To Fuel or Not to Fuel Subsidy: The $800 million question (2)
There is something off about the price of petrol in Nigeria!
Can you spot it? 🔬
If we can spot it, it could help us decide whether the government should continue to subsidise the current pump price or instead impose taxes on petrol consumption.
This is it: All over the world, the price of petrol, diesel and kerosene are relatively close. Petrol has the highest price, followed by diesel and kerosene. In short, petrol is the costliest and kerosene is the cheapest.
In Nigeria, the opposite is the case.
In Nigeria, the 3 fuel products have the highest price range. That is, the difference between the price of the cheapest product (petrol) and the costliest product (kerosene) is N901.
This is according to Dataphyte Research’s analysis of world petroleum product prices as of April 10, 2023.
However, the difference between the highest prices of these 3 petroleum products around the world is N201.
Also, the difference between the average prices for the 3 petroleum products around the world is N110.
Lastly, the price difference between the lowest prices of the 3 products around the world is N5.
Besides the sharp differences between the high range of prices of fuel products in Nigeria and the moderate and low ranges around the world, petroleum product prices also exhibit an awkward pattern in Nigeria.
In Nigeria, petrol is cheap, diesel is costly, and kerosene costliest. This is opposite to the global trend where petrol is the costliest, diesel is cheap, and kerosene is the cheapest.
Due to subsidy, the petrol price is still officially fixed at N185 but purchased at an average of N261 nationwide. For over two decades, the government has argued that it cannot sustain this relatively low petrol price with the huge public spending.
Yet, labour unions and other civil society groups have always argued that removing the subsidy on petrol would impact the poor and ill-remunerated workers in the country.
Is this true? Will poor people become poorer if the government removes subsidies from petrol?
Let’s ask Shadia, a multidimensionally poor peasant farmer, and Sheila, a middle-income upwardly mobile worker:
For Sheila and Shadia with Love
February 2021
The game goes on
The government gambles on,
Labour and languor meet behind closed doors
To remove petrol subsidy or to let it remain.
Petrol at one-sixty-two for Sheila’s generator’s noisy light
Kerosene at three-fifty and Shadia’s lantern is silent than night,
Trekked upstream to farm, hawked downstream with her produce
Still, Shadia cannot afford the kerosene to fill her stove again
March 2021
Steely petrol nozzles hang high and dry
Staff and uniformed attendants sit idly by,
Liquid gas mocks solid cars barred by closed gates,
Waiting to be poured out for gain or procured in pain
Sheila’s car has guzzled all her gasoline
Shadia’s cooking stove still in want of kerosene,
Sheila grumbles on in the taxi taking her to a dinner
Shadia gathers firewood to prepare her supper again
April 2021
Labour and languor agree to tread with caution
Sheila’s car is back at the station for her subsidised ration
Shadia pushes home a cart of firewood to cook her food
Joy to the poor, petrol subsidy returns, the sweetened refrain
The game goes on
The government gambles on,
To fund Shadia’s hard life or fuel Sheila’s highlife
To remove petrol subsidy or to let it remain.
© Seyi Olufemi 2021
Shadia’s hard life reveals that the poor cannot afford the market price of kerosene. Instead, they are forced to cook with firewood. Unconnected to grid electricity (aka NEPA light), Shadia can hardly light her kerosene lantern, and she cannot afford to buy a petrol generator.
Yet no one is fighting Shadia’s cause or complaining about her plight. No one accuses the government that its removal of subsidy on kerosene is making Shadia more multidimensionally poor. Why?
Don’t ask anymore. They are interested in Sheila’s highlife!
Sheila is not rich like that. She cannot afford a diesel-powered generator to augment grid electricity failures. But she can afford a petrol-powered generator because petrol is cheap. Yet Sheila can’t afford to take the joint commute with other workers in the morning and evening after work.
