Fuel subsidy removal: Repositioning Nigeria’s economy?

Following Federal Government’s withdrawal of fuel subsidy last week, this move attracted massive protests across various parts of the country and heated debates giving the socio-economic implications on Nigerians. However, full deregulation of the petroleum sector is believed to ensure sustainable petroleum pricing, writes ALEXANDER CHIEJINA

In Nigeria today, the most contentious issue is the removal of subsidy on Premium Motor Spirit (PMS) otherwise known as ‘Petrol.’ The withdrawal of fuel subsidy by the Federal Government generated heated debates by Nigerians from all walks of life, including the civil society groups and the Nigerian Labour Congress (NLC), owing to its implications on the nation’s socio-economic landscape.

Over the years, the Federal Government operated fuel subsidy with the aim of making petroleum products available to cushion the effect of actual market prices of the products on the general populace. According to reports by the Petroleum Pricing Regulatory Agency (PPPRA), the country consumes an average of 35 million litres of fuel daily.

As at August 15, 2011, the pricing template of the PPPRA showed that the landing cost of a litre of petrol is N129.21. It showed the margin for transporters and marketers as N15.49, bringing the expected pump price of petrol to N144.70. However, the initial official pump price for petrol is N65 per litre, a difference of N79.70, which the government subsidises.

While the FG spends over N1.4 trillion on fuel subsidy in the past five years, it also pays heavily to subsidise kerosene which is imported into the country through the Nigerian National Petroleum Corporation (NNPC), although the actual amount is not known.

 Bearing in mind that fuel subsidy hasn’t benefited most Nigerians, several economists see the subsidies as hugely corrupt, wasteful and bled money from the treasury into the pockets of rich fuel importers.

Giving this obvious reality, the Federal Government on January 1, 2012 dramatically announced the end of fuel subsidy, citing that the move became necessary since there was no provision for the subsidy in the 2012 budget.

The Government further disclosed the need to checkmate smuggling of the product, to avoid incurring debts that the National Assembly might not approve of, and moreso to save the economy from collapse.

Following the pronouncement, motorists who were travelling back to their various stations after the New Year and Christmas celebrations, were hit by sudden hikes petrol prices. Prices rose dramatically, ranging between N140 and N150 per litre, and at between N170 to N200 on the black market.

Reports reveal that commuters complained that motorcycle and minibus taxi fares doubled or tripled even as there is growing uncertainty that prices of goods will rise as well. Meanwhile, opposition leaders, unionists and local rights groups condemned the move by the Federal Government, which it believes, will inflate prices in a country considered expensive for majority of its citizens living on less than £1.30 a day.

Many fuel stations in Abuja, and the commercial capital, Lagos, were shut Monday last week while they adjusted their prices. Those that were open were jammed with queues and selling at prices of up to N150 a litre, up from a fixed price of N65 before.

"This is a bad new year present from the government. What next” said Sylvester Ezema, a motorist in Lagos, as a queue of about 30 cars formed behind him at the filling station.

Meanwhile, aggrieved Nigerians marched across major parts of the country such as Lagos, Kano, Kwara, Bauchi, Ondo, and Abuja to protest the removal of fuel subsidy which led petrol prices and transport fares to double. For instance, in Lagos, protesters marched pass petrol stations, shouted insults and tried to persuade them to close.

The protestors also disrupted traffic along Ikorodu, Maryland, Yaba, and other parts of the state, setting   bon fires. Though not as busy as it normally is, many people were stranded as they could not afford the new transport fares after going away for the holidays.

At Abuja, policemen blocked Eagle Square, where protesters had planned to gather for a protest. They however fired tear gas to disperse people who had gathered chanting “Remove corruption, not subsidy.”

Nigeria is Africa's biggest oil producer but most of the available 2 million barrels per day are exported in an unrefined state. The state of the nation’s refineries and infrastructure is such that it has to import refined products such as petrol, which is expensive.

With the price of fuel said to be cheaper in Nigeria than in neighbouring countries, the subsidy led to widespread smuggling. Nigerians are heavy users of fuel, not just for cars but to power generators that many households and businesses use to cope with erratic electricity supply.

Although previous governments have tried to remove the subsidy, it backed down in the face of widespread public protests and reduced it instead. The International Monetary Fund (IMF) has long urged the Federal Government to remove the subsidy, which costs a reported $8billion (£5.2billion) annually.

