The Buhari led administration has again announced plans to remove petroleum subsidies from 2022. This development has elicited different reactions across the country.
But this is not the first go-round, similar announcements were made by the government in 2015.
In 2016, the country’s Vice President, Yemi Osinbajo, was quoted as saying that the country saved N15.4 billion monthly from non-payment of subsidy for the year.
Earlier this year, the country announced that it had returned the subsidy regime. According to official information, the report noted that while Petroleum prices stood at N212 globally, the average country-wide price of N170, meaning the government was paying a subsidy of N42 naira per litre.
The back and forth removal of subsidies did not however start today.
In 2012, when former President Goodluck Jonathan announced the removal of fuel subsidies, there were massive protests in the country. The then President in a bid to remove subsidy had increased fuel price from N65 to N141.
A similar protest was held in 2000 when former President Olusegun Obasanjo attempted to remove fuel subsidies which he said cost the government $2 billion annually as of then.
Subsidies were first introduced in Nigeria in the 1970s as a response to the Oil Price shock of 1973. The situation of the shock led to a global rise in oil prices and if the international rates were to be used would have made Nigerians pay more, thereby forcing the government to regulate local prices for energy products. A decree which was further enacted in 1977 institutionalized subsidies in Nigeria.
2015 was the first year the Buhari-led administration raised the issue of fuel subsidy removal after there was no budgetary provision for subsidy in 2016.
Despite subsidy, except for a short period in 2016, fuel prices in the country have increased considerably between 2015 and 2021 in Nigeria. In 2020 however, there was a dip in price when the Crude Oil price crashed to N125 from 145. The government noted that the fall in the price of Crude Oil globally caused the decrease in price. The price increased again to N165 in 2021 from the earlier N125 pegged in 2020.
What Really is Subsidy?
Subsidy is aimed at lessening the burden or cost of certain products and an attempt at financial support by the government.
There are two types of subsidy; they are direct and indirect subsidies. Direct subsidies are targeted towards a particular group, individual or sector.
Indirect subsidies on the other hand include activities such as price reductions for required goods or services that can be government-supported.
Indirect subsidies lead to subsidized products being bought below-market rates. In this case, the government fixes the price of petrol below the ‘international’ rate and pays the difference.
In simpler terms, if the price of a bag of Rice ought to cost N50,000 after consideration of all production costs and prevailing market prices, the government then decides that cost is too high and sets a sale price of N40,000 for every bag of rice but pays the 10000 naira difference to rice merchants; that is subsidy. The N10,000 is the subsidized amount.
Subsidy means that a fraction of the price meant to be paid by consumers is paid by the government to ease the burden off consumers. For petrol, the argument is that the amount paid for petroleum by Nigerians is lower than international benchmarks.
If subsidy is removed, for instance, it means that the international market determinants will also decide what the price of petroleum will be in the country.
For instance, in 2020, the Nigerian government announced that it had reduced the pump price of fuel from N145 to N125, the decrease was hinged on a crash in price at the international market and in the event of subsidy removal, a crash in the price of Crude Oil globally should lead to a crash in price locally while an increase in the price will also have an effect on the local price of Petroleum.
Also, the removal of subsidy is expected to open up the market to more private competition even as the government may still intervene in regulating the market ‘when’ needed, due to the essential nature of petrol.
The amounts spent on petrol subsidy have been questioned by stakeholders including Trade unions, Civil society organisations among others.
Nigeria’s refined petroleum import is put at $10 billion by the Observatory Economic Complexity widening Nigeria’s subsidy requirement.
Earlier this year in March, the country was said to be spending N102.4 billion monthly on fuel subsidies. The figure increased to N150 billion in June 2021, when the NNPC GMD, Mele Kyari was quoted as stating that the government was subsidizing petroleum by N92/litre.
The amount spent on subsidy has been varying due to varying market conditions at the international market; especially as the amount that will be spent on subsidy is largely dependent on what the price of petroleum is at the international market in the prevailing time.
