Derailed Deregulation and the Danger of Dithering

By Waziri Adio

On 19th March 2020, the government took a step towards the deregulation of the downstream sector of the petroleum industry. It slashed the pump price of petrol from N145 to N125 per litre, proclaimed the end of subsidy, and crowed about the eventual take-off of the last mile of the long-desired reform of the still strategic but sputtering oil sector.

But the step was tentative, lacking both conviction and clarity. After initial confusion about whether prices will be set by the market or for the market, the administration settled for a gradualist approach by which government was setting monthly prices for petroleum products ‘based on market fundamentals.’ It should not take much imagination that this approach could only be sustained if the price of crude oil continued to fall. That, of course, was unrealistic.

Predictably, oil price reverted to its volatile character, and that put the government on the wrong foot. The monthly price modulation scheme was quickly abandoned after reductions in modulated prices were displaced by consistent hikes that mirrored movements in crude oil price. Because of that, subsidy (cleverly framed as under-recovery) reappeared, then soared. And deregulation started sliding off the table.

Between 24th and 26th of January 2022, the administration undertook some sequential and consequential reversals. One, it announced a suspension of the plan to end the skyrocketing fuel subsidy from July this year. Two, it disclosed an intention to seek legislative amendment to one of its most important achievements, the Petroleum Industry Act (PIA), to allow an 18-month pause on one of its most significant provisions, the commencement of deregulation. And three, it revealed that the Federal Executive Council had received a N3 trillion bill from the national oil company as the estimate for fuel subsidy for 2022.

These unusual speed and coordination could have been spurred by the desire to avert strikes threatened by labour unions and social unrests that could follow. They could also have been to avoid the charge of violating both the PIA and the 2022 Appropriation Act. Keeping the peace and maintaining fidelity to laws are always desirable. These two may be about the only upsides from this costly halt.

When the final accounting is done, it is doubtful if the supposed gains will outweigh the real losses. There will be immediate, medium-term, and future costs—mostly avoidable costs—which we will return to shortly. More than anything else, the predictable fate of deregulation underscores the heavy cost of failing to act on time and with conviction. That is all you need to undermine a potentially contentious reform.

Now, to some of the costs of this dithering. For one, the government has made deregulation a more difficult proposition. Those against it have scored an easy victory, which will embolden them to put on stiffer opposition the next time. Two, if this administration doesn’t conclude on deregulation it will end up passing a heavy and avoidable subsidy burden to the next administration. Three, it will be difficult to sustain the confidence of investors in future efforts at deregulation, given government’s readiness to succumb to pressure. Four, most of the financial gain that should have accrued to the country from the steady rise of crude oil price will be frittered away on petroleum subsidy. What high oil price giveth, subsidy taketh! As the price of crude oil inches towards $100 per barrel, and this may be crude oil’s last hurray, it seems we are determined not to make it count for much.

And the last, and most important cost, is how the proposed N3 trillion estimate for subsidy will further complicate Nigeria’s dire fiscal state. To start with, the N3 trillion (which will be borne by the Federation and not just the Federal Government) is almost 18% of FG’s 2022 budget of N17.6 trillion. According to the Ministry of Finance, the total revenue earned by the Federal Government from the oil sector from January to November 2021 was N1.468 trillion (made up of N970.33 billion from crude oil, N117.31 billion from FG’s share of NLNG dividends, and N381.27 billion from signature bonus and early renewals). Read this slowly: the 2022 estimate for fuel subsidy is almost three times of what the FG earned from the oil sector in 11 months in 2021.

The media have been replete with stories about the national oil company struggling to make remittances to the Federation Account for some months last year. Even with rising oil price, this is not only likely to be more regular there is also the possibility that oil earnings may not even cover the subsidy. With the constraints of OPEC quota, our struggle to even meet that quota, and the spike in oil theft, don’t rule out the possibility of borrowing to fund fuel subsidy.