The government finance team led by the pair of Lamido Sanusi, Central Bank of Nigeria Governor and Ngozi Okonjo-Iweala, Minister of Finance and Coordinating Minister of the Economy, have long argued that removing the subsidy would free up money to invest in other sectors and relieve poverty.

Why fuel subsidy removal

A top Federal Government official told BusinessDay, that the move became necessary since there was no provision for the subsidy in the 2012 budget. He reiterated the long held Federal Government position on subsidy as hugely corrupt and wasteful and described the recent development in Ghana, which decided to deregulate the price of petrol, as a major source of concern to the Federal Government.

The concern was that Ghana would join the already long list of countries to which Nigerian petrol is smuggled, if the price of petrol was not deregulated, consequently putting pressure on the volume of fuel being consumed in the country.

The announcement leaves government agencies like the Nigerian National Petroleum Corporation (NNPC) worrying how to sustain fuel imports, to keep the pumps flowing as well how to source funds to finance imports.

The source however said that if the National Assembly makes a budgetary provision for subsidy, the NNPC and oil companies would go ahead to bring in subsidised (PMS) petrol.

“If there is no budget to support fuel importation, what can anybody do?” the source asked.

The subsidy removal announcement was a bitter blow to motorists, as most of them who were travelling back to their various stations after the New Year and Christmas celebrations were hit by sudden hikes petrol prices ranging between N140 and N150 per litre.

Even with the current price, put at N141 per litre, analysts are of the opinion that the price of petrol is still N35 cheaper in Nigeria than in a place like Ghana. They believe that if the differential between the prices of petrol in Nigeria is higher, or that the price in Ghana is higher than what obtains in Nigeria, the product would find its way to Ghana.

According to the government, going ahead with the plan to remove fuel subsidy will save the Treasury over 1 trillion Naira in 2012, which was heavily criticised by the International Monetary Fund (IMF) for the wasteful use of public funds

Peace talks over subsidy

President Goodluck Jonathan raised two committees last week to push through his policy on subsidy withdrawal. An 11-member committee headed by Alfa Belgore, retired Chief Justice of the Federation is to meet with organised Labour and Civil Society groups who kicked against the subsidy removal.

The second committee, described as “high-powered”, will oversee the use of the cash to be saved from the withdrawal of subsidy. The subsidy reinvestment and empowerment programme board is headed by Christopher Kolade, Nigeria’s former High Commissioner to the United Kingdom. Mamman Kontagora, a former Minister of Works is deputy chairman.

A statement by Reuben Abati, Special Adviser to the President on Media and Publicity, reveals that the board will ensure the effective and timely implementation of the projects that would be funded with savings made from the removal of fuel subsidy.

Other members of the Board include two representatives of the National Assembly, two representatives of organized labour, one representative of the National Union of Road Transport Workers (NURTW), one representative of the Nigerian Union of Journalists, one representative of Nigerian Women Groups, one representative of Nigerian youth, one representative of civil society organizations, the Coordinating Minister of the Economy/Minister of Finance, the Minister of National Planning, the Minister of Petroleum Resources, the Minister of State for Health, the Special Adviser to the President on Technical Matters,  and six other reputable individuals from the six geo-political zones in the country, three of whom will be women.

According to Abati “The mandate of the Board shall be to oversee the Fund in the petroleum subsidy savings account, and the programme specifically to improve the quality of life of Nigerians in line with the Transformation agenda of Mr. President.

“The Board will determine in liaison with the Ministry of Finance and Ministry of Petroleum Resources, the subsidy savings estimates for each preceding month and ensure that such funds are transferred to the Funds’ Special Account with the Central Bank of Nigeria; approve the annual work plans and cash budgets of the various Project Implementation Units (PIUs) within the Ministries, Departments and Agencies (MDAs) and ensure orderly disbursement of funds by the PIUs in order to certify and execute projects; monitor and evaluate execution of the funded projects, including periodic Poverty and Social Impact Analyses (PSIA)l; update the President regularly on the programme, to name but a few.

Meanwhile, members of the committee to meet with organised labour, civil society groups and other stakeholders include Rotimi Amaechi, Governor of Rivers State and Chairman, the Governors’ Forum,  Governor Babangida Aliyu, (Niger), Governor Peter Obi (Anambra), Governor Adams Oshiomhole (Edo) and Governor Sule Lamido (Jigawa).

