Fuel subsidy removal will be a Greek gift to the Tinubu administration  

Key highlights

• The Nigerian government is planning to end the fuel subsidy regime, which is a huge drain on the economy. 
• Pressure groups are bracing up to have a spat with the federal government over the removal of the fuel subsidy. 
• Removing the subsidy days or weeks before the swearing-in of the incoming government could result in massive labor unrest and distort the smooth takeoff of the new administration. 

Sequel to the recent pronouncement by the Minister of Finance, Dr Zainab Ahmed, and the federal government’s posturing to end Nigeria’s half-century subsidy regime, pressure groups, as expected, are bracing up to have a spat with the federal government. 

Charter across government circles indicates the government may have struck a deal with the incoming Tinubu government to remove the fuel subsidy before May 29th. As expedient as this may look, experts are of the view that this could be a Greek gift to the incoming administration. 

Considering the magnitude of the possible fallout of an outright fuel subsidy removal, President Muhammadu Buhari could simply have just extricated himself and his government from the wrath of Nigerians, leaving the incoming Tinubu government with the huge responsibility of dealing with the aftermath. 

It is noteworthy that at least seven presidents and heads of state have had some brush with pressure groups and civil society over the issue of deregulating the downstream oil sector. If the federal government were to deregulate the downstream oil sector today, it would be the steepest possible price leap to date. 

If the removal occurs days or weeks before the swearing-in of the incoming government, they will have to deal with a likely Labour unrest of massive proportions distorting the smooth takeoff of the new administration. 

Cost of subsidy removal 

The initial cost, according to the national president of the Independent Petroleum Marketers Association of Nigeria (IPMAN), Mr Chinedu Okoronkwo, could be up to N750 for every liter of petrol after the full implementation of the subsidy removal. He, however, caveated that the pump price is likely to drop to around N500 if the government encourages the Central Bank of Nigeria (CBN) to provide forex to marketers at the official rate. 

Nigeria currently runs two forms of subsidy. The first is the payment of the difference between the actual pump price of petrol, which is arrived at after calculating the landing cost and the extant margins. The other is the cost of transportation (about N30) paid for every liter to ensure that the price of petrol is similar across the country. 

What you should know

While all parties are in agreement that the expensive subsidy regime is a huge drain on the economy, all are also concerned about the hardship the deregulation will inflict on the masses. That’s why the labor unions insist that before the full deregulation of the downstream sector, the refineries must be up and running, and for obvious reasons. 

The current landing costs of petroleum products are as high as they are because the country’s fuel needs are almost 100% imported. So, there are cost implications of taking Nigeria’s crude oil out to be refined and imported back into the country, which have shipping costs attached, duties, storage, and distribution. Much of that cost would be eliminated if Nigeria’s crude were refined in Nigeria for consumption. 

On the other hand, if subsidies were removed today, all of that cost would fall on the already multidimensional poor masses, with inflation already at 21.82%, clearly, a recipe for social unrest. 

Experts’ views 

One economist, who pleaded anonymity, said such a move could narrowly scale through with a government that is extremely popular with the people, not one that is struggling with popularity. 

A lecturer in the Department of Banking and Finance, University of Nigeria, Dr Godwin Imoibe, speaking with Nairametrics, said the situation has negatives and positives. He said the percentage increase would be astronomical. He said if he were the president, to buy the goodwill of the people, he would hold on a bit to gauge the economic situation and the environment before taking such a radical decision. 

On the other hand, being into public financial management, Imoibe admitted that the country is bleeding, and doubts that the country can sustain the level of debt hanging on its neck. He noted that for the past two or three years, the NNPC has not contributed to what is shared by the Federal Account Allocation Committee (FAAC). He stressed that subsidy removal is a two-way thing – “If you remove subsidies, you incur the wrath of the people. On the other hand, if you keep it, it’s not sustainable for an economy like ours.” 

He noted that if you have a smart finance minister, he can renegotiate the country’s debt and have a long moratorium. 

The chief executive of Anthill Concepts Limited, Dr Emeka Okengwu, said he has nothing against removing the fuel subsidy. He said if it were left to him, the subsidies should be removed much earlier than June. He, however, posed the question: “After removing the subsidies, what next?” He said if you remove the subsidies and the prices of goods and services skyrocket, as would be expected, how does that help the economy, considering that fuel is a major component of what drives the Nigerian economy? 

He stressed that the government will have to look at alternatives because if you remove subsidies, there will be consequences, if you don’t remove them, what are the consequences?

• “Whichever way you look at it, it’s going to be difficult,” he said. 

Partner and chief economist at KPMG Nigeria, and former statistician-general, Oyeyemi Kale, said “I prefer the holistic approach. Look at the entire system and then, determine ‘what is overall best for the country’ because any policy, including this one, will have positives and negatives. Somebody will benefit, and other people will lose out from the policy,” he explained. Kale added that it is a cost-benefit analysis that ultimately determines what is best for the economy. 

The chief executive of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said the incoming government will need to have some engagements because it would not be good to start on a crisis note. He said while the policy of downstream deregulation is good, the consequences could be dire. 

He cited the current situation in Kenya; he said the Kenyan president has the best intentions, but his move has caused a backlash. He said if your political and social environment is not stable how do you govern? 

Benefits of subsidy removal 

• “Fuel subsidy removal has enormous potential benefits. First, there is the revenue effect. The removal would unlock about N7 trillion into the federation account. This would reduce the fiscal deficit and ultimately ease the burden of mounting debt. 
• “Second, is the investment effect. Currently, it is extremely difficult to attract private investment into our petroleum downstream sector because of the unsustainable subsidy regime and the stifling regulatory environment. The subsidy removal will eliminate the distortions and stimulate investment. We would see more private investments in petroleum refineries, petrochemicals, and fertilizer plants. The post-subsidy regime would also unlock investments in pipelines, storage facilities, transportation, and retail outlets. We would see the export of refined petroleum products petrochemicals and fertilizer as private capital comes into the space. Quality jobs will be created. 
• “There is a foreign exchange effect. This would result from the import substitution as petroleum products importation progressively decline. This would conserve foreign exchange and boost our external reserves. 
• “Increase in investment would translate into more jobs in the petroleum downstream sector. 
• “Smuggling of petroleum products across the borders will come to an end with a market pricing of refined products,” he said. 

Need for palliatives 

He, however, stated that there must be palliatives, which should be segmented into immediate, short-term, and medium-term deliverables. 

• “Immediate and short-term options include wage review in public service, electronic cash transfers to the vulnerable groups in our society, designation of few retail outlets [maybe 10% of the outlets] as subsidy stations while all others will sell at deregulated prices for a transition period of one year; introduction of subsidized public transportation schemes across the country and reduction in import duties on intermediate products for food-related production to moderate food inflation. 
• “In the medium to long-term, there should be accelerated efforts to upscale domestic refining capacity driven by private investments; accelerated investments in rail transportation by the government to ease logistics of fuel distribution across the country as well as domestic freight costs,” Dr Yusuf proposed. 

The downstream sector operations cover crude oil conversion into refined and petrochemical products and finer chemicals, gas treatment, as well as transportation and marketing of petroleum products. 

The subsidy regime is largely blamed for some of the expenditure challenges by successive administrations.