Gainers and Losers of FG’s Volte-Face on Subsidy Removal

While it is true that the federal government’s policy on fuel subsidy removal severally advertised to begin in July this year has been put in abeyance, it is also true that reactions to this policy reversal have left on its trails feelings of victory for gainers and confusion for losers. Festus Akanbi here captures the mood of policy watchers

It wasn’t a coincidence that reactions to the federal government’s policy reversal on fuel subsidy have come in torrents in the past few days.

Economic affairs commentators said the timing of the government’s capitulation to political pressure on subsidy payment, on petrol, came with a shock that will linger for a very long time.

Speaking at a stakeholders’ meeting in Abuja to announce the resolve of the federal government to jettison its earlier plan to remove subsidy on petroleum products from July, the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, said there is still heightened inflation and that the removal of subsidy would further worsen the situation and impose more difficulties on the citizenry.

Ahmed explained, “Provision was made in the 2022 budget for subsidy payment from January till June. That suggested that from July, there would be no subsidy.

“The provision was made a sequel to the passage of the Petroleum Industry Act (PIA), which indicated that all petroleum products would be deregulated.

“Sequel to the passage of the PIA, we went back to amend the fiscal framework to incorporate the subsidy removal. However, after the budget was passed, we had consultations with some stakeholders and it became clear that the timing was problematic.

“We discovered that practically, there is still heightened inflation and that the removal of subsidy would further worsen the situation and impose more difficulties on the citizenry.

“Mr President does not want to do that. What we are now doing is to continue with the ongoing discussions and consultations in terms of putting in place some measures.”

The Winners

President Muhammadu Buhari

Analysts believe that no matter how one looks at the government’s decision to swallow its pride on the issue of subsidy removal, the president has won the heart of the masses and the labour force. It was like a well-orchestrated drama. At the height of the organised labour’s intransigence over the subsidy issue, there was panic in the land as the attendant spike in the cost of living stared the people in the face. The recent press interview of the President of the Senate, Ahmad Lawani, dissociating President Buhari from any plan to remove fuel subsidy was therefore described as a public relations masterstroke. The eventual declaration by the Minister of Finance that President Buhari does not want Nigerians to suffer, hence the suspension of the implementation of subsidy removal, came as the icing of the cake. This is why a school of thought argued that the policy reversal was largely inspired by political consideration to the benefit of the President and his political party, the All Progressives Congress (APC).

Analysts said with the election campaigns starting in a few months, the opposition would have used the implementation of the subsidy removal and the attendant pains to the people as one of the policies to use to roast the president and his party during campaigns. This was the point captured by the Chief Executive, Centre of the Promotion of Private Enterprise, (CPPE), Dr Muda Yusuf in his reaction to the new development.

He said, “The capitulation on the subsidy removal did not come as a surprise. There were too many odds against the move. There were obvious concerns about the potential political cost to the government and the ruling party. There were worries about the social cost given the excruciating poverty in the country. There was also the waning goodwill required by the government to enlist the support of the people.”

The Labour Unions

Given the sustained media attacks against the federal government by the Nigeria Labour Congress and the Trade Union Congress on the planned subsidy removal, there is no doubt that the decision of the government to backpedal on the policy is a big win for the leadership of the labour union, especially the NLC.

Analysts said the NLC President, Aliyu Wabba, who has been consistently confronting the government on policies deemed obnoxious, did a good job in rallying his members in battling the government to a standstill. Labour industry analysts likened Wabba’s popularity to that of the former governor of Edo State, Adams Oshiomhole in his heys days as the NLC President.

The Nigeria workers who had panicked over the anticipated high cost of living can now have a respite, at least till the end of the current administration since the planned subsidy removal has been put in abeyance.

Fuel Smugglers

One of the arguments in support of subsidy removal was the high incidents of smuggling of petroleum products across the Nigerian borders. Daily reports are replete with stories of several fuel tankers crossing the various borders with subsidised fuel at a greater cost to the Nigerian finances. The planned subsidy removal had raised the prospect of an end to the economic loss. However, the policy reversal has given the perpetrators of this crime more time to bleed the Nigerian economy.

According to Yusuff, “The petroleum products smugglers, beneficiaries of the fiscal leakages in the fuel subsidy ecosystem and their collaborators will continue to smile to the banks for the next one and half years.”

The Losers

Governments’ Finances

The cost of subsidising fuel in the next 18 months will weigh in on the nation’s resources. This was how CPPE’s chief put it. “The economic cost of the capitulation is equally weighty. The truth is that you cannot eat your cake and have it. We should expect the cost of funding the subsidy to be much higher this year because of the surge in crude oil price. If the oil price remains high for most of the year, the subsidy cost could go as high as N2.5 trillion or even more by the end of the year. This would surely affect funding for critical infrastructures such as roads, railways, healthcare education, and even security.

“Some states would struggle to pay salaries, especially states that are heavily dependent on federal allocation. Some may have to lay off some of their workforce. Many will struggle to meet their financial obligations as subnational.”

According to Chief Economist and Head of Research, Middle East & Africa, Standard Chartered Bank, “With the adoption of a considerably more expansionary fiscal stance in 2022, the absence of fuel-subsidy related savings will have important implications for the fiscal outlook. The risk now is that the budget deficit may balloon even further if a specific provision for the difficult-to-forecast fuel subsidy is included as an extra provision in the budget. More pro-growth expenditure may have to be forgone as a result. In addition, the design of the subsidy means that if oil prices rise further on geopolitical risk, then Nigeria’s spending on the subsidy will also rise in de facto terms, with little control over the scale of the subsidy itself. The policy may become more deeply regressive, with little evident economic benefit. “

She warned that macroeconomic risks would become elevated as fiscal deficit and borrowing significantly surpasses projections in the 2022 budget.

“The CBN 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 the exchange rate, leading to further depreciation of the currency.

“Meanwhile, prospective investors in the downstream oil sector would withhold their investments until the policy environment becomes conducive. Additionally, a major confidence crisis has been created around the petroleum industry Act as a result of this capitulation. These are the price we would have to pay as a country for the policy reversal.”

Fuel Marketers

The new dispensation, no doubt, has closed the door against some oil markets, which have to rely on the Nigerian National Petroleum Corporation as a sole importer. This was the position of the National Operations Controller, Independent Petroleum Marketers Association of Nigeria, (IPMAN) in an interview with our correspondent.

Ministers of Finance, Petroleum Resources

Critics of the government’s latest posture on fuel subsidy wondered where the Minister of Finance and her counterpart in the Petroleum Ministry would put their faces on the policy somersault.

These two government officials led the campaign against subsidy removal. The finance minister even announced some palliatives that would cushion the effect of the subsidy removal initially planned for the first half of the year.