The Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, who is a former Director-General of the Lagos Chamber of Commerce and Industry, tells TUNDE AJAJA his views on how the government can reduce the amount paid as subsidy on petrol
Despite its scarce resources, the Federal Government would have to spend trillions of naira on fuel subsidy following the plan to suspend the removal of the subsidy. What is your position on this issue?
From a purely economic point of view, the removal of subsidy is something that should have happened because the cost to the economy is horrendous. But politically and socially, it is a very difficult thing to do, especially at this time. Politically, we all know it is a difficult thing for a politician or the government in power to do now. Socially, it is also difficult because the majority of the citizens are on the edge due to the extreme poverty inflicted by factors like inflation over the last one or two years. It has massively eroded the purchasing power of the citizens. Those are the two major concerns. My proposition is that between labour and the government, there should be a strategy that can be worked out on how this can be done. There were a lot of options already being discussed, like the palliatives. Labour has put on the table the proposition that if we can get the refineries to work, it would be easier to transit. If we refine domestically, the shock of the withdrawal will not be as much as if we are importing. Those are propositions on the table.
What do we do now that we are faced with a fiscal sustainability crisis?
If we had followed through all those propositions, we may not need to suspend the implementation for 18 months, as is being proposed. That is my position. But like I said, from a purely economic point of view, we should have removed the subsidy. The cost to the economy is huge. You can see what the Nigerian National Petroleum Company Limited is asking for; it’s in trillions of naira. So, there is a cost that you cannot sustain. If you carry on that way, the country would go bankrupt. That is the reality; you become insolvent. Look at the price of oil, as of Wednesday, it was $90/barrel and we don’t know how far this Ukraine/United States/Russia crisis would go. If that comes into it, we may be looking at over $100 per barrel, so we are even looking at a much higher figure as far as subsidy is concerned. For me, there is a fiscal sustainability issue; is it fiscally sustainable? The second factor is the credibility problem that this issue is creating, even for the entire reform of the oil and gas industry. If you signed an Act (Petroleum Industry Act) last year and there were a lot of ceremonies around it, about six months after, you are already saying you want to suspend part of it. How do you want investors to take you seriously, even with regards to other parts of the Act? So, there is a very strong investment argument to support the fact that this thing needs to be done urgently. There is also the opportunity cost argument. We don’t have enough funding for roads, railways, power, hospitals, educational institutions and even security purposes. All of them are asking for funds. Some states cannot even pay the new minimum wage, yet we want to spend N2tn to N3tn in paying subsidy. These are my points. For this kind of situation, it’s not easy to say ‘do it now or do it later’. NNPC is asking for N3tn for subsidy, where will they get that from?
What is the way out?
An alternative that I see here is for us to have maybe a dual pricing regime. If it is N500bn that the government can afford realistically, set it aside and call labour and tell them this is the amount you can afford to budget for it and this is the number of litres it can cover for this year. They can then identify the filling stations that would be dispensing this subsidised fuel, which we can call social pricing. We can then leave the balance of the consumption to the private sector to sort out, such that if they have the money, let them import and bridge that gap. We have that approach in many other public utilities, like electricity, in which case if you can’t use electricity, you use your generator. In the health sector, if you don’t want to use a public hospital, you can go to a private hospital. In the education sector, if you cannot go to a public school, you can decide to go to a private school. So, in those areas, we have private and public sector options. In the public sector, you have social pricing, and in the public sector, you have commercial pricing.
Will the inequality in price not create another layer of problem, because most people would want to buy where it is subsidised?
No, it won’t. If you are rich and can afford it, you drive to the filling station where they sell at commercial pricing and buy fuel. But those who can’t afford it can go to the stations where it is subsidised. In any case, the subsidy is to ease the burden on the poor, not the rich. If it is well monitored and there is no racketeering, you would have solved that problem. With that, you would have removed those who have the capacity to pay from the lot and they will no longer be part of the queue where it is cheaper. In the education sector, the federal universities are cheaper, but some people prefer to take their children to private universities and some even take their children abroad to study. That option would segment the market and that segmentation approach can work, which the government can explore. In situations like this, you have to put all the options on the table.
The price of crude oil is increasing, and inasmuch as it helps us to make more money it also means Nigerians would pay more or in this case the subsidy would increase. Do you foresee a time the subsidy would be totally removed and the impact on people would be minimal?
Yes, it will come, if we have the right leadership and we invest in the right things. In the United Kingdom and some other countries, the public transportation system is superb. In terms of transportation, those in the middle class in such countries tend to complain more if such things happen. Most other people enter bus and train and they barely feel it.
But it will increase our transport fares here.
If we have an effective public transportation system, the burden would be much less. Take Lagos as an example, if there is an intra-city train system that is safe and reliable, a lot more people would use the train rather than drive. Even with sanitised and decent commercial buses, coupled with the elimination of the chaos on the roads, many of those who drive around would park their vehicles somewhere and take commercial buses. They would take that option than sit in traffic for hours. Those options can make things easy. Most of those long commercial buses use diesel, and a litre of diesel is over N300, but nobody talks about it. Many factories with big generators and trucks that transport raw materials use diesel but nobody is talking about that. But for petrol, some people make a lot of money from this subsidy.
The Senate President queried the authenticity of the number of litres the NNPC claims we consume daily, why has it been so difficult to rid the subsidy regime of corruption?
Before now, importation was done both by the private sector and the NNPC, but for the past few years, only the NNPC has been importing refined petrol. When the private sector was involved in the importation, there were allegations of fraud and some persons were taken to court. Now, it is only the NNPC that imports fuel, so we have to hold them to account. There has to be a proper audit. We are talking of a single importer, so it should be easier to deal with.
The Senate President also complained about the smuggling of petrol to neighbouring countries, how come that illegality is thriving till date?
I must tell you that the incentive to smuggle fuel out of Nigeria is extremely high. The borders are manned by persons who are not well paid, so when they and their superiors at the borders are offered some millions, they could compromise. The system has created an irresistible incentive, so it’s very tempting for people to be corrupt, because of this huge differential. It’s like talking about the differential between the official window and parallel market for forex, you cannot but have corruption in that system. Any system that has this huge differential in price and any system where you can easily move the product from one segment of the market where the price is low to a segment where the price is high, there is a very serious problem of monitoring and enforcement. That is the reality. With the increase in oil price, the incentive is growing bigger. You find that in the West African sub-region up to Cameroon, they would be using our fuel. There are some forms of corruption that the only way to correct them is through your policy or by allowing the market to dictate. But to say you want to enforce physically, it might be a waste of time and it would be less effective.
You spoke about how the proposed 18 months extension for PIA implementation could affect investment in the sector, could you expatiate on that?
It was another instance of policy somersault and it reflects the absence of political will to reform the oil and gas sector, which would aggravate the political and policy risk of investing in Nigeria. That sector has been starved of investment for decades, simply because of policy and regulatory issues. This suspension of a major instrument of reform is not good for our perception by investors as an investment destination and it will affect our rating in terms of risk. Like I said, the economic cost of the capitulation is weighty. You cannot have your cake and eat it. Macroeconomic risks would become elevated as fiscal deficit and borrowing significantly surpasses projections in the 2022 budget. The Central Bank of Nigeria may have to continue to cover financing gaps through ways and means. This of course has serious inflationary implications. The macroeconomic outcomes would adversely impact on the exchange rate, leading to further depreciation of the currency. Prospective investors in the downstream sector might withhold their investments until the policy environment becomes conducive. This is the price we would have to pay as a country for this extension.
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