Cushioning Impacts of Planned Removal of Fuel Subsidy

 

With Nigerians coming to terms with the inevitability of the fuel subsidy removal anytime from now, discussions are being zeroed in on the nature and scope of palliatives designed to mitigate the anticipated spike in the cost of living, reports Festus Akanbi

All things being equal, the federal government will remove the controversial policy of fuel subsidy this month as the outgoing administration of President Muhammadu Buhari winds down its activities.

The planned action aligns with the decision of the federal government to deregulate the downstream sector of the oil industry for optimum performance.

The downstream sector operations cover crude oil conversion into refined and petrochemical products and finer chemicals, gas treatment as well as transportation and marketing of the petroleum products.

Nigeria currently runs two forms of subsidy. The first is the payment of the difference between the actual pump price of petrol, which is arrived at after calculating the landing cost and the extant margins. The other is the cost of transportation (about N30) paid on every litre to ensure that the price of petrol is similar across the country.

 The subsidy regime, largely blamed for some of the expenditure challenges by successive administrations, according to the Minister of Finance, Zainab Ahmed, is to come to an end in April, one month before the handover to the new administration. 

Upward Price Adjustment       

The calculation of stakeholders in the nation’s downstream sector of the oil industry is that the subsidy removal will balloon the cost of petrol.

The initial cost, according to the National President of the Independent Petroleum Marketers Association of Nigeria (IPMAN), Mr. Chinedu Okoronkwo, could be up to N750 for every litre of petrol after the full implementation of the subsidy removal, adding, however, that, the pump price is likely to drop to around N500 if the government encourages the Central Bank of Nigeria (CBN) to provide forex to marketers at the official rate.

 However, as narratives shift to the removal of subsidy this month, some stakeholders have called on the various organisations in the petroleum industry to begin a massive sensitisation campaign on the gains of the planned action. They argued that the degree of understanding of the issues that make the removal a non-negotiable decision will determine the nature and severity of the response of the people to the policy.

 Protecting the Vulnerable

Responding to THISDAY inquiries, Chief Economist and Head of Research, Africa and Middle East, Standard Chartered Bank, Razia Khan said that given the vulnerability of the poor especially in a difficult time like this, and the pervading fear of the unavoidably high cost of goods, the time has come for the government to announce its plans to protect them from the harsh realities of the subsidy removal.

According to her, “Ideally, some sort of social safety net, cushioning the most vulnerable Nigerians from the impact of the subsidy removal would have been good. The IMF favours cash transfers. In practice though, there may not be enough time to have this fully in place, with pressure for the subsidy to be removed imminently.” 

Corroborating Khan’s view, the IPMAN President, who spoke at a stakeholders’ workshop last week urged the government to channel expected savings from subsidy removal to the provision of palliatives for the masses. He advised the government to be alert and sensitive to resentment from Nigerians.

Other industry stakeholders who attended the workshop called on the government to implement appropriate palliatives in the form of public transportation and freight of agricultural produce, ensure transparent and effective communication, and improve access to foreign exchange. They also urged the government to address issues around trade finance, guarantee strategic stock, and provide access to crude oil for refineries ahead of the plan to embark on the total removal of the petrol subsidy. 

In his own submission, partner and chief economist of KPMG Nigeria, Oyeyemi Kale, said a holistic and well-phased approach is needed for petrol subsidy removal.

The former statistician-general of the federation spoke on a recent programme on ARISE NEWS Channel.

Asked whether he supports the deregulation of petrol prices, Kale said petrol subsidy removal has significant economic and social implications although he maintained that the subsidy has significant economic, social, and environmental costs.

“I prefer the holistic approach. Look at the entire system and then, determine what is overall best for the country because any policy, including this one, will have positives and negatives. Somebody will benefit and other people will lose out from the policy,” he explained.

 Kale added that it is a cost-benefit analysis that ultimately determines what is best for the economy.

