Memo To Buhari: Remove Fuel Subsidy By Dave A. Lafiaji

Barely six weeks after Nigeria received rare favourable commentaries in the international media for its ground-breaking transfer of power from a sitting president to a victorious opposition candidate, Nigeria slipped back into the “bad news” pages in the foreign news media in the last days of the Jonathan administration. Prominent foreign media organizations were relaying all over the place, news of acute fuel shortage in Nigeria that not only threatened the continued normal operations of businesses, especially the mobile telephone network companies, airlines and banks but had the potential to disrupt the milestone event of the formal handing-over of power at the end of May 2015, to Nigeria’s sixth (constitutional) president, Muhammadu Buhari. And this, in a country that has been, for an unbroken period of more than forty years, Africa’s N° 1 oil producer and exporter!
If the self-styled “giant” of Africa could be misgoverned and kicked into the gutter of international public opinion in this manner, what other proof do those who continue to doubt the capacity of the black man to organize his own affairs properly and govern himself reasonably well, need? None, I would say.
While most people within and outside Nigeria think that President Goodluck Jonathan “redeemed” himself and fully atoned for his poor performance (or refusal to perform) in office, by way of the civilized and patriotic manner in which he conceded victory to Buhari, it is most sad that that his last week in office was overshadowed by a spectre of agonizing Nigerian citizens and businesses thrown into disarray and uncertainty, in search of non-existent fuel! If anything, this should serve as a poignant warning to Buhari, if he does not want a similar scenario to play out for him in a mere 48 months’ time.
What then should Buhari do, now that he is in the job (of president of Nigeria)?
Rather than discuss from a straight answer to this question which I’m sure his advisers are already working on, perhaps it would be more interesting to let an answer flow from our discussion.
First, let us debunk the fallacies that have been spun on (and by) successive federal governments of the last sixteen years at least, namely:
-once the refineries are re-fitted and begin to operate at full capacity, Nigeria would no longer need to import fuel and there would no longer be subsidy; this reasoning is utterly absurd. When you allocate one barrel of crude for domestic refining, you reduce by one barrel, the quantity available for export at world market prices, say US$53 and thus reduce your export earnings by same amount. Now, if you sold the locally refined products at say, half its true (world market) price, you would have obtained the equivalent of US$26.50 instead of the US$53 that you would have obtained otherwise. In other words, you would have provided a 50% subsidy to the price of the locally refined fuel.
Alternatively, if you sold the refined product at the true market price, you would obtain the same proceeds (assuming full recovery of refining costs) as from exporting the crude (feedstock). Upshot: subsidy is present whenever you sell or exchange any good below its true (economic) cost
-petroleum is “God-given” to Nigeria; therefore, Nigerians should be allowed to “enjoy” the resource as cheaply as possible: utter nonsense. Water is also a God-given resource and you know what you pay when you pick up a 1-litre bottle of table-water off a supermarket shelf. Government has never subsidized (bottled) water and I have never heard anyone complain of scarcity of the item, yet millions of litres of the stuff is consumed daily. And this is despite the fact that water has an intrinsic value (you actually drink it) whereas fuel (gasoline, kerosene, AGO,..) has no such value: it is worthless (even dangerous to keep) unless you have and need to power an automobile or machinery with it. Talking of Nigerians being allowed to “enjoy” their God-given resource, it is presumed that Nigerians, rich and poor, each have access to and consume roughly equal amounts of the reported 40 million litres of fuel that now allegedly consumed daily. Of course, this is not the case. What fuel subsidy has been doing in effect is make the poor pay (indirectly) for the fuelling of the harem of “huge-litre” automobiles kept by the rich and the well-to-do. In fairness to these comfortable Nigerians, they have never complained to anybody that they were incapable of fueling their machines at whatever price the product is sold on the market but only ask that availability of fuel be guaranteed throughout the country, as is the case in all sanely governed countries around the world! In any case, what “enjoyment” is that which puts you in a near permanent state of anxiety of whether fuel would be available when you drive out to a fuel station tomorrow morning?
-removal of subsidy would lead to hikes in the cost of transport, which would lead to hikes in the prices of foodstuff, cause generalized inflation and further impoverish Nigerian workers: a vacuous and ghoulish argument. When you realize that Nigeria now consumes increasing quantities of foodstuff imported from neighbouring West and Central African countries (tomatoes from Burkina Faso, pine-apple, gari, yam flour from the Republic of Benin, beans, onions, cattle from the Republic of Niger, cattle from the Republic of Tchad) whereas the pump-price of fuel in each of these countries is at least twice the Nigerian subsidized price, you ought to ask yourself how such farm products and livestock get produced at prices that still make them sellable (price-competitive) in Nigeria. If those examples still do not convince you, what about the imported rice from Thailand, chicken from South Africa and Brazil, vegetable oil from Malaysia, countries in which fuel is not subsidized but which still produce goods cheaper than we do? The fuel-driven inflation hypothesis, therefore, if not entirely false in the aftermath of subsidy-removal, is not absolutely true. In any case, the role of government is, through a smartly assembled set of robust and targeted fiscal measures, to extinguish the inflationary impulses that would accompany a major policy reform like the removal of subsidy.
