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The Mythology of Subsidy and Governance in Nigeria By Prof. Murtala. S. Sagagi If it is likely that any savings will be squandered on programs that benefit an elite and politically connected minority then (unfortunately) fuel subsidies in reality may be an attractive second best policy. In such a situation, improving governance should be the highest policy reform – Espaham, H (2002)
Protests are being held all over the world against politicians and the Big Guys in the financial sector for wrecking economies. In Nigeria, the deregulation not backed by genuine agenda to improve governance is the source of grave concerns even among the proponents of free market reforms. Since the mid 1980s, various forms of structural reforms have been introduced with the hope of diversifying the economy and improving living conditions. Half a decade ago, the nation pledged to implement development programmes in line with the global strategy for cutting poverty by half worldwide. The debt overhang was used to justify the government’s inability to fund development projects. On June 30th, 2005, Nigerians celebrated the debt relief deal. In the package, $19,293,207,575 was wiped-out from the Nigeria’s debt profile. The Paris Club group of creditors was convinced that the savings from the relief and the over $1 billion (1/3 of the country’s annual budget) used to service the debt annually would be used in pro-poor programmes such as the attainment of Millennium Development Goals (MDGs). Recently, the 2010 Global Monitor Report (GMR) of UNESCO revealed that about 92% of Nigerians still live on less than $2 a day while about 71% survive, somehow, on less than $1 a day. UNESCO in 2010 concludes that Nigeria is far away from attaining its commitment on global economic development target. The MDG Report Nigeria (2010), equally lamented that “No Goal is certain to be achieved”. The result is the year by year increase in poverty across the nation as shown in Table 1.
Source: (NBS, 2006, UNESCO, 2010) The ongoing campaign on the removal of fuel subsidy as the magic formula that will free funds for development projects has intensified. Without doubt, subsidy in Nigeria has been bastardized. And those behind the abuse are apparently known but operate above the law. As usual, the only soft strategy implemented over the years is the removal of subsidies.
Table 2: Fuel Pump Increase Overtime 1986-1993 30k – 50k 1993 3.25 1994 11 1999 20 2000 22 2002 26 2006 40 2007 65 The present deregulation agenda was contained in the Petroleum Industry Bill (P1B) and the Medium Term Expenditure Framework and Fiscal Strategy Paper 2011-2013. The paper undertakes to promote fiscal discipline, prudence in the public expenditure, ensure macro economies stability, stabilize exchange rates and pursue strategies to bring down interest rates and inflation. It is expected that the private sector will be stimulated to create new jobs thereby lessening economic hardship. This according to the paper will pave way for helping the nation address vision 202020, MDGs and others. The critical question is, how could all these be achieved? Beside the usual macro economics, the paper hopes to deliver mainly in the following ways:
1. Helping the nation save 1.2 trillion to 1.6 trillion naira from the removal of subsidies. 2. The share of capital expenditure in the aggregate spending will increase from 25.6% in 2011 to 27.5% in 2012. At the same time, recurrent expenditure spending will be reduced from 74% in 2011 to 70% within the next four years. 3. Achieve growth by 7, 7.5 and 7.5 for 2011, 2012 and 2013 respectively 4. The creation of AMCON and N150 intervention to industries 5. Direct allocation of petroleum products to manufacturers and improved efficiency in the ports 6. Invest massively on infrastructure, human capital development, and SMEs
These objectives are clearly desirable. However, two fundamental questions need to be asked and resolved: Is it necessary for the government to totally remove subsidy to achieve these rather incremental changes? Are the government structures capable of effectively delivering the intended goals? To begin, let’s us examine the performance of the Nigerian economy vis-à-vis the projections for the future.
