Nigeria Lifting Fuel Subsidies: Needed but Implementation to be Challenging

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Nigeria has dominated broadcasts around Christmastime as Boko Haram  attacks killed dozens in many parts of Northern and central Nigeria. The  government has upped security spending, declared a state of emergency  in a swathe of the country and insisted that it will get the situation  under control.  This is likely to be difficult as the government  measures have prompted an outcry from the Islamist group and further  escalation could undermine economic growth.

Nigeria is now making headlines for another reason, as the government is pushing ahead with a bold pledge to cut fuel subsidies,  which absorbed about 25% of the government budget in 2010 or US$8  billion.  The government petroleum products regulatory agency has  announced that it will no longer provide the subsidy to producers, who  will still have to sell products at an approved price, set biweekly, but  one that will be closer to global market price. As yet, there are still  questions about how the prices will be set and it is possible that  producers will be expected to make up some of the difference between  global and local prices, eating into profits if they cannot pass on the  price to consumers. Moreover there is still the potential for political  blockages -Nigeria’s parliament rejected the proposal last month –  though the senate is expected to approve. Even if the move is approved,  implementation could be difficult, some groups have threatened to strike  and the increase in energy prices could prompt a revival of  inflationary pressures, which have only just eased due to aggressive  monetary tightening, which paused the freefall of the naira.



The  move has been considered for a long time, particularly since Nigeria  still lacks sufficient refining and distribution capacity to meet oil  product demand at home, meaning that it exports raw crude and imports  refined product, bearing extensive transportation costs and letting  others gain the additional returns and value-added from refining. RGE  has long seen this as a vulnerability to Nigeria’s oil sector and  economy. Subsidizing a good that must be imported, hits the government  budget directly. Other highly subsidizing oil exporters like Saudi  Arabia, instead forego potential export revenue as more of oil  production is absorbed at home. Neither is necessarily sustainable over a  longer horizon, but the tradeoff of importing costly products in the  face of low per capita oil revenues is particularly problematic.

One  question is whether Nigeria will suffer the sort of backlash  experienced in many Arab countries that tried to roll-back subsidies, or  whether like Iran, it will be able to ride the storm (at least  temporarily) of higher inflation and political pressure.  The jury is  still far out on the long-term in Iran despite some oddly positive  research from the IMF on the phase-out, but that is a topic for another  post.

Fuel subsidies always pose problems, distorting both demand  and supply as companies are reluctant to produce a good sold at below  local or global market prices as they will lose money and lower prices  encourage greater demand as the price signals fail to influence demand.  Given the political rents to be garnered from Nigeria’s oil sector, the  extensive subsidies and other reform of the downstream oil sector have  been very difficult.

This bold move though, does suggest that  Goodluck Jonathan’s somewhat technocratic policy makers are committed to  bringing spending on to a more sustainable path  and using some of  Nigeria’s scarce resources on the needed infrastructure. This implies  that perhaps there might be some surplus left to go into the new and  vaunted sovereign wealth fund.

Given the precarious situation  politically at home, and uncertainties abroad, there is of course a risk  that Nigeria’s political class might block passage of the legislation  or prompt a return of subsidies. Either way, 2012 is set to be another  challenging year for Goodluck Jonathan’s government in light of a series  of political and economic risks. Other African countries also looking  to scale back the subsidy regimes and free up fiscal space for  investment, may follow a similar path. Ghana unwound some of its  subsidies in recent weeks. A busy political calendar could prompt some  reversals.

Source: EconoMonitor.com


1 COMMENT

  1. Fellow Nigerians do you know that, history is the memory of mankind and philosophy of history is the analytical ability of man to distinguish correct from incorrect. Philosophy of history helps to know the reasons for the rise and fall of nations. There is nothing I will like to tell you now about the present situation of our fatherland that you don’t have first hand information on. Is it about the leadership recycling (tired brains) and failure, pervasive corruption, violence and insecurity of lives and property, treasury looting, elusive kidnappings, death-trap highways, hospitals without drugs, inept civil service and triumph of mediocrity, lip service rule of law being violated with much impunity, fading national sports, high level unemployment and poverty, sophisticated armed robbery, notorious 419 letters, prisons congestion, epileptic infrastructure, religion fideism and terrorism, devilish political crisis, recent killings in the northern parts of this country in the of religion, all this are making development impossible. It is time for positive change, unity, and progress in Nigeria. Progress, according to George Bernard Shaw “…is impossible without change, and those who cannot change their minds cannot change anything”
    Let us stand-up
     Against all manners of killing in the name of religion and ethnicity

