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Would style undermine the substance of Tinubu’s reform? 11 Jul 2023

The administration of President Bola Ahmed Tinubu has taken two major policy decisions that will have significant impacts on Nigerians. His removal of petrol subsidies and the national currency devaluation are momentous policy calls. The fuel subsidy removal means that the government will stop paying for the difference between the regulated price of petrol, which was N185 per litre, and the market price, which hovered around N600 a litre at the end of June.

For starters, Nigerians have to accept that energy subsidy reform is necessary in the country. The petrol subsidy programme cost N4.39 trillion ($9.7 billion) in 2022, according to data from the state-owned oil company, NNPC Limited. The fiscal burden of the subsidy regime had grown as the four refineries owned by the NNPC remained off stream. This has left the country to be reliant on fuel imports. Also, the acute drop in official oil production figures due to oil theft and a slowdown of investments in production has caused a big dent in the federal government's revenue.

The decision to end the subsidy programme, therefore, is justifiable. It had become fiscally unsustainable. The last administration was struggling to meet the cost, despite ramping up public debt. But the abrupt manner the programme was ended by the new administration would likely cause more pain than otherwise. Civil unrest is likely to follow the decision as its negative impact on the welfare of the people becomes more biting.

The arguments against fossil fuel subsidies are formidable. The subsidies are inefficient by artificially lowering the price of the product. This encourages the consumption of an energy product known to be environmentally harmful. Rather than this situation, some countries have introduced 'green taxes’ to raise the prices of fuels that cause high carbon emissions, thereby discouraging their use.

The IMF estimates that global fossil fuel subsidies reached $4.7 trillion in 2015 and that efficient fuel pricing would have lowered global carbon emissions by 28%. Reforming energy subsidies and instituting green taxes are important steps that policymakers can take to reduce carbon emissions and protect the environment. But these were not the direct motivations for the removal of the petrol subsidy in Nigeria at the end of May 2023.

Regardless of the motivation, the IMF estimates that the benefits of reforming energy subsidies would be greater over the long term. Economists also agree that reforming energy subsidies and instituting green taxes are essential policies for addressing climate change and creating sustainable economic processes, especially in the developing world.

However, socioeconomic factors had complicated attempts at ending the fuel subsidy programme in Nigeria despite its burden on the economy for decades. As such, the preceding administrations did not have the nerve to act decisively on it because of the perceived political repercussions or populist considerations. Nevertheless, President Tinubu was decisive because his predecessor made no budgetary provisions for petrol subsidy payments after mid-2023. The budgetary cover of N3.36 trillion was for the year's first half.

Given this programming, all Tinubu had to do was stay on track with the extant budgetary arrangement, which auto-terminates petrol subsidy at the end of June. In his first month of office, the President should have busied himself supervising the development of a programme that would cushion the inflationary impact of higher petrol prices on the people and deploy same at the beginning of July as subsidy automatically ended. The negative impact of the tripling of petrol price, literally overnight, and the ripple effect of such increase on household and industrial consumption ought not to have been glossed over as has been the case.

Understanding why the President seemingly acted rashly on the subsidy removal is important in discerning the direction of his administration. It also informs expectations of the possible realisation of the potential benefits of the policy decision. But while the Tinubu presidency is in its infancy, the likely nucleus of his economic management team has been known to him for years since he was governor of Lagos State from 1999-2007. Therefore, he could have designed his palliatives programme soon after becoming President-elect at the end of February.

The pains of the subsidy removal are immediate. Energy and transportation costs have shot up. Food prices have also significantly spiked. Increases in the prices of industrial goods will follow. These changes were hardly reflected in the inflation rate for May 2023, which printed at 22.41%, since the pump prices of petrol were adjusted on the last day of that month. But the consumer price index for June would have also been impacted by the second      inflationary policy of the government: the re-introduction of market exchange rate. With the new exchange rate policy, the value of the naira has depreciated by more than 40%.

Policymakers often work to prevent economic shocks. But the Tinubu administration decided to send two powerful shocks to the Nigerian economy within the space of two weeks. But again, the new exchange rate policy holds potential benefits. By lowering the value of the naira, Nigerian exports would become cheaper. This means the country can ramp up exports because of the price competitiveness of the export goods in the international market. In that scenario, the local industrial capacity and utilisation would grow, creating more jobs. But there is nothing automatic about these outcomes; they have to be masterfully orchestrated. But given the Nigerian circumstance, the reality in the short-term has been the reverse, as higher local and foreign input costs are stifling industrial capacity.

To be sure, sheer hubris, instead of good planning, in introducing these two policies can spark capital flight, lock in higher unemployment and poverty rates over the medium term, and worsen inequality. With many stakeholder groups ruing the style – and not necessarily the substance – of the policy decisions, it remains to be seen which would have a domineering impact on the outcomes beyond the immediate term.

Nevertheless, it is necessary to point out that there are alternative pathways to the outcomes President Tinubu wants to achieve. India and Egypt are countries that executed smoother energy reform plans, opting for fluid and socially acceptable transitions with mitigation measures. These include gradual increases in fuel prices, expanding social safety nets, and government-aided transition to cheaper fuel sources.

In 2014, India deregulated diesel prices and replaced its kerosene and liquefied petroleum gas (LPG) subsidies with direct benefit transfers to eligible consumers. The government also invested in improving LPG access to poor and rural areas. In the same year, Egypt embarked on a comprehensive reform of its energy subsidies, which accounted for about 22% of its budget. The government gradually increased fuel and electricity prices over several years while expanding social safety nets and public services.

The Tinubu administration can borrow a leaf from these two countries. A Nigerian programme could also involve converting vehicles and generators in the country for autogas as fuel. Autogas is a cleaner and more efficient fuel than petrol or diesel and domestically produced. The government could provide subsidies for the conversion and invest in infrastructure to distribute autogas. The largely one-time subsidies are different from the continuous ones for petrol.

By diligently implementing a well-planned reform programme, the Nigerian government could create a sustainable local energy market with prices similar to what was obtainable before the removal of the petrol subsidy while having none of the fiscally ruinous burden associated with the old subsidy regime.

It is also better to phase in the reforms gradually. A sudden tripling of fuel prices would be problematic in any economy. So, it is a choice that should take time to be embraced in one of the world's poorest countries.

The government needs to re-strategise on a gradual and predictable approach, which allows consumers and businesses to adjust to the changes. What is important is to respect the reform process once it starts.

Cheta Nwanze is Lead Partner at SBM Intelligence.