, the government must give social protection the same level of fiscal priority that it has given to fuel subsidies. A year of “subsidies gone forever” must be a year of “social protection at the forefront” includes those who may inadvertently suffer from fuel price deregulation.

The hardest part of ending a bad relationship is falling into the mindset that you can’t get out—that this is the best you are ever going to get. Nigeria needs to reject defeatism and believe it can build a better future.

Other countries can become sources of inspiration. Indonesia deregulated fuel prices in 2014. Despite some ongoing problems with subsidies, the reform allowed it to make massive investments in cash transfers, school assistance and health insurance, paving the way for eventual independence from the subsidy. Similarly, India deregulated its prices for gasoline and diesel once and for all back in 2010 and 2014, respectively. During the recent price crash, it hasn’t turned back to fuel pricing as a way to support people—it’s taxing fuel while prices are low, to raise revenue to help fight COVID-19. Costa Rica is doing exactly the same thing. Fuel prices are being fixed—but at above market prices—and the revenues will pay for a compensation program to help workers cope with the ongoing crisis.

These countries—Indonesia, India, Costa Rica—are all developing countries with features comparable to Nigeria, and have remarkably demonstrated that fuel subsidy reform and taxation is a pathway to improving government revenue for the benefit of the poor through social investments.

Nigeria and its people have suffered enough self-harm from the toxic relationship with gasoline subsidies. They deserve better. It’s time for all stakeholders—government at all levels, private sector organisations, labour unions, civil societies, students and youth groups—to stand up and agree that fuel subsidies aren’t welcome any more. It’s time to dump this bad relationship and start over.

Beaton is Lead, Sustainable Energy Consumption with the International Institute for Sustainable Development (IISD).

Adeoti is a Professor of Development Economics at the Nigerian Institute of Social and Economic Research (NISER).

Get real time updates directly on you device, subscribe now.

Comments are closed.