Nigeria: Rethinking fuel subsidy removal
As trillions mount in the local currency in the name of fuel subsidy, nothing puts the rulers and ruled on warpath than this hot topic. Nothing also reveals more policy contradictions and double-speak than this time-worn subject. The citizens contend that further removal of subsidy only feeds ‘fat cats’ at the expense of the poor and pays for gross inefficiencies down the fuel import value-chain. Is anyone listening? Is anyone listening? President Goodluck Jonathan may be listening but his advisers seem bent on fuel subsidy removal, a matter apparently top of the agenda.
This raises questions: Is this right time? Who really benefits from fuel subsidy removal? How is a halt put to the vicious cycle of fuel price-hike and inflation? Does ‘subsidy’ like ‘a mirage’ – disappears and relocates ahead as one draws closer? Nigeria’s recent economic history is replete with several instances of subsidy-removal. What has been the shelf-life? Very short, indeed: It is probably time the Nigerian authorities wash their hands off fuel pricing-fixing and rethink the policy from the point of sustainability. Many countries such as the United Kingdom have a credible mechanism which transfers the periodic swing in input price to pump price. That way, there are no erratic price increases attracting mass resistance as we find in Nigeria.
It is important for both the policy-makers and the Nigerian masses to have a common understanding of the nature and components of subsidy. The price of crude oil is a key driver of fuel prices the world over. Not only have crude oil prices risen from the seventies to well above $100/bbl, but they are subject to wide and wild fluctuations.
So, an analysis is not required to establish that Nigeria’s static fuel pricing model is flawed. In addition, there is a transport and landing cost element that could have been obviated were Nigeria’s aging and under-maintained refineries working at close to full capacity. Importers even build-in questionable financing charges to arrive at the landed cost of a litre of fuel. Sometimes, there are logistic hiccups at the port with cost-consequences.
The issue is really not subsidy but having a proper pricing model in a world of powerful ‘oligopolists.’ A fair price from the point of view of a consumer would be one that is affordable, reflects market realities and excludes inefficiencies. There are considerable doubts as to whether the pricing mechanism maintained by the Petroleum Products Price Regulation Authorities (PPPRA) works as it should.
If the mechanism works well, why should subsidies be in their trillion before the authorities worry? The solution is easy. Remove all the market imperfections and have a credible pricing mechanism Nigerians would trust and cut out the inefficiencies. Does the will exist? The authorities must be careful about making promises about what they do with money from subsidy-removal.
Many believe that previous promises were not wholly kept. Some well-placed individuals are already linking subsidy-removal with minimum wage payment. In theory, there should be no link. ‘Subsidy’ means there is a hole to fill. Fill the hole! It is this difficult to spin subsidy removal as a public benefit that encourages the resistance. There should be transparency and accountability as to what the money is used for. Fuel imports create jobs abroad. The citizens are right to demand that subsidy-removal and the use of the funds so derived must create jobs at home. Why not?
Beyond the usual pedestrian economic arguments for fuel-subsidy removal, the Nigerian authorities must rightly seek buy-in of the people. It is not easy. The Jonathan-administration needs to show itself not just as meaning well – by not “letting down” its teeming supporters – but it must show example in accountability. Trust is central to this subject and only accountability earns that trust. A wide-angled view is needed in re-thinking policy around the ageless subject of fuel-subsidy removal.
