Olusola Dahunsi, PhD, Lecturer, KolaDaisi University

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Subjects of Interest

  • Development Finance
  • Fiscal Policy
  • Public Sector Reform

First aid and sustainable treatment for fuel subsidy removal shocks 01 Sep 2023

The removal of fuel subsidy by the new administration of President Bola Ahmed Tinubu and the proposed palliative programme to cushion the impact of the policy have continued to raise a dust. Fuel subsidy – the transfer of money from the government to related entities to reduce the price of the petroleum product – was for decades a controversial policy in Nigeria because of its debilitating impact on the country’s revenue. It was also an abiding consequence of the inability of the country – a major crude oil producer – to refine the product locally to meet domestic demand.

As a result of the bloated subsidy programme, the state-owned oil company, NNPC Limited could not remit revenue into the Federation Account for months last year. That year, N4.39 trillion was used to subsidise imported fuel, according to data from the National Bureau of Statistics (NBS). The last administration indicated the subsidy programme was no longer sustainable and made a decisive move to end it by not making budgetary provision for it beyond June 2023.

Following an abrupt ending to the programme at the end of May 2023 by a presidential pronouncement, the National Assembly appropriated N500 billion to be expended on a palliative programme to cushion the effect of a market-determined over 200 percent increase in the prices of petrol, as part of other financial allocations in the 2022 supplementary budget of N819.5 billion.

It is demoralising that the proposed palliative programme – a conditional cash transfer – will only support 12 million poor households for six months. With an average of six persons by family, the total number of beneficiaries of the programme is 72 million. But over 80 million Nigerians live in poor households, based on the national poverty rate of 40.1 percent, according to data by NBS. At least 8 million poor Nigerians are likely to fall through the cracks of the demographic coverage of the conditional cash transfer.

Also indicating lack of enough rigour in the design of the palliative programme was its duration of six months. It was not indicated if the cash transfer would have built enough resilience for the beneficiaries to be able to cope with higher petrol prices after six months, whether the prices are anticipated to fall to affordable levels after that period, or other social safety nets would be introduced. Without these and other information provided by the government, the six-month duration appears haphazardly determined.

However, the palliative programme, which includes the presidential order for the release of fertilisers and grains to approximately 50 million farmers and households, is essentially targeted at the poor – who are only one of the demographics that are vulnerable to the adverse impact of the removal of fuel subsidy. According to the World Bank, an additional 7.1 million Nigerians could become poor if adequate palliatives are not provided. Many small businesses could be in jeopardy, pushing their owners and workers into poverty.

The conditional cash transfer programme, now withdrawn for redesign, addressed the issue of income inequality. In that, it was a good policy. But mitigating the adverse effects of higher energy prices is a broader issue. Indeed, transfer payments – i.e., cash transfers by the government to indigent citizens – and subsidies are two different types of government interventions in the economy. They serve different but complementary purposes. The planned transfer payment will only address the problem of income inequalities by way of income redistribution to poor households. But those who have daily need of petrol consumption and are mostly affected by the fuel subsidy removal are not directly targeted by the palliative provisions.

As it is now unfolding, the fuel subsidy removal is on course to be the most corrosive public policy on the welfare of the citizens. The majority of low-income earners and junior officers in the civil service are losing their welfare to the hike in petrol prices through astronomical increases in transport fares and its inflationary backlash on the prices of food and other products.

It is important to state that the basic idea of social welfare describes a situation where an individual’s satisfaction increases without making another person worse off. But the intended cash transfer – as initially proposed – would end up making certain households better off while leaving others worse off. The latter were thought to be able to cope with fuel price increases or overlooked in the design of the conditional cash transfer programme. This discrimination might not be with prejudice, but it would not have been less damaging because of the absence of ill-intention.

Despite the fiscal challenges in funding the fuel subsidy, its removal will continue to be opposed by a majority of Nigerians. The subsidy was about the only common benefit of governance the generality of Nigerians enjoyed. Our policymakers should realise that government exists for social welfare maximisation. The free market ideology obviously supports this, as evidenced in the fact that most of the world’s prosperous nations operate this philosophy. However, the market mechanism does not provide end-to-end functionality. Its dysfunctions – in particular trenchant inequality – are rectified or ameliorated by government interventions.

The new administration appears to be too hasty in ending the fuel subsidy. It opted against other policies or a gradual approach that would allow the poor masses and the economy to transition more smoothly from the subsidy regime to full price deregulation. Complete removal of the fuel subsidy should have been an end point in a process that addresses the inefficiency and corruption that permeateed the management of the hydrocarbon resources of the country and government revenue.

The gross abuses of the petrol subsidy had been begging for effective redress since the administration of President Goodluck Jonathan. The exploitation of the subsidy in various ways, including sabotage of the state-owned refineries, inflation of the daily petrol consumption figures to fraudulently bloat the amount of subsidy to be paid, and smuggling product covered by subsidy to neighbouring countries to be sold at market prices, was the problem and not the subsidy in itself.  

One of the valid arguments against the subsidy structure was that it favoured the rich and corrupt public servants who unproductively consume more fuel than the poor who need it for their daily subsistence. This only called for the fuel subsidy to be redesigned in a progressive manner such that payments for fuel consumption increases as a proportion of income or as income generally rises. Rather than the universal price subsidy system, a progressive subsidy system should be adopted and this can be achieved by leveraging on a comprehensive national database.

Adopting the progressive system of fuel subsidy requires data-sharing and database interactions among the National Identity Management System, National Bureau of Statistics, Corporate Affairs Commission, Nigerian Communications Commission, Federal Inland Revenue Service, state boards of internal revenue service, financial institutions and other governmental agencies. In addition, the role of information and communication technology (ICT) and other infrastructural development cannot be overemphasised in capturing and identifying duly registered transportation (passengers and goods) vehicles; tricycles; motorcycles and other means of public transportation; and small and medium-scale enterprises (SMEs) and their equipment such as generating sets. This will help to validate eligible persons and entities that should benefit from the palliatives and have access to fuel at subsidised rates.

In the event that the subsidy removal is permanent, the government would have no option but to raise the minimum wage. The minimum wage of N30, 000.00 was fixed at a time when the petrol price was N145/per litre in 2019. Even then, not all the state governments have been able to implement the minimum wage. But now, the price of petrol has reached N617/per litre.

Notwithstanding the concern over the inflationary impacts of a higher minimum wage, it has become inevitable, alongside an adequate palliative programme. The need to comprehensively address the welfare impact of the subsidy removal has seen many private sector institutions increasing the salaries of their staff. In this regard, the government should consider a payroll support for SMEs that are not able to similarly increase salaries. This could be by offering tax break to such businesses for retaining their staff and forestalling reduction in their welfare.

By withdrawing the conditional cash transfer programme for the purpose of redesigning it, the federal government has admitted that its first aid was inadequate. It now has an opportunity to device a sustainable treatment of the challenges that the withdrawal of the fuel subsidy – and introduction of market exchange rate – have created.

In conclusion, the government needs to take the country’s energy security as a strategic and economic imperative more seriously. The policy decision that was initially hailed as “bold” has become unwise because of the overdependence on one energy source that is supplied through importation. Having a local monopoly in the petroleum products refining space is also fraught with danger. The country needs to diversify its energy sources as part of its strategy for building a prosperous and resilient economy.

Olusola Dahunsi, PhD, who is a chartered accountant, is a lecturer in the Economics Department at KolaDaisi University, Ibadan.