By Dr. Emmanuel Ojameruaye
The purpose of this paper is to examine the politics and pure economics of the debate on petroleum products subsidy in Nigeria. The paper is divided into two parts. In this first part, I will examine the politics of the debate. Part II will look at the elementary economics (Economics 101) of petroleum products subsidy (fuel subsidy) in Nigeria and conclude with some suggestions on how to resolve the issue..
The issue of “appropriate” pricing of petroleum products or removal of subsidy has always been a thorny and controversial public policy issue in Nigeria over the past 30 years. Successive governments, including the current one, have grappled with this problem to no avail. Like most other public policy issues, there seems to be no generally accepted solution because of the interplay of politics and economics. The federal government maintains that petroleum products subsidy has increased significantly in the past decade even though the prices of petroleum products have also increased significantly at the same time. The problem is that the prices of petroleum products are administratively determined and do not reflect true supply cost and the forces of supply and demand. So long as petroleum products prices are fixed by government the government will continue to grapple with the issue of subsidy and the debate will not end. In an attempt to ensure that petroleum product prices reflect supply cost and the forces of demand and supply, President Obasanjo embarked on the deregulation of the downstream oil industry in August 2000. The \Petroleum Products Pricing Regulatory Agency (PPPRA) was launched on June 19, 2003 with a mission to “reposition Nigeria's downstream sub-sector for improved efficiency and transparency”, and a vision “to attain a strong, vibrant downstream sub-sector of the petroleum industry, where refining, supply, and distribution of petroleum products are self-financing and sustaining”. After almost ten years, this mission and vision are still pipe dreams.
The prices of petroleum products are still administered and Nigeria is increasingly relying on imported petroleum products while the existing refineries are producing at less than 30% of their installed capacity. In fact, the cost of importing petroleum products has increased so rapidly in recent year that it is threatening the country’s balance of payments and capital expenditures. This is what has given rise to the recent round of debate on the removal fuel subsidy which started when President Jonathan submitted the 2012-2015 Medium Term Expenditure Framework (MTEF) and 2012 Fiscal Strategy Paper to the National Assembly on September 22, 2011. In the letter conveying the document, the President stated that: “A major component of the policy of fiscal consolidation is government’s intent to phase out the fuel subsidy beginning from the 2012 fiscal year. This will free up about N1.2 trillion in savings, part of which can be deployed into providing safety nets for poor segments of the society to ameliorate the effects of the subsidy removal.” The proposal quickly ignited a fierce debate with the representatives of government insisting on the removal of the fuel subsidy while many non-governmental individuals (NGI) and civil society organizations (CSO) and labour unions are vehemently opposed to the idea. Unfortunately, as in the past, the federal government and its agencies have not done a good job in presenting or “selling” their case to the National Assembly and the general public. In what follows, I will analyze the issue of fuel subsidy in Nigeria from both political and economic perspectives, with focus on the latter, and using as much data and evidence available from published sources.
1. The Politics of the Petroleum Products Subsidy Debate
The fuel subsidy debate has been overtaken by politics with proponents and opponents adopting a “war” approach (Ayoola, K.A & Salami, O, 2010). This approach is based on the assumption that all public issues are political. Thus, since politics is about power grab – the power to make decisions, to control resources and to control other people’s behavior and decisions – the proponents and opponents of fuel subsidy seek to gain power by trying to “manufacture” the consent of the public and decision-makers by presenting their beliefs and positions as the “common sense” or dominant one. They do so by the careful, selective and deceptive use of language. This is why they have been employing polarizing language or expressions to present their case while ignoring the “pure” economics of the issue. For instance, the federal government representative have been using expressions to steer people to believe that petroleum products are underpriced and that the subsidy is inimical to the economy. In addition, they claim that fuel subsidy is unsustainable and that the money being used for subsidizing fuel can be used in a better and more effective way to reduce poverty and benefit the poor. For instance, a source at a meeting between President Jonathan and the National Working Committee of the ruling Peoples’ Democratic Party on October 22, 2011 to discuss the fuel subsidy removal plan, said that “The President told us that there was the need to remove the subsidy and that though he appreciated the pains Nigerians would pass through after the removal, he said it was necessary if we did not want the economy to collapse”. The President also said that the “N1.2trn saved from the subsidy removal would be spent on providing social projects for the poor…the planned removal would be followed by a lot of palliatives, which he said were still being worked out.”(O. Fabiyi & O. Adetayo. Punch, October 24, 2011). At another event on November 10, 2011, President Jonathan reportedly claimed that the critics of the fuel subsidy removal policy have turned the issue into full-scale politics with the sole aim of bringing down his government. He said that “the opponents of fuel subsidy removal in their closet saw the wisdom in fuel subsidy removal, but they resorted to politicizing the policy when they saw it as an opportunity to bring the government down” (G. Subair & L. Usigbe. Nigerian Tribune, November 11, 2011).
