…Subsidy payment not sustainable – FG
…It’ll increase cost of doing business – MAN
…Subsidy exclusion unavoidable – LCCI
…Govt should build new refineries – Expert
‘…No law provides for subsidy’
The issue of petrol price increase is not new to Nigerians; rather what is new is that the federal government is bent on removing subsidy on petrol for good by 2022. BENJAMIN UMUTEME, in this piece, looks at the issue and its implications on the average citizen in the face of the prevailing harsh economic realities.
In January 2012, when former President Goodluck Jonathan’s administration announced the removal of subsidy on petrol, it set the stage for the beginning of the end of his regime as Nigerians from all walks of life kicked against the decision. According to them, the living standard of the average Nigerian would be worse off. That was when the exchange rate still went for as low as N186/$. That was when oil prices were high and daily production was above 2 million barrels per day.
Ten years down the line, it is like the economic indices have gone full circle plus. Presently, the exchange rate at the parallel market is over N530/$, oil production due to OPEC+ production quota agreement is about 1.4 million, leading to a significant drop in foreign exchange earnings for Nigeria. This added to the near absence of infrastructure, reduced Foreign Direct Investment (FDIs) and to crown it all, the worsening insecurity which has significantly impacted negatively not just agriculture, but other forms of business. This is not forgetting to add that debt payment is eroding the government’s ability to meet its obligations to the citizenry.
Enter fuel subsidy removal talks, vows
It was a bolt out of the blue when the group managing director of the NNPC, Mele Kyari, hinted that a litre of petrol may sell between N320 and N340 in 2022.
This hit the populace hard, and the reactions from Nigerians showed that they see the plan as further de-humanising the citizenry. According to Kyari, the government would exit the subsidy regime as the law does not provide for a subsidy; hence, its removal in 2022.
“There will be no provision for it legally in our system, but I am also sure you will appreciate that the government has a bigger social responsibility to cater for the ordinary and therefore engage in a process that will ensure that we exit in the subtlest and easiest manner,” he said.
Many Nigerians continue to wonder why the strong interest in petrol subsidy when subsidy for gas and kerosene has long been removed. The minister of Finance, Budget and National Planning, Zainab Ahmed, was even blunter.
Speaking with State House correspondents in Abuja, the minister was adamant that the subsidy regime of the government was becoming unsustainable. She noted that it was becoming very difficult for the NNPC to fulfill its obligation to the Federation Accounts Allocation Committee (FAAC).
“If you take N250 billion times 12 months, that is about N3 trillion. If we don’t remove that, that is what it is costing us. This money from the petroleum subsidies we can use to apply to health and education.
“So, for the petroleum subsidy, if we look at a cost of about 250 billion per month, and it has been increasing consistently. So, we are expecting something around N120 billion per month from NNPC. And now we are getting to a point where NNPC is remitting near zero.
“If we don’t stop we will get to a point where they will tell you to pay me this for managing the fuel provision in the country,” she said.
According to her, the Petroleum Industry Act (PIA) has a provision that all petroleum products must be deregulated.
“In the 2020 budget, we made a provision to assume that at the maximum by the end of June, we must exit the petroleum subsidy. So, this last FAAC the subsidy cost to the Federation was N243 billion.”
Nigerians, experts react
The argument for the removal of subsidy by the government has been going back and forth among Nigerians,
For the Manufacturers Association of Nigeria (MAN), the proposal will increase not only the cost of doing business; it will also lead to fuel-induced inflation.
According to its director-general, Mr. Segun Ajayi-Kadir, the implication is that with the strategic importance of petrol to business activities in the country, the cost of production will skyrocket.
“Regardless of the arguments back and forth on the issue, petrol remains a commercial product. It is, therefore, not insulated from the laws of demand and supply.
“From an economic point of view and that is the area I am comfortable to talk about, it should not come as a surprise. The rise in the price of crude oil should signal the inevitable increase in the landing cost of PMS in the country. You have oil marketers importing the fuel with the need to recover their costs and make a profit. Taken together, it is inevitable that the pump price of PMS will increase.
He, however, said fuel-induced inflation might arise, adding that it would also increase the cost of doing business for manufacturers and small business owners.
“The increase in the cost of transportation – and the multiplier effect on other costs – that will accompany the more than 100 per cent increase will erode the disposable income of the average Nigerian.”
For the Lagos Chamber of Commerce and Industry (LCCI), the removal of subsidy was becoming more unavoidable looking at the pressure it places on the government revenue.
Its director-general of LCCI, Dr. Chinyere Almona, said spending up to N250 billion monthly on fuel subsidy at a time when the debt to revenue ratio was above 73 per cent was not economical.
