Following the recent hype in discussions about government plans to completely end the decades-long petroleum subsidy regime in Nigeria, there is also a corresponding spike in concerns among Nigerians and global industry stakeholders regarding the actual economic realities that may play out if President Muhammadu Buhari eventually makes true his promise to outlaw, outdate, and totally scrap any subsidy on petrol consumption in the country
By Yange Ikyaa
Few weeks ago, reports emerged about the announcement by Zainab Ahmed, Nigeria’s Minister of Finance, budget and national planning, that in the year 2022, the government would end or phase out the subsidy that it heavily pays on the consumption of premium motor spirit (PMS), which is most commonly called petrol in the country, and replace same with a monthly transport grant of N5,000 to about 40 million “poor Nigerians”.
While this plan is yet to be implemented, there seem to be mixed feelings and divergent views about its eventual implementation and potential market-reaction impact on the lives of the same “poor Nigerians” that the policy was conceived to help or support in the first place. In some instances, even those who support it as a concept still express opposing views about the idea in some aspects of its intended implementation.
Figures from the Brookings Institution seen by Valuechain indicate that globally, governments spend over $500 billion on subsidies for fossil fuels that contribute to inefficiency, inequity, and negative externalities.
However, if countries are to achieve the de-carbonization goals of the Paris Agreement on climate change, they need to urgently address these subsidies as part of the transition away from fossil fuels that damage the environment and push towards cleaner energy sources that can help to better preserve the planet.
This means that they need to identify and tackle both production and consumption subsidies. Production subsidies increase the profitability of extracting and transporting fuels, usually by offering tax breaks, production credits, or accelerated depreciation for capital investment. The Organization for Economic Cooperation and Development (OECD) found that production subsidies increased by 30% in 2019, reversing a five-year downward trend. On the other hand, consumption subsidies, which make energy products cheaper for end consumers, declined on average but still rose in some other key economies such as India.
The Independent Petroleum Marketers Association of Nigeria (IPMAN) was one of the earliest groups to publicly back the Federal Government’s plan to remove subsidy on PMS by early 2022, and they also stated their reasons for doing so.
Chinedu Okoronkwo, IPMAN’s president, said that the Petroleum Industry Act (PIA), which was signed into law by President Muhammadu Buhari on August 16, 2021 had no provision in it for petrol subsidy. This assertion means that any element of subsidy on PMS is now an unlawful act within the Nigerian energy market space.
In the words of the IPMAN president, “we, as marketers have always advised the government to remove petrol subsidy because it is not in the interest of development of the downstream sector. We welcome the decision of the government to stop subsidizing petrol by 2022 and we are hoping it will attract more investments to the sector. What we want is that a level playing field be provided for everyone in the sector to encourage competition once the subsidy is removed.”
Despite his support for petrol subsidy removal, Okoronkwo’s thinking was not supportive or accommodative of the Federal Government’s plan of replacing subsidy expenditure with another huge expenditure of cash grants to what it called poor Nigerians. He advised the government to rather “reinvest the subsidy savings in critical areas such as healthcare, education, agriculture and other sectors that would increase revenue accruing to the country.”
His advice is predicated on the assumption that economic activities generated from such investments could better create jobs, incomes, and a raft of entrepreneurial mindsets that are more helpful and sustainable for those in the demographic group that the Federal Government intends to make richer with paltry cash-outs in form of grants.
In the same vein, Tunji Oyebanji, who is the immediate past president of Major Oil Marketers Association of Nigeria (MOMAN), posited that the continuous subsidies that the government was paying on petrol were not sustainable in light of the current economic realities and needed to be totally terminated.
The deadline set by the government in 2022 to phase out fuel subsidy, he said, was realistic and that its impact could be mitigated with the coming on stream of the 650,000bpd Dangote Refinery, the Bua Group Refinery, the Waltersmith Refinery and other modular refineries.
On how to utilize the funds that could accrue from the retirement of the subsidy regime, Oyebanji, who is the managing director of 11 Plc, rather faulted the plan to replace petrol subsidy with cash transfer to Nigerians, citing lack of a reliable database in the country that could make room for such palliative measures to produce intended results.
His words: “In my personal opinion, I am of the view that such funds should be channeled to areas like education and mass transportation that would be accessible to ordinary Nigerians.”
For some others with discordant tones concerning this subject under review, the cash handouts being planned by the Federal Government to outlive subsidies that will come in the form of a N5,000 monthly allowance for 40 million Nigerians have not been provided for in the 2022 budget. And if the PIA also does not provide for such subsidies, then they may be right to regard such considerations as unconstitutional and unlawful.
In reaction to the announcement made by the minister of finance, Senator Adeola Olamilekan, who is the chairman, senate committee on finance, said there was no provision for subsidy in the 2022 budget submitted by the executive to the National Assembly.
