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Petrol subsidy and the next administration 08 Feb 2023

If Nigeria were to end its petrol subsidy, it wouldn’t be because such a programme does not exist in other countries. In 2019, global subsidy on consumption of fossil fuels, mostly oil and gas, was $320 billion according to the International Institute for Sustainable Development (IISD). The consumption subsidy in Iran was $86.1 billion, China ($30.5 billion), Saudi Arabia ($28.7 billion), Russia ($24.1 billion), and India ($21.9 billion).

Energy is central to the economic production, distribution, and consumption of both industrial and consumer goods. Without it, modern economic production cannot take place. It is on this basis, and for the international competitiveness of an economy, that the subsidy exists, either for production or consumption, or both. Between 2017 – 2019, production subsidies for the fossil fuel industry averaged $290 billion in the G20 countries.

The subsidies are aimed at ensuring the availability and affordability of the energy products. Unfortunately, however, Nigeria’s petrol subsidy has been unable to guarantee uninterrupted supply. Every so often, the country experiences fuel scarcity, as is currently the case since Q4 2022. Affordability is actually targeted at the consumers. But Nigeria’s petrol subsidy has become unaffordable to the government offering it.

Unlike in other countries, Nigeria’s petrol subsidy has also failed to smoothen the product’s supply. This is mainly due to its negative incentive for domestic refining of the product. All the country’s four state-owned refineries have been in a state of disrepair for decades, with the government vacillating between their effectual turnaround maintenance and privatisation. Therefore, the country has the distinction of a major oil producer and a major economy that relies on imported petrol.

Dependence on the importation of the product has not bred efficiency in its distribution infrastructure. The depots and pipelines of the NNPC Limited are poorly maintained and often vandalised by thieves. Petrol importation has increasingly become an enclave activity. The grossly inefficient state monopoly is currently solely responsible for the product’s importation. The monopoly is not fostered by policy; it has evolved from the acute corruption in the downstream activity that makes private investment in it highly risky.

At a global level, fossil fuel consumption subsidy has been declining. Compared to the 2019 figure aforementioned, the subsidy was over $500 billion in 2013. But the fuel subsidy cost in Nigeria is rising astronomically. The country budgeted N888 billion ($5.73 billion) for the programme in 2012. In 2023, budgetary allocation for the first six month was N3.36 trillion, with the total cost for the year projected to double to N6.7 trillion ($14.70 billion).

The expansion of the financial cost of the subsidy is driven by many factors. Between 2012 and 2023, the naira has depreciated by 192 percent, based on the official exchange rate by the Central Bank of Nigeria (CBN). Although the annual average price of crude oil has fallen from its historical peak in 2012, it steadily rose after the 2016 crash and has been rising since the Covid-induced price shock of 2020. Nigeria’s population has also been growing at around 3 percent per annum, driving up the fictitiously high numbers for daily consumption of petrol in the country. It is common knowledge that the country does not know the accurate figures, highlighting the incompetence and corruption in the administration of the programme, thus allowing product subsidised by the Nigerian government to be smuggled into the neighbouring countries for sale above the regulated price at home.

The subsidy is no longer affordable by the government, nor can the citizens afford commercial pump price of petrol. President Muhammadu Buhari having muddled along with the programme he called a “scam” before assuming office almost eight years ago, is wary of ending it. Worldwide, energy subsidies are very difficult to end. Removing the subsidy will automatically increase energy prices for consumers and trigger increases in the cost of goods and services, as well as social unrest. In Nigeria and elsewhere, this scenario has been at play.

But clearly, Nigeria’s petrol subsidy is not sustainable in its current form. Its huge cost is preventing public social investment in education, healthcare, and effective safety nets. The argument that the consumption subsidy benefits the rich than the poor is true, making the subsidy socially unjust and economically inequitable. Subsidy also encourages over-use and wastage of energy. Global policy in the era of climate change is focusing on drastically reducing fossil fuels that contribute the most to carbon emissions and global warming. In addition to the fiscal unviability of the petrol subsidy, Nigeria will come under pressure to end the programme because of the environmental concern.

But ending the subsidy at once, or within a short period of time, like the major presidential candidates in this month’s general election have promised, will lead to utter bedlam. The first step in genuinely addressing the issue is by conducting a proper accounting to determine the true size of the programme. Only then can the government determine if it can continue the subsidy at the current price level or scale back its size by increasing the pump price of petrol. Indeed, given the dire fiscal situation of the country, it is inevitable for the next administration to scale back the subsidy cost to enable it to make important social investments that will help bolster its legitimacy. Going forward, the programme should be run with vision, competence, data transparency, and financial and legal accountability.

Jide Akintunde is Managing Editor at Financial Nigeria International; He is also Director, Nigeria Development and Finance Forum.