On the other hand, at a Symposium organized by Academic Staff Union of Universities in Ibadan, former petroleum minister, Prof. Tam David West, who is a fierce critic of the removal of fuel subsidy, stated categorically that the so-called fuel subsidy “is a sanctified falsehood, absolute lie…I challenge (President) Jonathan… to prove me wrong…They have killed the refineries through sabotage…You are asking the masses to pay for your inaction”. (Daily Sun, November 16, 2011). Another opponent of the removal of fuel subsidy, Mr. Emmanuel Afonne, in a article titled “Politics of Oil Subsidy: The Cartel’s Fraudulent Acts” stated that: “Successive governments at the federal level in Nigeria since 1986, had tinkered in several ways with the price of petroleum products under various guise. Often they blamed their administrations’ failure to provide basic amenities for the citizens on… a bogus heading tagged oil subsidy… Yet government’s huge appetite for increase in pump price of petroleum products seems insatiable…Ordinarily, Nigerians would not have lost a minute’s sleep on the purported hike in price of fuel, if previous exercises had yielded desired results. Rather, while many people in the country may be feeling the crunch wrought on their already lean pockets by the incessant increase in price of the product, a select group of brief-case-businessmen are smiling to the banks. There is a cartel which has perfected plans to inflict maximum pain on many people in the country... It is obvious that the cartel’s fraudulent activities are at work, albeit tacit support from government functionaries”.
In another article titled “Why Nigerians must resist the next fuel subsidy withdrawal”, Tony Ishiekwene, another opponent, stated that “I have never seen a country run so fraudulently as is Nigeria. The rulers have been criminal liars and there don't seem to be any end to this, more or less, perpetual fraud and deception of the people… that petrol in Nigeria is heavily subsidised, and the "fuel subsidy" must be removed so government can free itself from subsidising motorists and use the money for infrastructure development… the arguments have been the same by the evil leadership Nigeria parades- leeches that don’t care about the welfare of its people because they get everything for free- The truth of the matter is that there has never been any subsidy... a cabal has hijacked the Nigerian Petroleum distribution and Marketing process…There is no end, and there will be no end, to this as long at these band of pirates continue to rule us! … tons of cash has been allocated for the turn-around maintenance of the 4 refineries which never get anywhere near Engineers or equipments for maintaining Refineries, but end up in bank accounts of PDP supporters and election rigging facilitators…And so Nigeria has been dependent largely on imported petrol and kerosene for a growing population… Can you now see the Nigerian people are in deep shit?…There will be no end to these cycle of increases and lies of “subsidy removal” so long as the greedy elites… continually depreciates the Naira relative to the dollar… Yes the Nigerian people must resist very vigorously this umpteenth increase in fuel prices the name of a bogus fuel subsidy removal”. Furthermore, in a recent paper titled "Issues with Oil subsidy in Nigeria”, the Chairman of Rivers State Council of Trade Union Congress of Nigeria, Comrade Chika Onuegbu, said that "what is required is the removal of corruption and inefficiency in the subsidy and downstream sector management, rather than the removal of the oil subsidy, as virtually all countries of the world operate one form of subsidy or the other for her citizens. …Our main concern with the government model or proposal is that much of the funds that will be freed from the removal of fuel subsidy will disappear through corruption and inefficiency. …The next concern that we have is that the government seems to be only interested in the removal of oil subsidy and not the total transformation of the downstream sector for the economic development of Nigeria… We expect the government to carry out a sincere, detailed and comprehensive review of the downstream sector with a view to finding and implementing lasting solutions to the industry's problems”
Following the reject of the President’s proposal on December 1, 2011 by the House of Representatives Committee looking at the fuel subsidy issue, the Minister of Finance, Ngozi Okonjo-Iweala, came out to make what appeared to be a strong politico-economic case to justify the removal of the subsidy. According to her “Subsidy does not get to the poor; the middle and upper classes are the real beneficiaries. It is clearly unsustainable.. Evidence shows that the price of fuel in Nigeria is below both the African and international average…Nigeria, with its large population and small oil base, is comparatively poor, compared to other oil producers…With total crude oil production of approximately 2.5million barrels per day, Nigeria has a significantly lower GDP per capita..Therefore, we must rethink our approach to managing our scarce resources to provide services to Nigerians. We will be better off using the amount spent on subsidy to target poorer groups and big infrastructure projects…Under the current downstream sector structure, prices are not determined by demand and supply. Pump price of PMS is fixed at N65 per litre by the government…Fuel subsidy is what is paid by government to keep prices below free market. The subsidy causes distortions that result in huge economic costs such as rent-seeking behaviour and smuggling…The amount of subsidy equals to the difference between the consumer pump price of fuel versus the total cost of producing or importing. The price of petrol is N65 per litre, but actual cost of supply is N139 per litre. And projected at N120 per litre in 2012…This means that currently for every one litre of petrol purchased at the official price of N65, government contributes N73. Presently, only petrol and kerosene enjoy government subsidy. Diesel has already successfully been deregulated…Subsidy is a major fiscal and financial burden on the nation. From 2006 -2011, about N3.7trillion was spent on subsidy…In 2011, N1.348trillion was spent between January and October and it is expected to reach N1.436trillion by the end of the year. This represents 30 per cent of total Federal Government Expenditure; 118% of the capital budget; and 4.18% of GDP… Deregulation implies limited intervention by government; it allows for better regulation and transparency; allows for free operation activities in the sector; attracts new investors into the market and it increases competition and promotes overall higher productivity; reduces scarcity by ensuring adequate supply of petroleum products; and similar success story to the telecommunication sector " The Minister also stated that some social safety nets that the government will implement if the subsidy is removed include the following: a) Launching of Subsidy Reinvestment and Empowerment Programme (SURE); b) Maternal and child health services; c) Public works/youth employment programme; d) Urban mass transit scheme; e) Vocational training schemes; and f) High-profile infrastructure projects: Roads and rail; water resources, power; refineries (with private sector). She insisted that the “Structures have been developed to guarantee adequate oversight, accountability and implementation of the various projects…To ensure effectiveness, efficiency and delivery, high powered committee of eminent Nigerians to monitor revenue proceeds and proper implementation and use of the amount saved. Members with proven integrity will be drawn from the Nigerian youth, women groups and civil society organisations." (Yusuf Alli, The Nation, December 5, 2011).