Apart from the lawmaker, many more Nigerians have expressed their outright opposition to this cash bonanza by any name that the government may call it. Both the Nigerian Labour Congress and the Trade Union Congress have opposed the plan, especially considering the fact that negotiations are still underway with respect to subsidy removal that is known to cost the country more than N102.5 billion every month.
Yet, despite this enormous amount involved, there is still no criteria publicly provided that would be used to determine the beneficiaries of the transportation allowance, thereby raising more questions than answers about its transparency and success.
An analysis made by federal lawmakers, who are anxious about the transparency with which this money could be handled, indicates that the planned intervention, which is estimated about N2.4 trillion annually, is even more expensive than the current subsidies it is seeking to replace.
Malam Mele Kyari, Group Managing Director and Chief Executive Officer of Nigerian National Petroleum Company Limited (NNPC), noted that the subsidy regime would have been eliminated or totally phased out since 2020 but “certain factors” prevented that from happening.
Kyari, however, said it is provided by law that by the end of February 2022, the nation should be out of the subsidy regime, assuring also that it would definitely be achieved as it was now fully backed by law. This, he added, could raise the price of the product to a range of between N320 and N340 per litre.
The governor of Kaduna State, Malam Nasir El-Rufai, says state governments are ready to support the Federal Government in the elimination of fuel subsidy regime, and that if not eliminated, 35 out of the 36 states of the federation may not be able to pay salaries in 2022.
According to him, “kerosene, which matters most to the masses had been deregulated without any hitches, while diesel which was most important to transporters had also been deregulated for a long time.”
One of the major reasons why experts, industry practitioners, and even political leaders kick against subsidy is the fact that a lot of the subsidized products are smuggled out of Nigeria to neighbouring countries at the expense of Nigerian masses. Technically, this means that Nigeria is subsidizing fuel consumed in other countries.
According to El-Rufai, “we cannot continue to provide petroleum products to our neighbouring countries, which is what we are doing. Right now, we are losing N250 billion a month and this has to end.”
Valuechain learnt that state governments are committed to supporting the Federal Government on how to solve this energy puzzle.
In the words of El-Rufai, “we will do our bit, engage stakeholders and put the facts on the table so that everyone understands the danger that the country is in, if the subsidy continues, as well as the benefits that will accrue when it ends, not only to the budgets of the states and their capacity to deliver social services, but also what will go directly to the pockets of the poorest Nigerians that will bear the brunt of any withdrawal of subsidy. This is the position of the state governments and we met just a few days ago to take this position.”
There has also been a torrent of calls from multilateral donor organizations, such as the World Bank, which hugely finances projects in Nigeria, that the country must restructure its economy and prioritize the retention of sustainable models, while eliminating unsustainable ones, such as the provision of fossil fuel subsidies.
According to Marco Hernandez, who is the World Bank Lead Economist for Nigeria, while the Federal Government plans to spend about N3,000 per person for health in 2022, the cost of petrol subsidy for 2022 could reach as high as N13,000 per person.
“Not only is the petrol subsidy costly, but it mainly benefits richer households,” he said.
Nigeria, Hernandez explained, has the opportunity to establish a “compact” with citizens that eliminates the subsidy and uses the savings to provide targeted cash transfers to lower-income-households, invest in job-creating programmes, and improve its fiscal position.
Under a business-as-usual scenario, he said, gross domestic product (GDP) per capita will continue to decline, but reforms could accelerate growth.
His words: “Thus, Nigeria faces a critical choice: it can continue to pursue a business-as-usual policy approach, while its economy and job market deteriorates, or it can undertake bold measures that put Nigeria on a robust and sustainable long-run growth trajectory.”
A recently released World Bank report highlighted urgent policy priorities that could be implemented over the next three to six months in key areas:
= Eliminating petrol subsidy, while protecting poor and vulnerable households from any inflationary impact and reducing inflation through a coordinated mix of exchange rate, trade, monetary and fiscal policies.
= Catalyzing private investment by enhancing foreign exchange management, easing trade restrictions and fostering a better business environment, as well as addressing fiscal pressures through enhanced domestic revenue mobilization and reducing reliance on CBN deficit financing.
Also joining the league of international donor organizations calling on Nigeria to end fuel subsidies is the International Monetary Fund (IMF).
As part of a concluding statement describing the preliminary findings made by IMF staff at the end of an official staff visit to Nigeria in the last week of November, IMF asked Nigeria to consider total removal of all energy subsidies by January 2022.
IMF also welcomed the recent passage of the Petroleum Industry Act (PIA) and stressed the need for its timely implementation. The PIA aims to improve administration and governance in the petroleum sector, introduce market-based fuel pricing and attract higher investment.
Preliminary assessments by the IMF and the World Bank suggest that the approved fiscal terms will provide greater incentives to invest in the oil and gas industry but will reduce the fiscal take from new and converted fields.
According to their report, “the complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor.”
It further observed that well-targeted social assistance will be needed to cushion any negative impacts on the poor, particularly in light of the still-elevated inflation, which currently stands at 17.28.