She said an immediate implication of removing the subsidy would be the increase in transport and logistics which would translate into higher costs for goods and services, rising inflation, increased poverty from diminishing purchasing power, and a likely rise in the unemployment rate.
“However, with more money freed for other purposes, the government should be able to spend more on utilities to cushion the effects of the removal. With cost-reflective pricing, smuggling of the products to neighbouring countries will reduce due to reduced margins.”
On his part, the chief executive officer of Financial Derivatives Company, Bismarck Rewane, said while the removal of the subsidy would lead to lesser consumption due to increasing prices, the government would have extra funds to trigger economic growth.
Rewane, however, questioned the process and essence of the distribution of the N5,000 transport palliative to 40 million Nigerians, which would likely cost about N2.4tn in one year – an amount that is N600 billion short of the N3tn for fuel subsidy.
He said, “N5, 000 times 40 million is about N200bn a month. It is N2.4 trillion in one year. This means that the government wants to save N3tn to spend N2.4 trillion. Now, who are the 40 million people? For instance, I buy petrol, but I am not among those who will get N5, 000 a month. So, who are those 40 million to get this money? And how will it be disbursed?”
Experts’ take
Experts are of the opinion that the proposed removal by the government is a little bit tricky, saying the authorities should be very tactful in order to prevent a social backlash. For many, the plan was coming at a very difficult time due to the harsh economic situation.
On his part, a former director-general of LCCI, Muda Yusuf, said the government must be creative in handling the issue. He said there was no doubt in the sound economic and business case in favour of fuel subsidy removal, “but the social and political contexts are equally critical.”
He said, “Certainly, the subsidy is not sustainable, which is why there is a need to accelerate engagement with the relevant stakeholders to come up with a policy transition strategy that is sustainable, realistic and pragmatic.”
Olamilekan Adefolarin, a political economist and development researcher, noted that the issue of subsidy removal boils down to poor leadership.
“The Nigerian authorities are deficit as a developmental state. And this has impaired our level of national development especially if we have feeble leadership that is ready to implement neoliberal policies. This comes with loans and grants in return to adhere to anti-poor prescription such as removing subsidy on petrol.
“Meanwhile, the implication on small medium enterprises would firstly, increase their operational and overheads cost. Secondly, it would retard there business as some end up close shop. Thirdly, some SMEs without options may go into liquidation.
“Fourthly, it could also lead to massive unemployment. Fiftly, this could also hamper the general health of the economy in all, we should expect the fall out to reverse whatever gains the government intervention fund disbursement to the SMEs in the year.”
Penny wise?
Some Nigerians have described the second leg of the plan as penny wise, pound foolish. They wondered why the government would stop subsidies on petrol and pay N5, 000 to 40 million Nigerians. To cushion the effect on the citizens, the federal government said it would pay N5, 000 to vulnerable Nigerians.
Questioning the methodology for selecting the 40 million, the LCCI said the method of selecting the beneficiaries is faulty.
She said, “On the proposed N5, 000 to be given to some people, we always wonder how the selection is made and from what database or register. What is the guarantee that the money will end up with the right people needing the intervention? One of the biggest problems with our social investment programmes is that we do not have a systematic methodology on how beneficiaries are selected.”
Even for the NLC, “The intervention we want to provide is for between 30 and 40 million people and there is still a lot of work going on. We have a committee that is chaired by His Excellency, the vice-president, governors and a few of us ministers as members. So, we have to have a landing as to the exact number between 20 to 40 million.
“We already agreed it will be N5, 000 and we have also agreed that the remittances have to be done digitally. So, the e-Naira will help, but also so are the various payment platforms that are currently available. What we will not do is pay people in cash.
“So, the transfers that people will receive through one kind of electronic money or the other and it is meant to be for a period of six, nine or 12 months.
“So, these are things that we are still in negotiation because it’s still money that would have to come from the Federation account. So, everybody that is a member of FAAC will have to agree on the numbers. The maximum will be 12 months; the minimum will be six months.”
The minister, however, justified the replacement of petroleum subsidy with N5, 000 monthly transportation grants to the “poorest Nigerians.”
Going forward
Adefolarin told this reporter that there was a need for the government to build new refineries to complement the ones already on ground.
“Conversely, what should be the way forward is for the government to have the will to build new refineries to complement the on-going modular refineries being constructed but replicated across the country.
“Secondly, the Nigerian authorities must see the need to hinge on the development state principle instead of relying so much on market forces and orthodox theologies of price mechanism.
“Thirdly, the Petroleum Industry Act law, the government must demonstrate total political will in making to work for all nigerians.PIA open door of opportunities that is not just regulation but making the government an active player in the sector providing petrol at accessible and affordable price for Nigerians through fair competitions as enshrined in the PIA objective,” he said.