     Let us not subscribe to import driven deregulation that is where I stand, do you know that every day we spend 2 billion naira on importation of rice, by the end of 12 midnight today will be arranging another 2 billion to create Jobs in Europe and Asia.

     Let us stand-up against subsidization of Political offices in the Country ( VP travelling allowances 1.6billon, feed 1billon and other political office holders)

    For this reason I strong advocate for subsidies if they are for production and not consumption and if they benefit the poor and not middle men and rent seekers. The US government subsidizes cotton and wheat farmers and Nigeria spends its reserves importing wheat from America and keeping American farmers employed. The OECD countries pay subsidies to cattle farmers. Today Promasidor imports powdered milk from New Zealand and packages in Nigeria using our foreign exchange while we have cattle. WAMCO imports milk from the UK and adds water and tins it and calls it “production” of Peak milk. We use our forex to import petroleum products and keep refineries and jobs open in Europe. Meanwhile precisely because of market distortions there can be no private sector investment in refineries since no one can make profit selling at the regulated price unless we are going to provide private refineries with crude for next to nothing. Certainly no one can purchase crude at market price, refine it and sell at N65 without huge losses so this explains why there are no private refineries”

    what I mention above is at the heart of the problem with government economic policy which needs to be changed. The economy since SAP is one that supports imported consumption and not local production, perpetuating dependency, non inclusive growth and insecurity. Why is it that the economy is growing at 7pct annually but the people are getting poorer. Because growth gains are not evenly distributed. Personal income is skewed towards people in the oil industry, telecoms, high finance, stock market, real estate and yes civil servants and politicians who feed on corruption. We produce crude oil but import petroleum products (today the UKs highest exports to Nigeria are petroleum products). We have a large cotton belt but import textiles from china (thus keeping their subsidized factories open and jobs in china). We are the world’s number 1 producer of cassava but import cassava starch from Europe. We have a huge tomato belt in kadawa, jigawa and chad basin but are the world’s largest importer of tomato paste-from China and Italy. We can produce rice but we import rice from Thailand and India-most of it from grain reserves that have been in stock for over 5 yrs.

    If above is clear then it is evident that this trajectory can only lead to disaster. We will continue to spend our resources promoting growth and employment in our trading partners. Terms of trade shift against us, we can only have foreign reserves because by the good grace of God we have Oil which will be exhausted soon and with new discoveries may become so cheap it loses value. We don’t create any value added jobs as the only real production is peasant farming. Oil, telecoms, finance and real estate are not employment intensive. So everyone becomes a civil servant as the economy cannot create jobs. Result? In 2012 budget out of a total N1.8tr recurrent expenditure for the executive arm N1.6tr is on personnel costs not overheads. To reduce this you have to cut salaries or pensions or retrench civil servants. This is the classic trajectory of underdevelopment, de-development and de-industrialisation.

    For the above reasons I am a strong proponent of structural reform and this begins from the fiscal framework. The limited resources of government should be allocated to supporting production-especially if we are running a budget deficit. We cannot keep borrowing to support conspicuous consumption. To support a job creating economy we need to fund power, transportation infrastructure, market infrastructure and access, technical and vocational education etc. We need to build rice processing plants, produce starch and cassava flour and ethanol, process our tomato and milk locally, regenerate our textiles firms (which used to employ 600,000 workers but now employ 30,000!), refine our own crude etc. We cannot even begin to do this if 30pct of govt expenditure is on fuel subsidy, if out of the balance 70pct is recurrent spending, 10pct is debt service, 10pct goes to the Niger delta and only 10pct is capital expenditure. So it is about a choice-what do we spend money on and how do we allocate resources?
    you can call me names but we need to refocus our economy for a better future

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