In the June 2, 2022 edition of the Punch Newspapers, President Buhari was reported to have said that: 'We can't justify subsidy removal; western countries are subsidizing fuel too.'. This position is not different from the one the President had while contesting the presidency. It only reinforces his belief that there is no logical basis for subsidy removal. This position flies in the face of available evidence. So, the question is, to paraphrase the Minister of State for Petroleum Resources, why do Nigerians expect the impossible when the country continues to avoid the inevitable? The fact on ground is that the continuing retention of subsidy is not sustainable. It is also important to state that western countries are not subsiding fuel. Rather, what they have been doing is to provide cost of living support for their citizens on account of rising energy prices. This explains the initiatives that some of these countries have taken in recent times. These initiatives include imposition of energy profits tax, release of crude from strategic reserves, suspension of fuel tax and provision of incentives to refiners to increase capacity.
Key Facts about Nigerian subsidy problem
Currently, Nigeria has 4 government refineries situated in Port-Harcourt, Warri and Kaduna. The combined installed capacity of these 4 refineries is 445,000 barrels of crude per day. However, their utilization rate has declined over the years. Currently, the four refineries produce zero litre of petroleum products despite the huge cost expended on turn around maintenance (TAM) projects. There is no doubt that the penchant for these TAM projects has cost Nigeria significant amounts of dollars with nothing to show for them. Nigeria now imports all its petroleum products needs from other countries and this has contributed to the decline in foreign exchange reserves.
As a result of importing petroleum products that are heavily subsidized, the monthly remittance to the Federation Account by the Nigerian National Oil Company - NNPC Limited - has been declining steadily over the years. In 2021, the remittance to the Federation Account was N542.30 billion compared to the expected remittance of N1.55 trillion, which represents only 35% of what was budgeted. The major reason for the shortfall was the amount of under recovery (a euphemism for subsidy) of N1.43 trillion. In 2021, the percentage of crude oil revenue utilized to pay subsidy was 42%. In the first 5 months of 2022, the average monthly amount spent on subsidy was N255billion, which amounts to 68% of crude oil revenue. In fact, NNPC has not been able to remit any amount to the Federation Account since January 2022 (at least up to May based on available records) because of under recovery and other deductions withheld at source. It is, therefore, not surprising that the states have now been clamouring for subsidy removal given the significant erosion of their revenue. Most states, except for 3or 4 states, are heavily dependent on federal allocation!
There are 5 main factors that drive the cost of subsidy in Nigeria. These are crude oil price, foreign exchange rate, refining cost, freight and related costs and local transportation costs. Even though all these variables have gone up, Nigeria has maintained the cost of petrol per litre at $0.40 cents compared to her neighbourrs. In most countries, the cost per litre is above $1. Even in a country like Saudi Arabia, which is one of the biggest exporters of crude, the cost per litre of petrol is $0.62. In Ghana, the cost per lire of petrol is about $1.28. No wonder, there is massive diversion of petroleum products from Nigeria to the neighbouring countries.
Unintended consequences of Subsidy.
In recent times, Nigeria has experienced massive fuel scarcity until the government granted a slight increase in the price of petrol from N165 to N170/N175 per litre. However, in dollar terms, the price remained the same or even lower because of the depreciation of the Naira (Nigeria's currency)! Certainly, subsidy has a high cost even though it is desirable for the low-income earners. The fact is the country must increase its borrowing to generate additional source of revenue. Also, there has been massive reduction of spending on other public goods because of subsidy. It encourages smuggling of imported petroleum products from Nigeria to other countries where the prices are higher. The smugglers are, therefore, able to make significant profits. Interestingly, we do not seem to know how many litres of petrol are consumed daily in the country. Depending on your source, the figure ranges from 55million litres to 65milion litres. Meanwhile, based on loading information from the petroleum products depots, about 100m litres are loaded every day. Your guess is as good as mine where the difference is going.
Subsidy acts as a disincentive for new entrants into the market. Without new entrants and infusion of capital, the sector became increasingly inefficient, undercapitalized, and corrupt. This also explains why none of the 4 national refineries is operational despite the massive costs incurred on TAM. Clearly, subsidy will continue to undermine macro-economic stability of Nigeria if not eliminated.
How to address the subsidy dilemma.