“It’s not easy at all. Car is a necessity not a luxury,” Sheila laments. She can afford a car. So she needs petrol more to survive, much more than Shadia.
Shadia has never bought petrol in a filling station before in her life. She treks to the farm. She hawks her vegetables, and it’s been a long time she needed to take a bike to sell her vegetables in the main market. She couldn’t harvest that much vegetables in the dry season.
Yet, when we borrow $800 million, we do so in the name of poor Shadia - to cushion the effect of removal of petrol subsidy - though we never bothered for once about the effect of the removal of kerosene subsidy on Shadia.
We never bothered about the removal of diesel subsidy on manufacturing companies who depend on it to run their machinery when there is no stable grid electricity (aka NEPA light) for them to use.
We never bothered why these industries began to fold up or leave Nigeria for Ghana. We never bothered why their staff and potential staff lost their jobs. We did not bother as our blooming manufacturing sector collapsed and we now depend on imports from China and Ghana. We did not bother as these jobless people increased the poverty headcount in the country.
Now we suddenly care for the poor that we made poor. Now we suddenly care for the economy.
On the other hand, if the removal of subsidy on diesel and kerosene was bad on the poor, won’t the removal of subsidy on petrol worsen the situation? Why did the government remove the subsidy on these fuels in the first instance?
Maybe the first question we should ask is: why did the government begin to subsidise fuels in the first instance?
In the beginning, there was no fuel Subsidy
So why did the government begin to subsidise fuels? A Dataphyte Research knowledge product answers this question:
“In 1973, the government of Nigeria introduced subsidies on petroleum products as a short-term cushion for the resultant high domestic price of refined petroleum products, due to a spike in international oil prices.
“The fuel subsidy, which was supposed to last for 6 months, has been in place for close to 50 years”.
It has lasted until now because “Many Nigerians believe that the fuel subsidy is the only tangible benefit the masses get from the country’s oil wealth, without considering the exploitation tendencies.
“The problem of the fuel subsidy is not specific to Nigeria; rather, it is a global challenge. A new estimate by the International Monetary Fund (IMF) shows that fossil fuel companies benefit from global subsidies of about US$5.3 trillion a year which is greater than the total spending on health by all the world’s governments.
“Economically, there is no justification for these enormous subsidies which distort markets and damage economies, particularly in poorer countries.
“Fear of the political consequences of large price increases, together with concern for the impact on the population of large price increases and pressure from actors benefiting from the fuel subsidy regime have made successive Nigerian governments reluctant to reform the fuel subsidy regime.
However, subsidy on fuel is unhealthy because it is not based on the provision of social infrastructure or developing a productive sector. Thus, the incentive is to reduce the people’s cost of purchase and not to increase their productivity and income. Otherwise, diesel would be subsidised more than petrol.
Along the way, government funding of petrol subsidy robbed the people of funding in critical sectors
The government’s continued fuelling of petrol subsidy threatens sound resource allocation.
Between 2006 and 2022, the government spent a quarter of its N68 trillion revenues on petrol subsidy. This drained away investment of these revenues in the vital socioeconomic sectors such as health, education, internal affairs and public infrastructure.
Two pertinent cases are the 2011 and the current year. In 2011, the government spent N2.11 trillion, an 82% of all its actual revenue, on petrol subsidy.
If the government does not stop fuelling petrol subsidy by June, it would spend at least N6.7 trillion, about 70% of its 9.72 expected revenue, on fuelling petrol subsidy.
One then wonders how a country can spend as much as 70% or 80% of its actual revenue on fuelling subsidy on petrol. How will the government provide for other needs in the year? How would it pay its workers, support defence, and keep the country going?
The answer is debt, debts and all kinds of ways and means of financing a deficit budget.
Without funding petrol subsidy, Nigeria would save half of the total amount it used to service debts between 2010 and 2022. The total amount paid as subsidy would have covered 52.75% of the total amount budgeted for debt servicing.
