Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited

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  • Fiscal Policy

The petrol subsidy removal imbroglio 22 Jan 2024

During his inaugural speech on 29 May 2023, President Bola Tinubu grandiloquently declared: “The fuel subsidy is gone.” Eight months later, the government still maintains that the subsidy programme has ended but nobody else believes it has. This is in spite of the fact that the pump price of petrol in the country has increased by at least 213% during this eight-month period, from N197 a litre in May 2023 to the currently N617 per litre.

The controversy arises because the country imports the energy product, and the naira has been depreciating since the Tinubu administration opted for market exchange rate. At the official market, the naira has depreciated by 115% since the inauguration day last May.

The subsidy programme was opaque and riddled with corruption. It was, therefore, impossible to precisely determine its actual cost. Although the above stated percentage increase in the pump price of petrol is nearly double the rate of the depreciation of the naira against the dollar over the same period, public economic commentators are now saying that the product should be selling at significantly higher prices if subsidy has not made a surreptitious return. Last December, the World Bank said the price of petrol should have been N750 per litre. And a day after the New Year’s Day, the Independent Petroleum Marketers Association of Nigeria (IPMAN) argued that petrol should be selling at around N1,200 a litre as the value of the naira has continued to slide and given that the “regular” product sells for approximately $3.00 per gallon, or $0.79 per litre, in the United States.

This makes the market price of petrol in Nigeria indeterminable. This is against the expectation that the current price will fall when both the Port Harcourt Refinery and Dangote Refinery begin to produce petrol this year. If the price of locally-refined petrol in the US is $0.79 a litre, why would a market-based pricing of the product be less for petrol refined in Nigeria? Both countries are oil producers. The slight difference in price between Nigerian-grade Brent Crude and North America's West Texas Intermediate crude (WTI) does not account for the expectation of price decline. And with Nigeria only currently rebooting local refining of petrol, it cannot deliver more market efficiency for the product than the US at this time.

The NNPC Limited (NNPCL) is also not convincing in its assertion that it currently fully recovers the cost of supply of imported petrol in the country. Its claim is not backed by proof. NNPCL has continued to function in the tradition of its forerunner, state-owned monopoly, Nigerian National Petroleum Corporation, which notoriously lacked transparency.

The Tinubu administration has put itself in a weak position by its removal of the petrol subsidy. First, the policy is not endogenous. It is a prescription of the IMF and the World Bank. The World Bank became more vociferous in canvassing the removal of fuel subsidy in Nigeria as its lending portfolio in the country began to grow. Its policy advice has become part of the terms for its lending. The lending programmes of the twin Bretton Wood institutions are often costlier than the interest rates on their facilities because they tend to narrow the policy space for their government borrowers.

Second, the removal of petrol subsidy and introduction of market exchange rate in quick succession was reckless. Although the government wanted to signal a pivoting to market principles very early in its life, the negative impact of the policies can overwhelm its potential benefits by serving as a trigger for economic instability. This is what has happened. In the Nigerian circumstance, the combination of the policies is quite risky, more so as they depend on external buy-in to deliver their likely benefits.

Third, subsidy removal has served as an escape from the much-needed course of action for improving Nigeria’s economic management and public sector managerial competence. It was canvassed on the basis that it harboured widespread corruption and aided the smuggling of subsidised imported petrol to the neighbouring countries. These problems are solvable by any serious government. President Tinubu, like his predecessors who at different times reduced financial outlays for the programme, preferred to sidestep these issues; he simply transferred the burden of the financial cost of the problem to the consumers – and, inevitably, to the economy.

Fourth, elite consensus on the removal of petrol subsidy, which Tinubu might have counted on in taking his decision, was ill-informed. The view that the subsidy absolutely benefitted the rich more than the poor is dubitable; so is the claim that it is merely subsiding consumption. Whereas the rich can cope with market price for petrol, it is evident now that the poor can’t, meaning the subsidy was hugely beneficial to the disadvantaged population. The combined impact of high energy and FX costs has also become an insurmountable macroeconomic headwind for manufacturers in the country.

Finally, the policy reforms have not worked because investor confidence in the economy has remained weak. The large cabinet formed by President Tinubu has not shown itself competent enough to counter the subsisting political and economic weaknesses.

To address matters arising from the purported ending of petrol subsidy in Nigeria, the government has to become more transparent about the programme. While it has demonstrated intent to adopt market policy, the government also has a duty to avert likely social upheaval that could occur if the price of petrol becomes unbearably high for the people. The government should also ensure it delivers on its commitment to the local refining of petroleum products.

Jide Akintunde is Managing Editor, Financial Nigeria, and Director, Nigeria Development and Finance Forum.