 He said conversations must take place to determine how the government will provide palliatives for affected citizens to minimise the negative effects of the policy.

 Taming Organised Labour 

Analysts believe that what will stave off a serious confrontation from organised labour is the promptness of the government’s decision to identify, and unveil policies that will cushion the effects of the price hike on petrol when the subsidy is totally removed.

“By now, the government should begin to tell Nigerians the alternative to subsidy on fuel. Nigerians, especially the downtrodden would like to know in specific terms, programmes, and policies that will alleviate the pains of the higher cost of fuel.

“By keeping the social safety net to itself, the current administration is only arming the labour unions who have promised to call out Nigerian workers in protest,” said a bank executive who prefers to be anonymous.

Organised labour has always threatened to resist any attempt to remove subsidy on petrol without full restoration of the refineries in the country. Although the current leadership of the Nigerian Labour Congress (NLC) is yet to make a categorical statement on what to do should government announce the stoppage of fuel subsidy in the country, analysts said their body language showed that he would not mind calling for a nationwide strike.

The position of the labour is that the nation’s four refineries should be functional before subsidy removal. Last year, the Trade Union Congress (TUC) tasked the federal government to take into consideration the attendant economic impact on the masses.

“There must be assurances that refineries are fully overhauled and establishment of modular refineries encouraged,” it added.

The trade congress noted that the effective policing of the nation’s borders to stem the rate of petroleum products smuggling must also be implemented.

 Boosts to Government Revenues

On its part, the Centre for the Promotion of Private Enterprise believes that one of the gains of the planned subsidy removal is the improvement of Nigeria’s revenues by at least N6 trillion annually.

A statement signed by its Director, Dr. Muda Yusuf, titled: ‘Tweaking the 2023 Finance Bill and Options for Unlocking revenues in 2023,” noted that the Nigerian economy is heavily burdened and encumbered by two major subsidy regimes: the fuel subsidy regime and the foreign exchange subsidy regime. The CPPE boss added that huge sums of revenue put at a minimum of N6 trillion annually can be realised from these subsidy programmes if appropriate reforms are implemented.

 “There is a plan to discontinue petroleum subsidy, which is a positive development. This action would unlock a minimum of N6 trillion in revenue into the federation account annually. Additionally, there would be an end to the several years of plundering of the nation’s resources through the subsidy regime,” the CPPE statement said.

In the nation’s 2022 budget, capital expenditure stood at N5.4 trillion while subsidy payment was initially N4 trillion but rose to about N7 trillion before the end of the year. In the 2023 budget, the subsidy from January to June when the government said it would stop the subsidy stands at N3.6 trillion.

With debt of about N77 trillion, Minister of Finance, Budget and National Planning, Zainab Ahmed, said this month that the federal government was borrowing money to fund petrol subsidies. “Fuel subsidy cost was a very high one; we have been funding it from borrowing,” she said.

This unfavourable situation informed the decision of the two multilateral institutions, the World Bank and the International Monetary Fund (IMF) to press for subsidy removal as one of the fiscal reforms needed to lift Nigeria’s development outcomes, which are severely constrained by the inefficient use of resources.

Speaking in this regard, the World Bank President, Mr. David Malpass once said:  “Nigeria’s government urgently needs to strengthen fiscal management, create a unified, stable market-based exchange rate, phase out its costly, regressive fuel subsidy and rationalise preferential trade restrictions and tax exemptions.”

 Similarly, the IMF, in a statement at the end of its Article IV consultation with Nigeria last year, said: “Directors also urged the removal of untargeted fuel subsidies, with compensatory measures for the poor and transparent use of saved resources. They stressed the importance of further strengthening social safety nets.”

The outgoing administration is bent on removing the subsidy, which stakeholders have described as a draining pipe because it thrives on corruption. The way the current administration sensitises the public on the gains and palliatives to cushion the effect of the attendant increases in the price of petrol will determine the success of the policy shift.