NIGERIA’S long-running petrol subsidy payments have become a gargantuan conundrum, resulting from inertia, corruption, and incompetence by successive governments since 1999. The President, Major General Muhammadu Buhari wants to end subsidies before he bows out on May 29, but the regime dreads the consequences. The Nigerian Extractive Industry Transparency Initiative said the government paid N16 trillion for petrol subsidies in 16 years (2005 to 2021), long enough for it to have fixed the problem. Now, the government is caught in an unpalatable dilemma; remove the subsidy and plug the unsustainable fiscal hole, but risk social and economic upheaval with uncertain outcomes.
The dilemma is all the government’s making. Having failed for 24 years to promote self-sufficiency in domestic refining, successive governments have neutered private investment in refining – save for the giant 650,000 barrels per day Dangote Refinery –entrenched corruption, state monopoly, inefficiency, corruption, and shortages in the supply and distribution of refined petroleum products. The country relies today wholly on imports for its petrol needs under a state monopoly and a primitive subsidy system.
Subsidies cost N4.39 trillion in 2022 and are expected to be higher in 2023. The government allocated N3.36 trillion for January to June when it aims to stop them. The exit plan has ignited debates, but there is a growing consensus that the subsidy in its present format must end.
Along with the subsidy is crude oil theft that drained another N12 trillion in 12 years (2009 to 2020). The two drainpipes aggregate N29 trillion, said the NEITI report. This is nearly the combined size of Nigeria’s federal budgets in 2021 and 2022. About 4.8 billion liters amounting to $1.8 billion of refined petroleum products were also stolen between 2009 and 2018.
Really, there is no easy way out of the quagmire. The government no longer has enough cash to meet its obligations. Subsidies at the current rate could reach N7.24 trillion for the 2023 full year. In the N21.83 trillion 2023 budget, with a deficit of N6.25 trillion and 96.3 percent of all revenue spent on debt servicing in 2022, and public debt rising to N44 trillion, catastrophe beckons.
Little is therefore left to spend on health, education, infrastructure, and security. Unemployment is 33.3 percent and inflation hit 22.04 percent by March. Many states struggle to pay their workers. Factory closures are rife, and foreign direct investment was down to $468 million in 2022.
Accordingly, regime officials, the Organised Private Sector, economists, and multilateral agencies, have called for the removal of petrol subsidies. The Bretton Woods institutions have been particularly strident. They should also apply their fervor to campaigning for domestic refining.
“Nigeria is 115th out of 115 countries in terms of the average revenue-to-GDP ratio,” Rajul Awasthi, a World Bank official stressed. The bank wants the government to redirect the savings from the removal to infrastructure.
In Nigeria, that is easier said than done. All palliative programs in the past failed woefully because of corruption and poor database, not the least the COVID-19 palliatives in 2020. Public officials moved billions of cash around, which is susceptible to embezzlement. Relief materials meant for distribution were locked up in warehouses or hijacked by politicians.
Controversy already surrounds the $800 million loan to provide “palliatives.” Nigerians smell corruption. The $53 million distribution costs and the dishonesty in purporting to share pittance to 50 million persons in a country without a reliable database are recipes for grand larceny. Going by past and current records, politicians, civil servants, and contractors are set for another looting frenzy.
Undoubtedly, the subsidy regime as it is being operated currently must be overthrown. Opaque, and lacking accountability, it facilitates massive corruption. In 2011 under President Goodluck Jonathan, N1.7 trillion was paid for phantom petrol deliveries.
Subsidies also distort the economy, and crowd out private investment and spending on social services and infrastructure.
The Nigerian National Petroleum Company Limited is at the heart of the quagmire. Apart from its monopoly in domestic refining and petrol imports, it solely determines the daily consumption figures, the cost, and the value of “under-recovery” (read subsidy) which it pays itself and withholds from the treasury. It did not remit money to the Federation Account in 2022, state governors claim. The incoming government should sensibly clean up this mess before diving headlong into wholesale subsidy removal.
Realistically, it is inauspicious to remove petrol subsidies wholesale now. The economy is fragile and dependent on petrol consumption. Unlike diesel, kerosene, aviation fuel, and lubricants on which subsidies have been removed; petrol prices impact too closely on business costs, transportation, food prices, and inflation.
With no alternatives like railways, and water transportation, petrol is important to power road transportation in Nigeria: its 195,000 kilometers of roads dwarf the 3,500km of rail tracks; air travel is troubled and fares prohibitive. Road travel accounts for over 90 percent of commutes in the country, says NBS. The economy could descend into a tailspin; inflation could run out of control, and production, transportation, and other logistics costs rise astronomically. Business closures will further undermine the government’s tax income. Social tensions will likely aggravate. Two million SMEs have already closed, says the OPS.
Currently, poverty is biting hard, with the World Poverty Clock estimating 91.6 million citizens living below the poverty threshold, the second worst poverty-afflicted country after India. An NBS survey estimated 133 million citizens living in multidimensional poverty by 2022.
Globally, the subsidy is a delicate issue. Despite the anti-subsidy rhetoric of the multilateral bodies, many governments continue to channel subsidies to their citizens. The United States announced farm subsidies of $12 billion to its farmers in 2018, and $16 billion in 2019.
The Cato Institute, an American think-tank, says there are over “2,000 other federal subsidy programs for state and local governments, businesses, non-profits, and individuals.” In 2020, the government gave $1,200 stimulus cheques each to more than 150 million Americans. In France, electricity subsidies to consumers in 2022 and 2023 totaled $49 billion.
The $800 million World Bank loan for palliative is dubious, inadequate, and misdirected. Paying N5,000 to a family monthly as planned is almost worthless today. The government should have partnered with multilateral agencies to promote private investment in refineries to achieve self-sufficiency and export. With crude reserves of almost 40 billion barrels and a daily production capacity of over two million barrels, borrowing to cushion subsidy removal while sustaining the importation of a product in which the country has a comparative advantage is an unhinged economy.
There is no completely painless road, but the best option is a phased reform of the downstream oil sector. First, subsidies should only be removed in phases. An independent study calculated that Nigeria could save N1.5 trillion annually by increasing petrol prices from the NNPC’s N184 per liter to N215.
Immediately, the corrupt, unreasonable, politically motivated “bridging” or “equalization” component that pays out cash to force uniform pump prices in every part of the country should be stopped. In the nine months to May 2022, the Nigerian Midstream and Downstream Petroleum Regulatory Authority said it paid N74 billion as bridging costs to marketers.
It does not make sense. Instead, the regulator should adopt a price band with a set realistic ceiling. In other federal jurisdictions like the US and Canada, different tax rates determine pump prices in the states or provinces.
Simultaneously, there is a need to fast-track national policy to promote several big, medium, and small domestic refineries. Investors, foreign and local, should be given incentives to build refineries, pipelines, and depots. The four state-owned refineries should be immediately privatized as well as all NNPC’s downstream assets. The government should immediately quit the retail sector and restrict itself to regulation and facilitation.
Working with security agencies, the incoming government should swiftly wipe out oil theft. At its peak, the NNPC said it lost $700 million monthly to oil theft. The next administration should clamp down hard on smuggling across the borders.
The problem of subsidy in its present form is rooted solely in the failure to refine domestically. Nigerian governments should recognize this and make achieving self-sufficiency an all-important national priority. Dangerously, Buhari and the NNPC are by commission and omission about to hand Dangote Refinery a virtual monopoly. The next government must vigorously compete, as any monopoly, public or private, is inimical to the national interest, guaranteeing high prices and stifling innovation. Having wasted his eight years in office without resolving it, Buhari should leave the subsidy issue to his successor.