Amplified by other ills (bloated bureaucracy and overpaid legislature, endemic corruption, wanton looting and waste of public wealth, etc.), it is clear now that the policy of subsidizing petroleum products has brought Nigeria to economic ruin, as amply demonstrated by:
1-vastly inadequate and dilapidated economic infrastructure and amenities (roads/highways, railway, electricity, water, hospitals and health centres, schools, colleges and universities) such that producing and moving goods as well as persons around the country has become a “hellish” and perilous undertaking; Nigeria is so lacking that today, her children are now to be found all over West Africa and elsewhere scavenging for university education in all manner of establishments; rich Nigerians in their own case routinely travel to Israel, India, South Africa…… (all, non-oil producers) to attend to health matters while their less endowed compatriots have their religious faith and prayers to hold on to for protection and divine healing
2-vastly diminished productivity arising from huge losses of man-hours to barely motorable intercity roads, traffic-jammed urban roads, queuing and running around for hours to find non-existent fuel for their vehicles, lack of electricity or fuel supply to offices and businesses to operate, forced idleness as businesses shut down in the day earlier than desired due to security concerns
3-vastly diminished level of public security and safety as public security agencies remain severely underfunded, understaffed, poorly-equipped, miserably remunerated and naturally de-motivated to put their lives on the line for the sake of public safety such that everyone, apart from those in government and legislature, now has to provide for their own security
4-heightened anxiety and agony of the citizens over sudden disruptions to continuous availability of fuel, an emotional burden placed on the shoulders of Nigerians but which is unknown in other countries, most of whom do not produce a single drop of oil to start with
5-(the) persistent loss of value of the national currency (store of value) such that a currency that was worth 150 American cents per unit (1 Naira = US$1.50) in 1982 is now worth half a cent (US$1 = 200 Naira) in 2015! In other words, our national currency has become virtually worthless, under the “able” leadership of the previous “patriotic” presidents and military heads of state!)
6-Increasing difficulty of the federal and some state governments to meet monthly salary payments as they fall due
7-(the) creation of multiple (easy) avenues for the illicit transfer of public wealth into private pockets thereby denying government the use of that wealth to meet genuine and permanent needs of the people for transformative physical and human infrastructure.
Having seen and experienced the ravages of the failed policy of fuel subsidy amplified by other heinous acts of bad governance, we should now ask ourselves: what would really happen if subsidy was totally removed from fuel prices? Here is what would most probably happen:
1-an initial sky-rocketing of public transport fares which are entirely determined by private operators; fare-increases would however be tempered soon thereafter as demand for public transport falls; in effect, people would invent or resort to alternative transport arrangements to reduce their consumption of public transport until tariffs fall to a new “equilibrium” level which matches supply and demand; moreover, the beneficial throw-offs (effects) of the new policy would have moderating effects on transport costs
2-an initial deluge of imported petroleum products as marketers regain the freedom to engage profitably in the product marketing activities for which they were established in the first place; expect to see fuel stations in the same neighbourhood selling fuel at slightly different prices as marketers battle (beg) for customers
3-a drastic drop of between 15 and 20% over the first nine months in the artificial (“wuruwuru”) consumption of 40 million litres as the “invisible hand” of Adam Smith (of 1776) sets to work and destroys fuel-smuggling, reduces wastes and rationalises fuel consumption: you would think twice before cruising aimlessly around town or embarking on long and un-necessary journeys if you have to pay between N200 and N250 for a litre of gasoline; this is the minimum price-range required to discourage smuggling to the neighbouring countries where the pump-price is already at that level, a price that incorporates a significant amount of tax to fund government budget in those countries
4-a significant appreciation of the Naira in the foreign exchange market over the first few weeks, driven by (a) mop-up of huge quantities of liquidity from the economy as people use more cash to buy fuel (b) extinguishment of the government liability for transferring billions of cash to marketers each month, to cover subsidy payments (c) renewed confidence of local and foreign businesses in a Nigerian economy that then offers prospects for better fiscal discipline and management as well as improved labour productivity and (d) increased oil export earnings as more crude is freed from (wasteful, unproductive) domestic consumption to be sold for good cash in the international market (note the expected favourable impact of Naira appreciation on the prices of imported consumer and even locally produced goods that directly benefits the common, vulnerable man, whether in the city or in the village).
As can be conjectured from some likely post-subsidy events mentioned above, it would not be doomsday yet; prices may sky-rocket initially but the heavens will not fall. Indeed, many of these prices would fall back within months to near their former levels as smartly-selected government measures kick in. Nigerians may finally realize that they have been held in subsidy-bondage for (too) long.