However, many Nigerians doubt the Minister’s case because they see her as a representative of the World Bank where she was a Managing Director until her recent appointment. They have not forgotten about the Structural Adjustment Program (SAP) which the World Bank foisted on the country in 1986 and which failed to deliver on its promise. Besides, many Nigerians will recall that the Minister was also the Minister of Finance when President Obasanjo started the process of deregulating petroleum product prices in 2002 which also led to increases in fuel prices without the provision of the promised social safety nets. Nonetheless, President Jonathan is insisting on removing the subsidy. At the opening ceremony of the Nigeria Inter-religious Council, North Central Zone, quarterly meeting, held in Ilorin on December 5, 2011, he insisted that the removal must be effected in January 2012. He stated his government needed to remove the subsidy to stimulate the economy. According to him “If we deregulate and stimulate the economy, a family with a car and five children, for instance, would be better off, as there will be job opportunities for the graduates. ..So, even at N18,000 minimum wage, if three of the children are employed, that will increase their income and improve their living standards than without deregulation and the children remain unemployed…Even if you give petroleum products free and our economy remains as it is today, we cannot expand our industries and so there will be no job creation. Job creation will reduce violence and insecurity. (O. Joseph & S. Nwogu, Punch, December 6, 2011).
It is clear from the above that while the government is bent on reducing or removing fuel subsidy, many people and trade unions do not trust the argument of the government. In fact, if there is a national referendum of the fuel subsidy issue, the majority of Nigerians are likely to vote against the removal of fuel subsidy, if it is not rigged! However, there are now strong indications that the Senate will approve the President’s proposal and the subsidy will be removed despite its rejection of the Committee of the House of Representatives. In fact, there are rumors that the government has bribed members of the National Assembly with N2.0 billion to approve the removal of the subsidy, but this has been denied. It has also been reported that if the National Assembly refuses to approve the proposal, the President will go ahead to remove the subsidy because the Constitution empowers him to do so. According to a government’s spokesman, “Whatever is the decision of the National Assembly on the withdrawal of fuel subsidy is advisory” and Section 16(2) of the Constitution gives the government the backing to withdraw fuel subsidy because it is purely economic matter even if the National Assembly does not approve it (Amokeodo, T. Leadership, December 5, 2011). In other words, the President will ignore the National Assembly and voices of the people. Of course, the voices of the people hardly matter in Nigerian politics, especially as the next presidential election is more than three years away.
However, out of fear of massive industrial action by the labor unions, the President was remarkably silent on the fuel subsidy issue in the 2012 budget speech he made to the Joint Session of the National Assembly on December 13, 2011. The next day, the Minister of Finance, explained the exclusion of the removal of the fuel subsidy in the budget as follows: “Mr. President is consulting widely on the subsidy issue. He has been consulting with various stakeholders in the country, including private sector operators, students, religious leaders and others. At the end of the wide consultation, we will give him room to take a decision… His decision will be made public at the end" (Nderibe, O & Ujah, E. Vanguard, Dec. 15, 2011). At the 2011 Christmas Carol service held at the Presidential Villa the next day, the President reiterated his plan to remove the fuel emphasizing that it will cause only temporary pains. He said: “The pains will be temporary, after few weeks or few months, Nigerians will be better off, the economy will be repositioned. We must aggressively pursue agriculture, we must aggressively pursue industrialisation for jobs to be created in the economy”. (Odebode, N. et al. Punch, Dec. 16, 2011). In other words, the end result of the “consultations” is almost certain – removal of the fuel subsidy!
However, if and when the subsidy is removed, it will not mark the end of the “war of words” on fuel subsidy in Nigeria because the subsidy will re-emerge sooner or later. This underscores the need for an optimal approach to petroleum product pricing in Nigeria that will put to an end the recurring fuel subsidy debate and episodic “removal” of subsidy. In the second part of this paper, I will discuss the Economics 101 of fuel subsidy in Nigeria and make some suggestions on how to address the issue. Stay tuned.
Dr. Emmanuel Ojameruaye
December 10, 2011