Budget deficit is likely to expand too. For context, FG’s aggregate revenue for 11 months in 2021 was N5.51 trillion but the borrowing for that period was N7.05 trillion, amounting to a deficit of 56%. But there is this small detail that N4.20 trillion was spent on debt servicing during that period, which is 76% of FG’s aggregate earnings and 97% of FG’s retained revenues of N4.30 trillion. Spending between 76% and 97% of revenues to service just debts shows that government is borrowing to fund personnel, other overhead items and capital.

Those who don’t get the chills from this might have been lulled by the beguiling talk that Nigeria’s debt-to-GDP ratio is sustainable. At below 35%, our debt-to-GDP ratio compares well with that of Ghana (59%), USA (107%), and Japan (237%). But Nigeria’s revenue-to-GDP is about half of the African average of 18%, meaning we are not leveraging the size of our economy for revenue. And it is worth bearing in mind that debt servicing and debt repayment are made from revenue, not by or from GDP. With expanding subsidy, debts will increase, so will the amount needed to service them. If the FG is in a tight fiscal space, the states are much worse off, because they do not have as much latitude as the FG. States may not be able to do more than pay just salaries, and the salaries will likely be owed, and retrenchments will not be unlikely. And because of the oversized impact of government, the effects will likely filter through to the rest of the economy. Is this a price worth paying for cheaper fuel that mostly benefits the elite?

The common refrain in government is that this is not a good time to remove fuel subsidy or pursue full deregulation. There is never a good time. But this returns us to the danger of not acting on time. Many opportunities were simply allowed to slide. The first great moment was when President Muhammadu Buhari assumed office in 2015. This was three years after the fuel protests of 2012 and all the executive and parliamentary investigations and other reports had shown that the fuel subsidy regime was inefficient and susceptible to capture and fraud. The issue had been sufficiently ripened for reform. It was one of the things many people, including in his party, expected him to move on right from Eagle Square.

Also, President Buhari had been elected with so much goodwill that he could have pushed through even the least expected and most painful reform. He also had an extended honeymoon period. On 11th May 2016, the administration increased the price of petrol from N86 to N145 per litre. No palliative was requested and none was extended for this 68% increase. There was not even a whimper of protest, a first in the history of fuel price hikes in the country. That was the second opportunity to go the whole hog. But it was another chance untaken.

Moments of low oil prices were another set of golden opportunities to pursue full deregulation. The initial burden on the consumers, especially the poor, would have been more bearable. Consumers could have enjoyed a long period of low fuel prices and gotten used to the reality that the price of fuel, like the price of other products, can fall and rise. There were moments the price of crude oil ranged between $28 and $58 per barrel between 2016 and 2019. A great window to move the needle on deregulation; another opportunity fluffed.

The last opportunity was in March 2020 when deregulation was approved and when timing wouldn’t have been an issue. The price of crude oil took a tumble and was even below $20 per barrel at some point. However, we set out tentatively. The resort to price modulation was a set-up, given the known volatility of oil prices. What government needed to do was remove itself from the business of setting prices and provide a level-playing field for others to compete with NNPC to import fuel. In fact, NNPC should have been freed of the responsibility for product availability so that it could face more important tasks befitting of a national oil company. Government should have confined itself to quality control, anti-trust, and consumer protection.

In addition, the move to deregulation should have been preceded with proper consultations with key stakeholders, and the development and marketing of a credible framework for alleviating the immediate impact of subsidy removal on the poor. Yes, the poor will be negatively impacted by increase in the price of petrol because they spend a disproportionate percentage of their incomes on food and transportation. As part of the preparation for deregulation, government should have designed and frontloaded an alleviation cum exchange programme to directly benefit and uplift the poor especially in areas such as public transportation, public health, and public education.

The deregulation reform, even when stipulated in the PIA, seems to have been pursued half-heartedly all along. With the foretold halt, old arguments against the reform have resurfaced, and its opponents have become more emboldened. Subsidy is not just staying, it is also growing, projected to cost about thrice the amount spent last year. But Nigeria in its present state cannot afford the N3 trillion bill on just one item whose benefits will be mostly cornered by the elite, by smugglers and their allies, and by our neighbouring countries. Even in the best of times, there should be more optimal ways to spend such a staggering sum. And this is just one of the costs of an avoidable delay.