Furthermore, the committee which is expected to begin its work immediately also includes Ngozi Okonjo-Iweala, Minister of Finance and Coordinating Minister of the Economy, Diezani Alison-Madueke Minister of Petroleum Resources, Emeka Wogu, Minister of Labour and Productivity, Ben Obi, Special Adviser to the President on Inter Party Affairs, and Ngozi Olajemi.

In the meantime, the main labour unions-Nigerian Labour Congress (NLC) and Trade Union Congress (TUC), threatened to launch an indefinite strikes from today (Monday 9^th January, 2012)if the government does not backtrack on the controversial measure that has doubled petrol prices.

“After exhaustive deliberations and consultations with all sections of the populace, the NLC, TUC and their pro=people allies demand that the presidency immediately reverses fuel prices to N65. If the government fails to do so, they direct thet indefinite general strikes, mass rallies and street protests be held across the country with effect from Monday 9^th January, 2012” a statement signed by the heads of the two unions said.

The country has since last week been rocked by increasingly volatile protests over the issue.

Way forward

In a separate forum, Emmanuel Ihenacho, Former Minister of Interior and Chairman of Depot and Petroleum Products Marketers Association of Nigeria (DAPMAN), alludes to the fact that deregulation would crash down prices.

While acknowledging that petroleum price might go up immediately after the commencement of deregulation, Ihenacho disclosed that full deregulation of the petroleum sector will encourage private-sector participation in the building of refineries and bring down prices in the long run.

The former Minister of Interior noted that “only the rich, who own fleet of cars and other vehicles benefited from petrol subsidy and not the masses. Therefore, the task ahead of President Goodluck Jonathan’s administration is not to roll out the gains of removal of subsidy because they are unquantifiable.

“Removal of subsidy will encourage Shell, Chevron, Total and other private investors to build more refineries to create employment opportunities, crash down the price of fuel to below N65 per litre and also engender stability in the supply of petroleum products, among other benefits. What this administration should be concerned with is to demonstrate in practical terms that the proceeds from the removal of subsidy will not be stolen by some government officials,” Ihenacho concluded.

A cursory look at Oil Producing Exporting countries (OPEC) such as Saudi Arabia, Venezuela, Qatar, United Arab Emirates, etc, shows that these countries were able to refine their crude oil locally and at cheaper rate, to meet their daily demands of petroleum products and also export to other countries.

This is principally because unlike other OPEC countries, that enjoy cheap fuel because of their functional refineries, Nigeria ’s total dependent on importation of refined petroleum products accounts for the high cost of fuel in the country.

With over 36 billion crude oil reserves and average daily production of 2.6million barrels per day, Nigeria is the seventh exporter of crude oil, with 10th largest reserves in the world, but the only country among OPEC that imports refined petroleum products.

Since Nigeria imports fuel, the price of products in the country is a reflection of international oil prices, instead of a reflection of the cost of local refining. However, the landing cost of fuel from the international market is currently over N147 per litre and it is expected that if refined locally, the cost will be far less.

While it is alleged that the nation’s refineries are deliberately sabotaged to pave way for continued massive importation of petroleum from which many highly placed government protégés are defrauding the country, they also argue that what is required for sanity is to expose such people, hold them to account and institute a corruption-free system.

Echoing the sentiments of Ihenacho, Ajibola Ogunshola, former chairman of one of Nigeria’s print media, stated from the country's past salutary experience of deregulation of previously government controlled monopolies and abolition of import licensing, Nigerians wonder whether the best thing would not be to get the government out of the way.

Ogunshola stated that as long as government continues to be involved in the local refining and importation of petroleum, with all the associated inefficiencies and corruption, the economic and political tension involved in subsidy removal debates will continue to come up from time to time especially when crude oil prices rise and whenever the naira weakens against the US dollar.

In his words “The government must get out of the way. Refinery construction and petrol importation, storage and distribution should be thrown open, subject only to quality control. The refineries should also be privatized.

“Since we know that our governments are profligate and corrupt, I propose that the extra money that will come into the hands of government from no longer subsidizing petrol should not entirely be left in the hands of the government but 50 percent of it should be returned to the people through reduction of Value Added Tax (VAT), personal income tax rates and company tax rates, based on the projected Year 2011 revenues of the federal and state governments from these sources on one hand and the projected amount to be spent on subsidies in Year 2011, on the other hand.

Ogunshola added that “This can be easily worked out mathematically and the consequent tax reductions agreed at the next meeting between the governors and the Federal Government and the NLC and the Trade Union Congress (TUC), along with their technical advisers, should also have a seat at the table to ensure that what is done is what is to be done.”