There are many countries that have implemented subsidy reform programs over the years. Some of these countries have succeeded while others have failed. We, therefore, do not need to reinvent the will. All we need to do is leverage on the lessons learnt. In fact, we can also learn from our past mistakes when we have tried to eliminate subsidy. For Nigeria to be able to eliminate subsidy, we must:
- have the political will and independent regulatory agencies
- have a comprehensive understanding of the extent of the problems associated with fuel subsidy
- carry out a comprehensive planning with respect to the activities that need to be done and when
- conduct supportive research and analysis to provide the relevant and complete information to
citizens on the cost and impact of subsidy n the economy
- Implement targeted social programs to reduce opposition to the removal. Since subsidy removal will increase the cost of petrol and may also lead to inflation, the government must determine the impact on low-income earners and implement an unconditional cash transfer to mitigate the impact. The cash transfer must be implemented before the subsidy is removed and must continue for a time after the subsidy is removed. In Indonesia, their subsidy reform program introduced in 2001 succeeded partly because a quarterly cash transfer of $30 per household was implemented for one year. Moreover, the scheme was widely publicized. It is also important that the social program must be announced as part of the comprehensive package to mitigate the impact of the subsidy removal. It is not enough to state that the savings from subsidy will be invested in infrastructure, especially when the citizens do not trust the government to do what it says it will do.
- Have constant dialogue and engagement with all stakeholders to achieve a successful reform.
The Subsidy Reinvestment and Empowerment Program (SURE-P) introduced by the President Jonathan administration in 2011 failed because of lack of transparency and the absence of most of the must-do activities discussed above. While the Government introduced the program in mid-2011, the mitigation plans were not announced until November. There was no supportive research and analysis to illustrate the cost and impact of subsidy. The government's brochure on SURE-P only said that the proceeds would be reinvested in infrastructure, construction of new refineries and rehabilitation of existing ones. There was also no well-thought-out public information and consultation program. Notwithstanding, in January of 2012, the government announced the withdrawal of subsidy, and this was met by stiff opposition. The government was later forced to dialogue with the labour unions before a compromise was reached.
Nigeria will also need to enhance its local refining capacity through privatization of existing refineries, construction of greenfield and modular refineries and co-location of refineries and crude oil production facilities. We may also explore the possibility of reducing our oil exports while focusing on domestic utilization like what Mexico has done. However, this should be a gradual process and done in such a way as to provide enough crude for local refineries before exporting the balance. Given the current production constraint that Nigeria faces and OPEC quota, we may not have barrels for export after utilizing them for local consumption. However, the good news is that the country can export the excess petroleum products produced by these refineries to other African countries and earn foreign exchange. The implementation of the African Continental Free Trade Agreement (AfCFTA) will help in this regard. The country will also save massive foreign exchange that is currently spent on the importation of petroleum products. One can then understand the optimism and euphoria surrounding the operation of Dangote Refinery, which can process 650,000 barrels of crude oil per day when fully operational.
There is no doubt that subsidy will benefit the poor, but it comes at a high cost in the from of fuel scarcity, smuggling, corruption, under investment, dormant refineries, and massive borrowing to provide alternative source of revenue to government. Currently, Nigeria spends about 76% of its revenue in servicing debts. This is clearly not sustainable. Any country that spends 68% of its crude oil revenue, like Nigeria, on subsidy cannot survive.
Therefore, the country must look for every opportunity to eliminate subsidy. However, this must be a gradual process. In addition, proper planning, supportive research and analysis, targeted social programs to mitigate the impact of the removal and constant engagement with stakeholders will be very critical. Government will also need to conduct an impact assessment and identify those that will suffer the most if subsidy is removed and the mitigation measures that need to be put in place before the removal. Such mitigating measures can include improvement in public transport, funding for healthcare and education and increase in the national minimum wage. Government can then use the findings from the impact assessment to provide justification for liberalizing petrol prices.
Though Dangote Refinery and the other refinery projects will greatly increase Nigeria's refining capacity, the problem is where will the feedstock come from. Nigeria is currently producing a meagre 1million barrels of crude oil per day compared to its OPEC quota of 1.8 million barrels of oil per day. The irony is that Nigeria, which was notorious for exceeding its OPEC quota in the past, is now struggling to meet the same. According to news reporting, Nigeria is losing about 150,000 barrels per day to theft. The country can no longer afford to pay lip service to this menace. If the issue of oil theft is not fully and urgently addressed, the ability of all these refineries to operate will be severely curtailed. Therefore, Nigeria needs to implement a headlong attack plan to deal with the problem of oil theft. Oil producing communities, oil operators and all the security agencies have a vital role to play in this regard. Of course, the country cannot do it alone. So, we must seek the cooperation and support of other countries.
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