� Table 3: Sectoral Contribution to GDP in Nigeria, 2008 � 2008 2010 2011 2012F 2013F � Agriculture 42.07 40.84 41.59 37.9 37.9 � Crude oil & natural gas 17.54 15.85 14.84 29.1 29.1 � Wholesale and retail 17.33 18.7 16.75 13.9 13.9 � Manufacturing 4.13 4.16 3.91 3.0 3.0 � Finance & insurance 3.79 3.75 4.04 4.0 4.0 � Building & construction 1.83 2.00 2.09 1.2 1.2 � Telecom &postal services 2.90 4.56 5.96 8.2 8.2 � Hotel & restaurants 0.46 0.50 0.53 � Solid minerals 0.31 0.34 0.36 0.4 0.4 � All Others 9.63 9.3 9.93 2.3 2.3 Source: National Bureau of Statistics, (2009 & 2011) 2011 figure are for the 2nd Quarter
It is evident from this table that the government itself is skeptical about making commitment for radical change in growth. As such, the promise of creating a structural shift away from oil sector to industries has already been compromised. In fact, significant growth is attributed mainly to the oil sector instead of manufacturing and other non-oil sectors. More worrisome is that the government accepted that the growth projected will be much lower than estimated by Vision 202020 which provided for 10.9, 11.8 and 13.1 percents for 2011, 20012 and 2013 respectively. Studies by Sala-i-Martin found that in the 1970s, 11% of the world’s poor were in Africa and 76% in Asia. By 1998, Africa hosted 66% of the poor and Asia’s share reduced to 15%. The reason was that Asian countries have grown while most African countries have not. For nearly a decade, Asian countries have grown and diversified. Sadly, Nigerian economy remains agrarian and resource-based.
Table 4: Economic Structure of the Emerging market Country structure production (% of GDP) Agriculture Industry Service Brunei 3 46 51 Indonesia 16 44 40 Malaysia 11 45 44 Philippines 19 32 49 Singapore 0 35 65 Vietnam 26 32 42 Thailand 11 39 50 Chile 8 35 56 Mexico 6 29 66
Source: IMF, Direction of Trade Statistics (2002)
Economic development has suffered from a rather unplanned journey in Nigeria. Arguing that fiscal and monitory approaches to growth are useful, but they fall short of the interventions required to stimulate growth. Thus, the current model for growth and their consequent implementation in terms of policies did not stand the test of time as poor economic performance dogged Nigeria. The point is that the marginal improvement promised, does not warrant the total subsidy removal. Besides, rather than helping the private sector, the inflationary trend engendered by the policy will automatically increase the cost of doing business thereby hampering firms from investing in growth. My best guess is that the Medium Term Expenditure Framework & Fiscal Strategy Paper was rashly conceived without meaningful inputs and due consultation even within the government circle. Second, the World Bank insisted that public sector institutions and weak governance constitute the major constraints to growth and equitable distribution in many developing countries. This gave credence to the findings of Daniel Kauffmann that countries that improve governance raise standard of living by about 3 times in the long run. In Nigeria, NBS/EFCC (2007), found that crime and corruption are considered by the private sector as the most serious obstacle to doing business than economic governance (taxes, inflation and changes in government policies etc). Thus, freeing funds for increased government spending whether through debt relief or removal of subsidies without commensurate efforts to address governance problems would continue to thwart development. Due to our inaction in this regard, recent empirical studies have concluded that government expenditure has not translated into meaningful development in Nigeria. This has been the findings of Olukayode, E. M. (2009), Nurudeen, A. & Usman A. (2010), Olupade, B.C & Olupade, D.O. (2010) and Adesanya, A.B e tal (2010). The results show that government spending in Nigeria has shown no considerable shift over time and have been crowded by corrupt practices, thereby contributing insignificantly to the economic growth of the nation. Thus, removing subsidies without a formula for improving governance is a recipe for disaster. Essentially, two things are pretty clear: Firstly, it is doubtful that the extra cash in the hands of the government will make any meaningful difference from what is presently obtained. Secondly, the capacity of the government to clean up itself with a view to gaining public trust and confidence is weak. Many would argue that sanitizing government will require decades of sustained effort. Also, providing billions of naira on subsidy may not be sustainable in the long term. These are genuine concerns. However, while I’m of the view that active private sector and limited government interference is desirable, we should establish effective, not rash, framework to make deregulation work for the betterment of the nation. From my observation of the present situation, with or without deregulation funds will continue to be diverted, mismanaged and misdirected.
Some countries were cited in the government campaign strategy to sell the deregulation agenda. On closer look one finds that it is true that many countries have deregulated, but on gradual basis. From the table below, it could be seen that the citizens of a number of countries which are somewhat at par with Nigeria earn, on the average, more than the Nigerians. As such, the pains of subsidy removal in those countries can easily be observed by their people. More importantly, the growth agenda (as shown in Table 4) of these nations seem to be working gradually unlike in the Nigeria’s case where at best we stagnate.
