Suffocating Subsidies, Oily Summersaults, and the Social Contract
Last week, Nigeria’s Finance Minister, Zainab Ahmed, lamented that petrol subsidies were costing Nigeria up to $7 billion annually but the government would suspend their planned removal because of a “problematic timing”.
In the same breath, Nigeria’s “junior” minister for petroleum, Timipre Sylva, announced that the government plans to amend the Petroleum Industry Act by asking the parliament for an 18-month extension in order to sustain its regime of subsidising imported petrol.
Last year, the Nigerian government had said that subsidy would be eliminated by mid-2022 and replaced with 5,000 naira (roughly $12) in monthly payments for up to 40 million people. It was a policy response to the World Bank's call for scrapping of the subsidy payment amid rising deficit, which was forecasted at 3.42% of Nigeria’s gross domestic product.
From the government’s own admission, subsidy payments have been quite suffocating over the years, threatening the fiscal sustainability of the Nigerian state.
Oily Mess
In January 2012, the nation was thrown into chaos as violent protests arose from different parts of the country against the background of the government's plan to erase subsidy payment on petrol. Nigerians—millions of whom have become apathetic of the government and its policies—fought against the plan because of the perception of corruption and the opacity in the oil industry. In the wake of the protests, a series of probes were instituted to look into the industry and expose fraudulent dealers perceived to be shortchanging millions of Nigerians.
In April 2012, the Nigerian parliament unveiled a report that claimed that $6bn (£4bn) had been defrauded from the fuel subsidy fund between 2010 and 2012. Several other jaw-dropping revelations came in the wake of the crisis.
A decade after the subsidy protests of 2012 erupted and shook the land, Nigeria has been unable to clean up its oily mess and address its suffocating subsidy payments.
Suffocating Subsidies
According to data from the Ministry of Finance and Nigeria’s Budget Office, between 2006 and 2018, a whopping N9.84 trillion was sunk into subsidy payments by the Nigerian government.
Within the same period, the country spent over 10% of its annual budgets on subsidies which over 90 million Nigerians, who neither have cars nor power generators, do not enjoy. More ominous is the fact that the government has consistently borrowed to bridge budgetary deficits within these years, with the deficit figure rising to N3.5 trillion in 2018.
Earlier in January, details emerged of how the nation recorded a budget deficit of N7.1 trillion in the eleven months ending November 2021, representing 33 per cent increase when compared with the N5.3 trillion recorded within the same period in 2020.
Despite the deficits, which key institutions including the World Bank and International Monetary Fund (IMF) have raised concerns over, the nation has performed poorly in funding of key developmental sectors that significantly impact the masses.
For instance, between 2011 and 2019, Nigeria spent a whopping N8.2 trillion on subsidy payments alone. In contrast, within the same period, the nation spent N4.5 trillion on education, N3.5 trillion on defense, N2.9 trillion on infrastructure and a paltry N2.8 trillion on health.
Surprising Summersaults?
The suffocating nature of the subsidy payments notwithstanding, the about-turn movement seen in the policy summersault announced through the suspension of the removal of subsidy may not be surprising to many, given what the finance minister described as “problematic timing”.
The Goodluck Jonathan government was swept off the seat of power in 2015, but political analysts believed that the government lost legitimacy—and indeed re-election—after the subsidy protest of 2012. It never recovered from the damage.
The Muhammadu Buhari government, a major beneficiary of the 2012 whirlwind, seems to have seen the looming danger in making such a sensitive policy decision a year away from a major election.
In other words, it’s the classic case of triumph of crude politics over pristine policy.
But whose Subsidy, really?
The general refrain from government and pro-subsidy commentators is that subsidy payment should be sustained because it is meant to cushion the effect of biting prices on poor Nigerians on the street.
Interestingly, a dollop of ignorance and fear of uncertainty have ensured that Nigerians, for whom subsidy payments haven't significantly been beneficial, remain indifferent or antagonistic to reform.
In surveys, many Nigerians have expressed opposition to reform of the subsidy regime, ostensibly because they feel it could drive domestic prices skywards, Nigeria has “enough” money to pay, and that removal will harm the poor. The survey showed that 70% respondents were in opposition to reform or removal of subsidy, while a paltry 30% were in support of reform.
Yet data crunched by Dataphyte analysts show that the richest 20% of Nigerians get more than half of the benefits from N1 trillion subsidy payments while the poorest 20% get 15 times less benefits from the same payment. For instance, 20 states across the country receive less fuel subsidy benefits compared to two elite-dominated and populous states like Kano and Lagos.
Data has equally shown that people across the country pay far higher than the subsidized rates of pump prices at petrol stations. In some cases, people in far-flung regions like the troubled North East pay as much as N231—almost 45% more than the official subsidized price of N162—with the typically higher black market rate accounting for 35% of purchase. People in the South East pay as high as N199.
This has ensured that the nation’s inequality gap remained, as the poor practically fund the oily appetite of the affluent through suffocating subsidies.
Forgone Alternatives
Meanwhile, what’s the opportunity cost of the huge amount the nation has continued to sink into subsidy payments over the years? What social contract have the people, rather inadvertently, chosen to forgo due to the suffocating nature of subsidies on petrol?
Between 2006 and 2018, money expended on subsidy payments could have transformed health, education, housing, roads, and general infrastructure.
For instance, the N9.8 trillion sunk into subsidies could help fix over 300 health centres, about 16,000 boreholes, way over 19,000 kilometres of roads, 656,000 houses, almost a million classrooms, among other basic infrastructure.
In contrast, the nation has committed the fund into subsidy amid collapsing basic infrastructure and poor quality of life—with the poor getting the crumbs and losing so much in basic amenities and safety nets.
In another related survey, Dataphyte analysts found that a paltry 16% of Nigerians owned or rented a car, while 25% owned or rented a motorcycle. In contrast, 69% and 67% use public transport via bus and motorcycle respectively, while just 35% owned or rented a generator.
Meanwhile, a major part of the subsidy removal strategy plan is the introduction of mass transit buses and other pro-poor programmes that would possibly provide relief for the 69% Nigerians who use public buses and 65% that do not own or rent generators.
And so as the nation continues on its merry-go-round on subsidy, the big question pops up: Whose burden essentially does the Nigerian government shoulder with its suffocating subsidies? That of the poor, or the rich and affluent Nigerians?