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Petrol subsidy removal was bad in 2012, it is bad in 2016 19 May 2016

There is no right time to do the wrong thing. The move by President Goodluck Jonathan to remove the subsidy on petrol in 2012 was ill-advised. Of course, the policy decision was resisted by Organised Labour, civil society and Nigerians across the wider spectrum. Eventually, we had to settle for a pump price increase. Now that President Muhammadu Buhari has taken the same decision of ending the subsidy regime more than four years later, the decision remains condemnable.

There is no fundamental difference between the context in which the 2012 decision was flawed and now. This is with due consideration to the disparity in the prices of oil in 2012 and the current much lower price level. Indeed, taking the same decision under two conflicting fiscal circumstances is the clearest indication that the decision cannot be right, at least in one of the situations.  

In 2012, petrol subsidy was removed because of the corruption in its governance. There was also the seeming helplessness of the government to address other abuses, including diversion of subsidised petrol meant for Nigeria to the neighbouring countries. This problem of smuggling is perennial. It has been cited for decades. Price increases at home, which would bring parity with prices in the neighbouring markets, were said to be the strategy to stabilise supply in Nigeria and save government the colossal sum of money it pays in subsidy.

But petrol prices have increased in Nigeria by more than 600 percent since 1999. Yet, there is still some gap between prices in Nigeria and those of our neighbours. As such, the problem of smuggling remains unsolved. Indeed, the prices of petrol vary from country to country. Internal economic dynamics that influence the price of petrol are not the same in every country; they are not the same in the net-oil-exporting countries, neither are they the same in the net-oil-importing countries. In the Nigerian policy debacle, the government has been unable to patrol the borders. Hapless Nigerians are simply made to pay for this ineptitude in the form of higher prices of petrol.

Nigerians would have simply paid much higher prices for petrol under the administration of President Jonathan and he still would not have fought corruption. He acquiesced to corruption. Official corruption, in the end, defined his administration and contributed to cutting it short in 2015. Had petrol subsidy been removed successfully in 2012, it would have simply freed more money to be looted by the regime.

Therefore, one mistake that must not be made in reacting to President Buhari’s decision to remove subsidy is to accept that policy objectives are accomplished by merely pronouncing them. This current administration has been most unfaithful to its policy pronouncements up to this point. On the issue of subsidy itself, the President has been wavering; he has moved from absolute “no” to subsidy removal to incredible “yes.” Nevertheless, his ‘yes’ is not more convincing in ending the shenanigans and inefficiency in the downstream sector of the oil industry than his ‘no’ would translate to a credible social safety net for the poor he said he wanted to protect from higher prices.

In 2012, the decision to remove the subsidy on petrol was inefficient. It truncated a consultative process the government itself enunciated with Organised Labour. The price increase was sold on inarticulate programmes of social investments that came as after-thoughts. SURE-P was a programme that was poorly Xeroxed; thus it became a racket which Dr. Christopher Kolade – its Chairman of good reputation – loathed to be associated with and he had to resign. YOUWIN left no legacy worthy of extending under the new administration. What’s more; the money that was saved from the partial removal of subsidy could not be used to turn around the state-owned refineries which were operating below 20% of installed capacity.

The latest decision to remove the subsidy by President Buhari is simply bizarre. It deliberately courted failure by side-tracking consultation. Even if Nigerians eventually allow him to have his way, he probably would have achieved the same through initial consultations, without causing the ongoing disruptions to business and social activities by the strike that may yet gain momentum.

The premise that the decision was taken because it had to be taken is both hollow and dangerous. If the decision was taken because of financial considerations – as it is said, “government cannot afford to continue the subsidy regime” – what about the social considerations? In the advanced capitalist economies, policy decisions are not taken for financial reasons in subjugation of social considerations. That is why they continue to have fiscal deficits, subsidies, social housing and social transfer programmes. These are cheaper, and less risky to manage, than a serious social backlash from anti-people policies. But we tend to think it is the other way around in Nigeria and other autocratic regimes in developing countries.

The financial coordinates for petrol at N145.00 per litre as announced by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, don’t add up. Governments don’t enact policies and base its implementation on variables outside its control; definitely not when it concerns a product that impacts the whole population. Therefore, directing marketers to source their foreign exchange for petrol importation from the so-called autonomous market is a guarantee that this policy is doomed to failure. Autonomous market rates will correlate more to black market rates. With the announcement, dollar price has jumped sharply to over N350.00. This has disarticulated the N145.00 per litre price that was premised on N285/$1 exchange rate.

Although petrol price cannot, under any circumstance, be subjected to market forces in grossly under-developed Nigeria, this decision is a pretence that it can; and at the same time an affirmation that it cannot. Otherwise, why make importation an all-comers affair and then regulate price? Why would importers go and source their forex, import the product and then not be able to determine the price at which to sell?

The N145 per litre price is over and above what should have obtained. Some analyses have shown that no more than N12 should have added to the last price of N86.50 per litre at the current price level of crude oil. But the new pricing is unsustainable by its very haphazard determination. If the price of crude oil rises near or above $100 a barrel again, it is either the government would reverse itself and reinstate subsidy or market prices of petrol would be unaffordable by a huge section of the population.

Perhaps, the administration would intervene in the forex market. One way would be to devalue the naira in the official market, forcing the currency to appreciate in the parallel market. The question that arises is why was this not done first so as to inform better pricing for petrol. Another way is for government to prop the parallel market by diverting in part dollar sales from the official market. The only justification for such move would be that government officials are jealous of the arbitraging opportunity the banks are currently enjoying with the gap between official and parallel markets rates, and would not be denied. Nigeria’s forex policies have always accommodated official corruption by instigating wide gaps between the official market and the ‘black’ market.

Nigerian policymakers are used to making policies to benefit themselves. With President Buhari’s policy, the CBN cannot afford to supply forex for the importation of industrial inputs and intermediate products. With the 2016 budget, government revenue is not enough for even 1 percent of the capital expenditure; everything has to be covered by borrowing. Even the N500 billion “social investment” is only covered by deficit financing of N2.2 trillion. What is covered with government revenue is recurrent expenditure, mostly spent on government officials and the bureaucracy. Belt-tightening policy calls by the same officials have always and will always lack credibility.

The problems in the downstream sector of the oil industry are corruption, ineptitude and state meddlesomeness in the market as opposed to genuine regulation. President Buhari, with his acclaimed anticorruption agenda, cannot sidestep the problem of corruption in the sector in the way he now proposes. He should crack the corruption ring, otherwise his anticorruption would remain indicted as lacking strategic know-how and steel when it is not dealing with political opposition.

Buhari should be able to address the issue with the refineries as President, substantive Petroleum Minister, former Head of State and former Minister of Petroleum Resources. No one should be better than him in governing the industry. He has to decide either to scrap, sell off or effectively fix the existing refineries. If Dangote can build a mega refinery in three years, the government can do the same. An anticorruption government should be able to mobilise private sector resources to complement its own to build refineries in a country of 180 million people – a huge market for refined petroleum products.

In the meantime, making government decisions and fiscal policy more efficient will create a completely different reality than the one the country is currently grappling with. Nigerian oil is an important political commodity; it is what has kept the country going. In that context, the price of petrol cannot be determined by market forces. Are the people of the Niger Delta – poor and polarised by oil production in their backyards – to pay the same price as obtained in a high income country as the United States or United Arab Emirates where oil money has helped deliver both physical and social infrastructures? Definitely not.