SUBSIDIES are one of the most politically sensitive subjects, both in developed and developing economies. Theoretically, subsidies are one of the easiest ways to uplift and support the economically weaker section of the society against inflation. However, if we look at the empirical evidence, the results are otherwise. In fact, subsidies invite more misuse of the resource and benefits accrue to the black marketers, it creates more disparity in the society as real benefits don’t reach the targeted class. It’s also the reality that political decisions on removing the subsidies are not easy unless it’s forced due to the economic situation.
It’s been well argued that fuel, being the primary need for all the citizens, should be given the priority budgetary allocation from the taxpayers’ revenue, so that food inflations are kept under check. However, if we see the past records in Nigeria, the ground reality gives a different picture.
First of all, most of the heavy transport vehicles use automotive gas oil, also known as diesel as fuel, which is more or less linked to the international oil prices, hence, any change in the premium motor spirit prices will not impact the food inflation. Secondly, the people who can afford the vehicles can also pay for the unsubsidised fuel prices. Various experts on economic development and environmental sustainability have been calling for reforms in global subsidy regimes. In Nigeria, fossil fuel subsidy is applied to the consumption of PMS in the form of price regulation.
But why are we talking about fossil fuel subsidies? On August 16, 2021, the President, Major General Muhammadu Buhari (retd.), signed into law, the Petroleum Industry Bill, now Act. While there are different aspects of the Act, the Act makes petroleum subsidy a thing of the past. This, in addition to the Mallam Nasir El-Rufai-led committee report to the Nigerian Governors Forum, recommending a new price of N380 to N408.50 per litre of PMS.
Sadly, it has been resisted. This resistance is linked to the argument that subsidy helps alleviate poverty and supports low-income households, which is not necessarily true. Both the rich and the poor benefit from subsidies by paying lower prices. In reality, they mostly benefit the rich – consuming more at subsidised rates.
But clearly, the common people do not understand the consequences of subsidies on the economy. This has resulted in the politically unwillingness for subsidy removal, exacerbated by the mistrust of the government to effectively use the money saved from subsidy removal to compensate for the higher cost of fuel paid for by the poor.
Between N240 billion to N330 billion is spent monthly by the Federal Government to keep PMS at N162 per litre. A spending that has created major issues towards the fund allocations to the state governments for the various developmental programmes. Few states already raised the issues several times with the Federal Government for the removal of the subsidies, however that has been rejected.
Importantly, consumption subsidies breed inefficiency. They limit incentive for investment in energy efficiency and other forms of cleaner energy. It ultimately increases dirty fossil fuel consumption.
To put in perspective, the daily consumption of PMS is between 60 to 80 million litres per day based on various sources. The current landed price of PMS is around N300/litre, which means the government is subsidising around N8 billion to N11 billion per day. These subsidies don’t add any value to the gross domestic product of the country. On the contrary, the Central Bank of Nigeria is paying valuable foreign exchange to the International Oil Companies, which creates the scarcity of dollars, and companies who want to import equipment are having to buy at 15 per cent to 25 per cent premium from the parallel market. The same is the case for various raw materials, which are imported, this, in fact, adds to the inflationary impact on the Nigerian economy, which is usually known as imported inflation.
Clearly, such spending is unsustainable and sooner than later, this will lead to the devaluation of the naira again and will create another round of repricing of the goods and services.
One has to understand that every PMS vehicle, which is running on the road, costs N20/kilometre or around N2000/per day to the taxpayers and the government if it runs 100km a day. If we look at the border countries, the PMS prices are between N400 to N450/litre, which provides a huge opportunity for the smugglings, since it’s sold at N162.5/litre within Nigeria. These numbers are real and it is a no brainer to analyse how it affects the Nigerian economy. However, the real question is, how can the country come out of this vicious cycle? For this, we have to think out of the box and look at the subsidy and fuel pricing model of the oil importing nations in Asia, in particular India.
At present, there is no subsidy on PMS in India but 10 years ago, the retail fuel prices were subsidised for around 20 per cent to 3 per cent. Over the period, with the schemes like direct benefit transfer and tax incentives for dual fuel vehicles, the subsidy was completely eliminated and on the top around 40 per cent is charged as taxes to the users, which is one of the biggest contributors to government revenue.
From an environmental sustainability point of view, while removing fuel subsidies would result in higher prices in the country, it would reduce consumption and thereby GreenHouse Gas emissions. Subsidy encourages the overconsumption and inefficient use of carbon-intensive energy and undermines the Nigerian Government plan (climate change mitigation effort) to reduce GHG emission by 20 per cent by 2030 in comparison to 1990 records.
According to a 2010 International Energy Agency publication, the gradual phase-out of fossil fuel consumption subsidy would reduce global energy-related carbon emissions by about per cent. At the same time, planned phase-wise removal of subsidy payments would remove a costly drain and burden on the government budget. This burden is particularly high on Nigeria and Nigerians.
This burden shows up in the form of poor state of roads, public schools and hospitals; limited investment in cleaner energy and diversion of fuel to neighbouring countries, where the fuel sells for higher prices.
Given the election around the corner and Nigeria already battling various socio-economic issues, the decision on complete deregulation of the PMS prices will be tough for the government. However, the multiple small steps, such as phase wise removal of subsidies, incentives on dual fuel vehicles for use of gas, buying of only dual fuel vehicles for the government, improved public transportation, etc will be welcomed by all, including the informed citizens, as this will provide more visibility on the Federal Government revenue and state allocations.
In a real sense, the signing of the Petroleum Industry Bill, means the end of subsidy. While we often focus on the cost of removing subsidy, we need to focus on the cost we bear for not removing subsidy.
In the final analysis, subsidy removal is one of those scenarios where ‘when letting go is braver than keeping.’ Fuel subsidies are a burden on the people.
- Amaefula, the President and CEO, Climate Transformation and Energy Remediation Society, writes from Athen, Ohio, USA via [email protected]
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