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Patrick’s Query: Kobo Wise, Naira Foolish?

Patrick’s Query: Kobo Wise, Naira Foolish? 

-Patrick O. Okigbo III | Nextier Consulting.

Nigeria has an unhealthy love affair with it’s fuel subsidy. A reform of the subsidy is a gift President Buhari should give Nigerians.

Here are the facts we know. Nigerians pay N145 per litre of petrol. This is below the cost to the government to purchase and distribute the product. Since the 1970s, the Federal Government of Nigeria has paid the difference. In Nigeria’s days of innocence, fuel subsidy payments were reasonable. Today, as Nigeria has matured in vices, such subsidy payments have exceeded all sense of reason and proportion. There is hardly anyone involved in this daylight robbery who believes that the subsidy payments are aligned with the petrol used in the country.

Between 2006 and 2018, Nigeria spent over N10 trillion on subsidy payments. In most years, these payments were far greater than the spending on health, education, infrastructure or defence. It is, therefore, no surprise that Nigeria has the greatest number of out of school children in the world (13.5 million) and even those who are in school are learning little to nothing. The country has only about 4,000 megawatts of electricity to share amongst 200 million people; 100 million of whom are not even connected to the grid. It is also no surprise that Boko Haram is making a mockery of all Nigerians.

What of the opportunity cost of the subsidy payments? That is, the things Nigeria would have achieved with the same subsidy payments. The N10 trillion could have built and equipped 2,400 units of 1,000-bed hospitals across the country such that Nigeria’s president would not have to do on medical vacations in London. Neither would ”Chairman” Christian Chukwu required the magnanimity of Femi Otedola to be alive today. The payments could have built 500,000 housing units at N20 million a home. It would have enabled at least 5 million homes if it was leveraged 10x. It would have delivered 27,000 megawatts of solar-powered electricity or multiples of that figure if the funds were likewise leveraged. At least 2 million Nigerians would have received tertiary education at a global standard.

Buhari Scared? –

A Nextier Political Economy Analysis from Q4 2019 strongly indicated that President Muhammadu Buhari will not reform Nigeria’s fuel subsidy. This is mainly for two reasons. One, he believes that this is one of the benefits that the common Nigerian derived from the country’s crude oil. Second, he believes that a reform of the subsidy will lead to public protests and his government would become unpopular. He is wrong on both counts.

Evidence from different scholars shows that it is the richest 20 percent of Nigerians who derive 57 percent of the value of the fuel subsidy. It is the owners of the fuel-guzzling SUV and those who own multiple cars who enjoy the subsidised fuel. The bottom 20 percent derives only 3.8 percent of the value. More recent evidence shows that 21 out of 36 states in Nigeria lose out on the subsidy while Lagos and similar states enjoy the benefits.

On public protests, a recent survey by the International Institute for Sustainable Development (IISD) shows that only 13 percent of those who are opposed to fuel subsidy removal indicated that they would protest the reform. It is important to note that most of those opposed to the reform believe that it will lead to an increase in prices (44 percent) and that it will harm the poor (28 percent). They wi be open to solutions that compensate for this increase without necessarily resorting to public protesrs.

Once Beaten, Twice Shy

Even if one accepts that there is a risk of protests with the proposed reform, there are a number of proven ideas on how to manage the risk. The recent IISD study on Nigeria suggests that sudden price increases may cause protests; therefore, the price increases should be gradually phased-in to make them bearable. The government should institute palliative measures to help the poor deal with the price increases. However,with the significant deficit of trust in Nigeria, there is a greater need to lead with transparency and good governance to ensure public trust. Similarly, the government should spend significant effort and resources on communication to build public trust.

Nigeria’s experience with President Goodluck Jonathan’s Subsidy Removal and Reinvestment Programme (SURE-P) has made this task doubly difficult. SURE-P set out to implement various palliative measures: conditional cash transfers, maternal and child healthcare programmes, stipends for apprenticeships, technical and vocational education programmes*, etc. These programmes delivered minimal results.

Courage Needed –

Notwithstanding the challenges, retaining the fuel subsidy (which is a significant drainpipe) does not make sense. Doing this whilst seeking foreign loans is akin to being kobo wise and naira Foolish. It simply does not look good at all.

There are a few options for the government to consider. For instance, the government can set out a five-year plan to end this cesspool of corruption. In the short term (now to two years), the government can develop and implement a compensation programme for the poor and most vulnerable. This should be put in place BEFORE the government implements the subsidy reforms. However, it is important that the government communicates that the palliatives are a precursor to the reforms. It would be shame for Nigeria to repeat the mistakes made in Sudan where the palliatives were put in place a long time before the fuel subsidy reforms such that the people could not connect both events. In this same period, the government of Nigeria can start gradual removal of the subsidies so the price increases are gradual and leave room for the people to adjust to the changes. Needless to say that the government must actively communicate every step of the way.

In the period from Year 2 to 5, the government should complete the gradual phase-out of the subsidies and continue the compensation schemes. It is important that the government strengthens the regulatory agencies to be able to monitor the activities in the sector. This should prepare Nigeria for full deregulation of the fuel market where the prices respond to the forces of demand and supply as is the case with rice, garri, and many of the other essential products.

Urgency of Now –

One understands why President Buhari may be scared of reforming the fuel subsidy regime but his apprehension is neither acceptable nor tolerable. Nigerians are dying under the weight of the fuel subsidy. There is enough scholarly evidence to show that subsidy reform is good for GDP and trade balance. While there is a risk of significant increases in food and other related prices (if the reform is not carefully managed), the long-run impact on inflation is small. Furthermore, the evidence shows that the impact of the fuel subsidy removal on food prices is negative for the poor so there is need to compensate them for the price increases.

The real challenge should not be whether to remove the fuel subsidies or not. Mr. President’s skepticism should be about the ability of Nigeria’s public service to deliver the palliative measures to those who qualify and need them. Yes, back to incompetence and corruption!

Without doubt, the time to end the fuel subsidy is now. It will require leadership which the President should be able to deliver because this is really a fight against corruption; his self-avowed strong point.

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