Table 5: GDP/Per Capita for Selected Countries Malaysia 14,744 South Africa 10,518 Thailand 9,221 Angola 5,749 India 3,408 Ghana 2,725 Nigeria 2,437 (Trust Index -$1,225) Source: IMF, 2010
Ghana, for example buys crude oil at a discount from Nigeria, and interestingly, its Tema refinery produces about 70% of its fuel domestic consumption. To ensure transparency in the management of savings, the National Petroleum Authority was established comprising of representatives of the government, oil companies, trade unions, NGOs and experts. Also, in order to promote growth and provide relief to the lower income families, massive investment in infrastructure was undertaken and social safety net was expanded. This explains why Nigerian firms relocate to Ghana to take advantage of the friendly business environment. In Indonesia, Chili and China direct cash transfers were made to the low income groups. In Sri Lanka the Samurdi Food Stamp programme was strengthened while in Jordan National Aid funds was created. All these were deliberate efforts use savings from the subsidy reductions to provide direct benefit to the poor.
In conclusion, both historical facts and received wisdom point that 100% subsidy removal will not benefit the low-income households in the short, medium or long term. I’m certainly not aware of any country that does not have some kind of subsidy or functional social safety nets to mitigate certain effects. Therefore, the idea of immediate fuel subsidy removal should be stalled at the moment, until the government team worked out a credible formula for achieving double-digit growth. Where the possibility of significant growth especially in the non-oil sector is assured, the following recommendation may be useful:
1. The capacity of the Nigerian government to protect the poor when subsidies are eventually removed is very weak. Government should launch Poverty and Social Impact Assessment (PSIA) for fuel. After mitigation strategies are determined, gradual withdrawal over the next three to five years should be carefully planned and monitored. The timetable should be implemented based on clear social and economic deliverables. In other words, subsequent removals depend on the government’s performance in meeting the growth formula, MDGs and Vision 20:2020 of the preceding phase.
2. The reliability of the government in terms of making well its promises and the capacity of the government to implement its own policy are suspects. This suggests that government should put in place a damage control mechanism. Perhaps by establishing a petroleum management agency/commission or any other suitable arrangement headed by credible professionals and operated by representatives of the government, experts, academics, civil organizations and trade unions. As much as possible the legislation of the management arrangement should be depoliticized. 3. A team of development strategists, economists, experienced private sector operators, and government representatives should be reassembled to review, upgrade and monitor the implementation of the pro-poor policies, Vision 20:2020 and the MDGs. The team should work closely with the National Economic Team, relevant government ministries/agencies and petroleum management arrangement to ensure speedy growth and development of the nation. This is not to suggest that the relevant government organs should be stripped of their responsibilities. Rather, it is to inject fresh ideas and challenge the existing protocols that seem to retard national progress in poverty reduction and stimulating growth. 4. Even though the Sovereign Wealth Fund (SWF) is on trial, it is certainly a very good initiative that should be supported. In the event it survives, governments should ensure effective and transparent management of the funds. 5. A Public Private Partnership arrangement should be used to rehabilitate existing refineries and undertake efforts to establish new ones. This should be part of the mandate of the subsidy management arrangement. 6. The Petroleum Product Price Regulation Agency and NNPC should be restructured and be made more effective and transparent. 7. Good governance does not happen by chance. Even though it is difficult to cite excellent models in Nigeria, the federal government should learn from some states that undergo radical transformations; build capacity for development, or making deliberate attempts to monitor how funds are applied in ministries and local governments. The cases of Lagos, Cross River, Kano and to some extent Rivers States are interesting examples. There is the urgent need to re-evaluate the mandates of the country’s corruption watchdogs with a view to make them better positioned to prevent, investigate and prosecute financial mal practices at all levels. 8. The composition of the National Assembly is impressive. The presence of professionals, academics and seasoned politicians among others suggest that an independent thinking and open-mindedness on issues will be assured. We advise that the Assembly will use its wisdom to referee on issues of national importance without recourse to political affiliations or sectional interest. 9. The federal government should rethink the indiscriminate waivers given to certain importers and make effort to curve smuggling in order to create a level playing field for local manufacturers. A radical approach to develop the industrial, service and knowledge sectors is paramount. The key is to focus on sectors where we have competitive advantage and where new jobs can emerge.
Prof. Murtala. S. Sagagi Director, Centre for African Entrepreneurship Research & Training Bayero University, Kano, Nigeria sagagims@yahoo.com
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