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How Nigeria’s suffocating petrol subsidy defines failure of Africa’s biggest economy

Public policy in Nigeria, the continent’s most populous nation is once again overshadowed by a contentious debate over whether or not to end the subsidy on premium motor spirit now estimated at around forty-four Naira per litre.

Nigeria has been here many times in the past, the most recent being 2016, at the onset of the Buhari administration. His predecessor was bloodied when he attempted to remove the subsidy in 2012.

In his thesis which examined the impact of subsidy in a community in South West Nigeria, Ojingiri Solomon defines fuel subsidy as the cost borne by government to cover the market rate of petrol and the pump price and the intention of the state is to cushion the impact of high pump price of petroleum products on the citizenry

For reform minded Nigerians, fuel subsidy removal is a virile tool for consolidating public finances and fostering sustainable economic development in a nation where many have been used to its oil endowment as curse.

The International Monetary Fund stirred this latest debate when it urged the Nigerian government to urgently move to buoy its finances by removing the subsidy.

Today the landing cost of petrol, is N35 higher than the pump price capped at N145 per litre by the government and without the cap, pump price could be as much as N189 a litre.

According to Ibe Kachikwu, minister of state for Petroleum, “you have very positive argument that says, ‘why is this happening; let’s get it (subsidy) out.’ But once you do it, the streets get flooded by protesters. And then you have five or six or 10 days of no activity in the country. So, any attempt to remove the subsidy must be very well-managed,” the minister said on a television programme on Tuesday.

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He said in 2016, the government wrote to the Nigeria Labour Congress and all the trade unions and that meetings were held with the security apparatus.

Kachikwu said, “even when there was a consensus on how we were going to do it, we still had an issue at the very tail end of the moment; NUPENG and PENGASSAN supported but, of course, the other members of the trade unions pulled out.”

Successive leaders of the various labour unions see opposition to the removal of the subsidy as primary reason for the existence of their associations and because of the huge trust deficit, the government is never allowed a chance to make the case for subsidy reform.

With an estimated 37.2 billion barrels of proven oil reserves, Nigeria is one of the world’s largest oil producers. However, the country’s mineral riches have not resulted in a significant improvement in the quality of life for the majority of Nigeria’s citizens, with a scandalously high rate of child death and maternal deaths in a country now mocked as the poverty capital of the world.

By 2011, the cost of fuel subsidy accounted for 30 percent of the Nigerian government’s expenditure and it was about 4 percent of GDP and 118 percent of the capital budget according to Nelipher Moyo and Vera Songwe in an article for the Brookings institute.

“Nigeria’s fuel subsidy continues to crowd out other development spending. By comparison,, Nigeria’s total allocation for education is about $2.2 billion and it is not much higher for health care. Infant mortality in Nigeria remains unacceptably high at 90.4 per 1,000 live births. In 2004, it was estimated that only 15 percent of the country’s roads were paved.

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“The $8 billion from the fuel subsidy could help to address some of these issues” they posited.

Many including Moyo and Songwe have argued that in debating the merits of Nigeria’s fuel subsidy it is important to understand who benefits the most from the program.

Contrary to popular belief, it is the rich not the poor who disproportionally benefit from Nigeria’s fuel subsidy. With the government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy. Nigeria’s poor rely primarily on public transportation as such their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles.

Neighboring countries also benefit significantly from Nigeria’s fuel subsidy through smuggling which has taken daily petrol supply to well over 55 million litres.

Kachikwu says “we need to segregate between those who need subsidy and those who don’t; you will find that 80 per cent or more of those who get subsidy today do not need it.

There is nothing necessarily bad with some element of subsidy if it is well-managed and is very little, and if the private sector can take it away completely; that is fantastic. That is the most ideal situation.

Moyo and Songwe suggests that Nigeria should start by assembling a committee of key civil society organizations to oversee the investment of proceeds from subsidy removal.

“Unlike the fuel subsidy itself, these programs should be targeted toward helping the poor including programs to reduce maternal and infant mortality and improve road quality and access. Most importantly, the programs must be tied to Nigeria’s overall development goals”, they explain.

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The government and the proposed civil society oversight committee must prioritize sustainable investments that will have long-term development impact.

It is too early to tell whether the Nigerian government will succeed in ending the subsidy indulgence this time, but after over 30 years of dodging the issue and trillions of Naira spent, the removal of the fuel subsidy should be supported.

If implemented correctly, the subsidy funds could lead to major development gains. Moreover, the removal of the fuel subsidy – if successfully implemented – creates the space for Nigeria to finally develop refinery capacity, rebuild the downstream petroleum sector and consequently increase the government’s potential revenue from the oil sector and create jobs. Civil society organizations should take this opportunity to fully engage in the debate on how best to redirect the funding from the subsidy program. In turn, the Nigerian government must do better to communicate its plans and actions transparently to the people.

Source: Business Day

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