Nigeria’s Oil and Gas Sector, Hotbed of Corrupt Practices
There is well documented, widespread corruption in the country’s oil sector. The Malabu Scandal may be the most publicised of this malady but there are several other such stories within the sector. In recent memory, a reported 104 million barrels of crude oil is unaccounted for in 2019, $26 billion maintenance cost for refineries which have failed to work nor reduce fuel importation burden of the country.
It is this predilection for corruption and impropriety that makes stakeholders and Nigerians generally wary of any interventions targeted at helping citizens especially one that has not had much impact given the ever increasing price of petroleum.
Replacing One Subsidy for Another; Government’s Bizzare 5k Transport Subsidy Plan
Clearly, the subject of subsidy removal is a hotly contested one and many experts have laid out pros and cons to the removal. Experts who spoke to Dataphyte noted that the removal of subsidy comes with positives but creates important policy conversations.
The one thing that experts agree on is that you cannot replace one subsidy for another; but not the Federal Government and its experts who have suggested a 5k transport grant to the poor to mitigate the effect of subsidy removal.
An energy and policy expert, Akintunde Babatunde while weighing in on the removal of subsidy noted that the financial situation of Nigeria warrants the removal of subsidy.
According to him, sustaining subsidies is bad economics, especially with the country fighting hard to finance its budget. He made reference to the borrowing plan of the country to finance the 2022 budget for instance as an indicator to the incapabilities of the country to finance subsidy. In his words ‘Nigeria is broke’.
He also noted that the advent of the Petroleum Industry Act has opened room for deregulation of the downstream sector, meaning the Nigerian government has no hand in the commercial activity of the sector, all things being equal.
Speaking further, Akintunde noted that if Nigeria would be part of efforts to prioritise renewable energy, there is a need to allow Renewable Energy and Fossil Fuel to compete. He noted that the challenge of Renewable Energy has been that the government makes Fossil Fuels cheaper but if allowed to compete based on market demand, the consumers will choose which option they prefer.
He however faulted the plan to give N5000 as Transport palliative to Nigerians wondering why Nigeria wants to replace subsidy with another subsidy especially as there is no data to capture who poor Nigerians are. He also noted that the definition of who is a poor Nigerian remains unclear. According to him, the Transport grant is ill-advised.
Akintunde said Nigerians will feel the impact of the increase given the importance of petroleum in the daily lives of the countries’ citizens. He further encouraged the government to invest in infrastructures such as good roads and easing public transportation. The energy expert noted that given fluctuations at the international market, the price of petrol may end up cheaper than it is now on some occasions or can be the other way round, depending on international market forces, upon subsidy removal. For instance, he noted that the Nigerian government already hinted at an N340 fuel price upon removal of subsidy.
On corruption, he noted that Nigeria can tackle corruption around the sector if frameworks are created towards enabling such. He blamed the issues around the sector also on non-existent refineries infrastructure.
Another policy analyst, Ronke Onadeko slammed the government for being inconsistent with issues of subsidy removal, she wondered why the government has announced subsidy removal many times, noting that there are unexplained actions.
She however noted that subsidy has strengthened corruption in the country with some persons gaining the benefits of funds said to be allocated to subsidy.
The energy and policy expert also wondered how the government wants to achieve giving stipends to Nigerians to ameliorate the effect of subsidy removal, according to her, this remains very unsustainable and bound to fail even before starting.
Citing instances of what the government has done before now with COVID-19 palliatives, school feeding program, Ronke Onadeko opined that the government is not in touch with societal realities.
On what can be done, she advised the government to borrow a leaf from other countries that have had policies on making the Oil sector better, she also advised that there is a need to invest in Education, Infrastructure and creating employment, that way, people can be empowered to economically make decisions and fend for themselves, instead of paying subsidy that only a few enjoy and also giving grants that reach a few persons or more places than the other.
According to her, the removal of subsidy was long overdue as the introduction of subsidy in the 1970s was meant to be short term. The subsidy regime has encouraged corruption and the amount spent on subsidies is alarming when Nigeria cannot even finance its budget.