In the current year, the N6.72 trillion budgeted to pay for subsidy exceeds the N6.31 trillion budgeted for debt servicing. Sadly, the country has begun to borrow just to pay for petrol subsidy.
In the end will there be petrol subsidy?
Maybe the question should be: In the end will there be a country?
With a huge and growing debt burden, of which the current $800 billion loan grant is only 1% of the federal government’s total outstanding $86.75 billion debts, Nigeria could go bankrupt at some point signalling the financial end of the country. Of course, by then, there would not be petrol subsidy anymore.
But do we need the country to die a national death before petrol subsidy dies a natural death? Like it’s often said about corruption, petrol subsidy’s twin evil, if the country doesn’t kill petrol subsidy, petrol subsidy will kill the country!
We must decide!
To help our decision making, Dataphyte Research suggested 8 gains of a zero subsidy in the current year in one of its knowledge document on subsidy.
Now the Government’s position is that $800 million loan grant among other things would alleviate the impact of the petrol subsidy on 10 million poor households (with an average of 5 persons each). That is, the $800 million is meant to be distributed to 50 million persons or $16 per person.
How much is $16?
With the Central Bank of Nigeria’s official selling rate of $1 to N460.93 as of April 11, $16 amounts to Seven thousand Naira (N7,374.88).
Who believes that the government would or should indeed borrow $800 million to pay back for 27 years till 2051 just to give Seven thousand Naira to 50 million Nigerians?
Everyone but Umar Yakubu may believe that. Basing his dollar/naira exchange rate on parallel market price of N750, he argued that “For whatever it's worth, the federal government should please desist from taking this loan.”
“To ease the pain of the removal of fuel subsidy, they intend to distribute the $800 million to 50 million Nigerians. What criteria were used in selecting the 50 million out of the 133 million people who are multidimensionally poor? That leaves us with a balance of 83 million people. What happens to those? Which database are they using to distribute the funds? He asked.
He further queried: “And, if they diligently distribute every dime of the $800 million at the exchange rate of N750 to the dollar, each recipient will receive just $16/N12,000 each! With the current Consumer Price Index by the National Bureau of Statistics on food inflation at 24,32%, what relief does N12,000 bring to anyone and for how long?
“Also, when you pump in that amount, especially within a short period, the purchasing power of the N12,000 will drop because of inflation, and wipe out at least 20% of that N12,000. That brings the amount to about N9,600 to alleviate the poverty of one who lives on less than $2 per day!”
Again, the government’s current petrol subsidy removal wisdom is to borrow $800 million to hand over N7,000 each to 50 million people that would take till 2051 to fully repay the World Bank.
However, Dataphyte Research’s position is this:
The $800 million and another 27 year debt trap is not worth the one-off seven thousand naira cash transfers.
The federal government has already budgeted 18 times that amount of money ($800 million * 18) to pay petrol subsidy to few oil importers in 2023 alone.
The government should repurpose the $14.54 billion (N6.73 trillion) it budgeted to pay subsidy into 8 compensation programmes (See details in immediate charts below and above).
Just end petrol subsidy in 2023 and the 133 million multidimensionally poor Nigerians would benefit from an wholistic all encompassing compensation programme that converts the 6.7 trillion petrol subsidy budget for 2023 into a transformative tool for lowering multidimensional poverty intensity and incidence.
Remember, the choice is not between borrowing and not borrowing $800 million. It is to fuel or not to fuel petrol subsidy.
The choice is ours!
For Sheila and Shadia with Love was written at a time like this when the government promised to remove petrol subsidy. The poet wrote it in March 2021 and predicted that the government would go back on its word the next month. The poet became a prophet. The government reversed it decision!
Will the government keep its word this time? That’s a question for the people this time. And it’s to be answered by President-elect Tinubu than President-incumbent Buhari.
While Nigeria waits to decide to fuel or not to fuel subsidy, do have a decisive work-free weekend. Enjoy your Saturday!