Such missions, as recently concluded in Nigeria, are undertaken as part of regular, and usually annual, consultations under Article IV of IMF’s Articles of Agreement, and in the context of a request to use IMF resources by way of borrowing. The visits also include discussions of staff-monitored programs or other staff monitoring of economic developments.
The Articles of Agreement of the International Monetary Fund were adopted at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire on July 22, 1944. They were originally accepted by 29 countries and since then have been signed and ratified by a total of 190 Member countries.
Key functions of the IMF are the surveillance of the international monetary system and the monitoring of members’ economic and financial policies, the provision of fund resources to member countries in need, and the delivery of technical assistance and financial services to them.
The international lender has a raft of portfolios in diverse sectors that it finances within the Nigerian economy, and the country knows it is important for it to meet all lending terms in order to continue enjoying the funding support it receives from the global institution.
Nigeria’s past experiences with fuel subsidy removal have all been short-lived and reversed, which underscores the importance of building consensus and improving public trust regarding the protection of the poor through efficient and transparent use of both saved and borrowed resources.
IMF foresees the wide fiscal deficit at 6.3 percent of GDP that characterized 2021 to remain in place in 2022 if fuel subsidies remain in place in Nigeria, combined with higher security spending, notwithstanding much higher oil prices being projected for that period. The meaning of this is that headline fiscal deficit has the likelihood to worsen in the near term and remain elevated over the medium term.
If present trends hold constant, IMF believes that general government interest payments will remain high as a share of revenues, which will water down the value of crude oil earnings, making the fiscal position highly vulnerable to real interest-rate shocks and dependent on central bank financing.
The attention received by this issue, both locally and internationally, is due to the fact that only the sheer scale of subsidies makes them an important pillar of the fossil fuel industry, with the International Institute for Sustainable Development (IISD) putting production subsidies by the G20 countries at an average of $290 billion from 2017 to 2019 alone. Of this amount, almost 95% went to oil and gas, with a relatively small amount earmarked for coal.
Similarly, in 2019, global consumption subsidies stood at around $320 billion, indicating once again that oil subsidies were the largest component, followed by electricity, natural gas, and then coal. While these subsidies have declined over the past several years, global consumption subsidies were over $500 billion in 2013.
Data from IEA show subsidies per country in 2019 as follows: Iran, $86.1 billion; China, $30.5 billion; Saudi Arabia $28.7 billion; Russia, $24.1 billion; and India, $21.9 billion.
These subsidies are problematic for many reasons. First, they create market distortions by artificially lowering the price of fossil fuels, which leads to overconsumption, particularly in energy and capital-intensive industries like power and transport.
Second, production and consumption subsidies create negative externalities. These subsidies increase the use of fossil fuels, which causes a range of adverse environmental and health impacts.
IEA says that the cost of externalities due to air pollution from fossil fuels ranges between $2.6 trillion to $8.1 trillion globally, and is felt most acutely in developing and emerging countries such as Ethiopia, Kenya, Nigeria, and India.
Third, consumption subsidies have always been ineffective in alleviating inequity. Since these subsidies typically do not vary by income, most of the benefits are accrued by wealthier households that already have high consumption levels.
Fourth, subsidies are not the best use of public finances, which can be better directed towards sectors like social protection, healthcare, education, and the environment.
Instead of subsidies, other policies such as direct benefit transfers have been found to be more effective in achieving developmental objectives, but having an effective structure in place to make them deliver intended results is another matter altogether. Whether or not this will work in Nigeria remains to be seen when the Federal Government makes true its pronouncement to end petrol subsidy in Nigeria in 2022.
The IEA found that 17 out of a sample of 40 countries spent over two percent of their GDP on consumer energy subsidies in 2017. So, if subsidies are so problematic and there are alternatives to it, why has it been so difficult to do away with them?
The reality is that fossil fuels, as the incumbent in the energy sector, have had decades of systemic support and have amassed political power. There is also pushback from consumers and producers impacted or potentially impacted by their reform.
For consumers, removing consumption subsidies will immediately raises the price of energy. And when energy prices increase, the cost of many other goods and services also goes up. Opposition to such inflation was evident by the waves of protest or public unrest in response to an increase in electricity prices in Morocco in 2015 and of gasoline price hikes in Mexico in 2017. Nigeria witnessed the same manner of protests in 2012 when President Goodluck Jonathan attempted to scrap petrol subsidies in the country.
Then, production subsidies are also preserved because of interest group politics. In some countries, fossil fuel industries play a large role in the economy, so removing subsidies can make domestic output more expensive and increase unemployment.
Knowing this, politicians are unlikely to push for reform since people’s dissatisfaction will negatively impact their chances of re-election. However, with the general elections slated for 2023 fast approaching, it is hoped that Nigerian leaders will have enough political will to push through in ending the over half-a-century practice, which has also been known not to add but erode the nation’s aggregate economic gain.