Removing Petroleum Products Subs

Removing Petroleum Products Subsidy in Nigeria: To Be, or Not To Be?

Dr. Emmanuel Ojameruaye

As we approach the beginning of a new financial year, Nigerians are again witnessing conflicting signals from the government about whether or not the subsidy on petroleum products will be removed or reduced. Firstly, the report of the Dr. Kalu-led National Refineries Special Task Force submitted to the President on November 2, 2012 noted that “…the uniform and regulated pricing policy for petroleum products .. is one the most widely adduced reasons…for lack of investment in new refineries in Nigeria… also believed to be substantially responsible for waste, distortions and corrupt practices in the industry”. The task force therefore recommended that “It will therefore be necessary to fully deregulate prices in the Downstream Sector prior to the completion of the privatization process”.

Secondly, while receiving the report of the graduating participants of the Senior Executive Course of the National Institute of Policy and Strategic Studies on November 15, 2012, President Jonathan stated categorically that his government was bent on getting rid of the subsidy. In a moment of candour and as if to echo the report of the Task Force, the President stated: “Why is it that people are not building refineries in Nigeria despite that it is a big business? It is because of the policy of subsidy, and that is why we want to get out of it” (emphasis mine). However, in a swift reaction the next day, on November 16, the President of the Nigerian Labour Congress (NLC), Abdulwahid Omar, fired back at President Jonathan, saying “Such a statement coming from... the President is highly disturbing and we want to believe that he will not toy with the tempers of Nigerians…coming at this time of the year, when many see the current fuel scarcity being experienced in most parts of the country as being artificially created”. This was a signal that the NLC will resist any move to remove or reduce the subsidy as it did in early January this year.

Thirdly, in what appears to be a response to the threat of the NLC President, during his media chat aired on NTA on November 18, President Goodluck stated that the government does not plan to remove the subsidy in 2013 because “the government has already accommodated fuel subsidy in the 2013 budget”. He went further to state that the his prior statement to the effect that his administration was going to remove the fuel subsidy was taken out of context by the media, and that he was only comparing the Nigerian situation with that of Canada and that he was only trying to emphasize that unless Nigeria deregulate her oil sector, necessary investment will not take place.

So, what are we to believe? If the event of January 1, 2012 - when the government announced the removal of the subsidy, but later “reduced” the subsidy after about two week due to massive protest - is anything to go by, one cannot swallow the President’s latest assurance hook, line and sinker. The fact that there is a provision for fuel subsidy in the 2013 budget is no guarantee that subsidy will not be removed or reduced, either of which will result in an increase in the price of petroleum products. As was the case in January this year, the government can reduce the level of subsidy while still maintaining the subsidy – a situation that will not contradict the President’s promise not to “remove subsidy in 2013”. If the government is known for one thing, it is poor budget compliance. Furthermore, what if the amount set aside for the fuel subsidy in the 2013 budget - N971 billion compared to N888 billion in 2012 and N1,700 billion actually spent in 2011 - proves to be inadequate due to soaring prices and increased volume of imported petroleum products? Will the government reduce the level of subsidy (i.e. increase the regulated price of petroleum products) in order not to exceed the allocated amount in the budget?

While the President’s assurance that subsidy will not be removed in 2013 may be intended to calm the situation and reduce hoarding of petroleum products and price escalation in anticipation of the removal or reduction in fuel subsidy, there is no doubt that the federal government must sooner or later take the bull by the horns by tackling the subsidy issue. Kicking the bucket down the road will only postpone the evil day. If the President is unwilling and unable to tackle the subsidy problem in 2013, he is less likely to do so in 2014 or 2015 given his unannounced plan to run again for the Presidency in 2015. Thus, the best time for the President to resolve the subsidy issue is 2013 so that the issue will be laid to rest by mid 2014 and he can boast of achieving what other Presidents failed to do. That is what President Obama did with the Affordable Healthcare law (otherwise known as Obamacare) in the United States. The question therefore is how the President should go about resolving the subsidy issue in 2013 while avoiding a backlash by organized labour and civil society similar to what happened in early January 2012?

The President has two options: Either remove the subsidy in one fell swoop in 2013 or 2014 or reduce it gradually and consistently beginning in 2013 until it is eliminated by mid 2014. The solution lies in working with organized labour and civil society to first convince them that it is the rich and well-connected (the ‘cabal”) who are benefiting most from the current subsidy regime and that it is in the best long-run interest of the country to remove the subsidy. All parties can then agree on the best option. Personally, I believe that a gradual reduction of the subsidy over a 12 to 18 month period is the best option in order to cushion the “shock effect”. Although it appears cynical, the gradual approach is also based on a psychological fable: “if you plunge a frog into boiling water, it will immediately jump out. But if you place the frog into cool water and slowly heat it to boiling, the frog won’t notice and will slowly cook to death”. For instance, under the gradual approach, the price of petrol (PMS) can be increased from N97 per litre to N110 per litre around March, 2013, then to N120 per litre around July 2013, N130 around October, 2013, N140 around February 2014 and the subsidy will be eliminated completely by June 2014 or earlier. Note that the “zero-subsidy” price of PMS for November 2012 according to PPPRA’s pricing template is N147 per litre. A similar price increase (subsidy reduction) schedule can be formulated for kerosene (HHK). In fact, if President Jonathan had adopted the gradual approach to reducing the subsidy after the January 2012 price hike we would have been approaching a “zero-subsidy” state by now.

Finally, while I agree with Mr. Ribadu that that “with a clean and sanitized oil and gas sector, there will not be any need to remove subsidy on oil”, the fact is that it is almost impossible to completely “clean” and “sanitize” the Nigerian oil industry in a way that will remove all the corrupt practices and distortions that have characterized the petroleum products market. Mr. Ribadu knows this very well from his EFCC experience. Besides, most economists agree that in the long-run fuel subsidies are inefficient in an open economy with porous borders like Nigeria. This is why I with agree with the fearless governor of the Central Bank of Nigeria, Mr. Sanusi who recently again called for the removal of the fuel subsidy. It will be recalled that during the fuel subsidy debate last year, the governor made a strong and compelling case for the removal of the subsidy. He showed that the much feared inflationary impact of subsidy removal is grossly overstated as evidenced by the relatively low rate of inflation that has followed the increase in the price of PMS from N65 per litre to N97 in January 2012. Ironically, by resisting the removal of the subsidy, the NLC and other opponents now have the same position with the fuel-importing “cabal” and those who are fleecing the economy in the name of fuel subsidy.