When and what should the government do before or simultaneously with the removal of subsidy? Muhammadu Buhari should announce the removal of subsidy within his first 30 days in office. Government should simply identify (or should have identified) the vulnerable classes that would be most affected initially in terms of sharp erosion of their purchasing power and target indirect compensating incomes or notional savings at them. Such classes should include trade union/labour movements (low and middle-income workers generally), pupils and students, teachers and university dons, Police and Army rank and file, low-income rural and urban dwellers. With these groups totally shielded from the initial shocks of fuel subsidy removal, instigators of subsidy riots as well as those who oppose removal of subsidy out of self-destructive ignorance would find nobody to burn tyres on Moshood Abiola (ex-Ikorodu) Road in Lagos or go on riot at Eagle Square in Abuja or disturb the peace in Ibadan or disrupt markets in Aba or Kano!
Now, take a look at the possible soft-landing (shock-absorbing) measures in favour of the vulnerable classes that the federal government, in parity/consultation with the state governments and the National Assembly, might take right away or by pre-determined dates made known to the public:
1-free and compulsory education up to university level for all Nigerian children with the concomitant expansion of facilities
2-two free quality meals per day and two sets of free uniforms per school year for all Nigerian pupils attending public primary and secondary schools
3-free medical care for all Nigerian children under 18 years
4-multiple-fold salary increases for qualified primary and secondary school teachers, university dons, doctors, nurses and health workers employed in public establishments who would need to be attracted in large numbers to cope with the expected explosion in service-demands
5-waiver, for a period of three years in the first instance, of import duties on imported staple food items like wheat, rice, vegetable oil, fish, to drive down their prices to the final consumers (households) and thereby compensate them for the increased portion of their incomes spent on transport
6-offer of tax incentives, duty waivers for a period of three years in the first instance, to electricity generation and distribution companies to enable them bring down by at least 50%, the cost of electricity supply to households
7-waiver for a period of three years in the first instance, of licence-plate fees for public transport vehicles and for non-luxury private cars on the basis of one free plate per person
8-slashing, for a period of three years in the first instance, of import duties on spare parts and tyres used by the various categories of public transport vehicles, as a way of easing cost pressure on transport operators and helping to drag down transport fares
9-forbidding until further notice, the Nigeria Police and the road safety agency to demand or seize vehicle particulars from public transport vehicles conveying goods or persons: it is well known that police check-point racketeering is a major contributor to transport and business cost inflation in Nigeria
10-setting the repair/reconstruction/construction of national road and railway networks as a first line charge of east 20% on the annual federal budget.
As you can figure out, the measures outlined above would not only re-channel a bigger chunk of the commonwealth to the less rich and less privileged but would also generate millions of real jobs for real people (not the imaginary jobs that Dr Ngozi Okonjo-Iweala was fond of announcing from her Abuja office): people to purchase and supply of foodstuff to schools, caterers to service the same establishments, textile factories expanding production line to roll out uniform-textiles, tailoring companies to sew, package and supply them to schools (Osun State has already blazed the trail here), teachers to teach increased numbers of children, medical personnel to cope with increased demand for services, expansion and opening of bakeries as bread becomes cheaper and in higher demand, etc.
Certainly, these measures would cost money, lots of money and this must be found. Simultaneously, the same measures would have booster-effects on the economy over the short to medium terms, for the reasons highlighted earlier in this discussion. Good money would also be saved from shutting down agencies like the PPPRA which will no longer have any “raison d’être”!
While the total removal of subsidy would provide the number-1 and major funding source, recourse would most probably have to be made to the progressive taxation of petroleum products as well as to savings from stripping down governmental machinery and emoluments of public officials (including the legislature) down to the barest essential at both the federal and state levels.
Indeed, we must enter a caveat here: resource-sucking “Dracula” state-governors should not look to subsidy removal as source of additional funds (increased monthly allocation) available to be spent on such stupid ventures as buying jets/helicopters, building “fly-overs” in places where there is hardly the traffic to use them or furnishing the governor’s state-house bedroom with million naira beds whereas most citizens in those states still do not have decent shelters!); not one Naira of the removed subsidy or petroleum product tax would follow them to their state capital as those funds would go straight into dedicated accounts to fund the needs itemized above.
Perhaps, apologists of petroleum subsidy and non-taxation of petroleum products (to fund real development, not pay salaries or for useless projects) would take another look at Norway, which came into the petroleum business (as a producing country) long after Nigeria but which is now cited as a world reference in good petroleum-resource management. During the period 2/2/2015-11/5/2015, gasoline (PMS) sold in Norway for an average price of US$2.06 per litre, 48% higher than the average world gasoline price of US$1.39 per litre (according to globalpetrolprices.com). On the other hand, Norway offers free education to its children to university level, provides excellent quality of life to its citizens who I believe are very contented. Would you ever find a Norwegian trying to escape from his/her country and willing to “die” to get an American, British or “any visa” just to go and seek a better life abroad? Never!
Just as many other Nigerians have done at one time or another, I have sketched in this discussion, what I do believe are the pathways the Buhari administration might have no choice but follow, unless it is determined from day-one, to fail. God forbid!

Dave A. Lafiaji

(Economist, former Executive Secretary of the African Petroleum Producers’ Association , Brazzaville, Congo)

views expressed are not necessarily the opinion of blog author. materials and other news items on this Blog, can be reproduced, published, broadcast, rewritten or redistributed in whole or in part provided that appropriate credit is given to the original sources.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s