Nasiru “Abu Abdurrahman” Yauri
Should the Federal Government deregulate the downstream sector of the petroleum industry and allow prices of petroleum products to be determined by the market?
Should Nigerians buy petroleum products at prices equivalent to international prices in spite of the fact that Nigeria is a major producer of crude oil?
These are some of the pertinent questions around the subsidy debate, and the removal of subsidy payments to oil marketers by the Federal Government.
Petroleum subsidy is a payment that Nigerian government makes to petroleum marketers, who are largely importers of the product, to sustain a controlled price of the products in the local market. It is meant to make petroleum products affordable to Nigerians. It becomes necessary because petroleum marketers cannot sell at the prices usually determined by government during the regulation era. This is because the cost per liter of petrol, plus the profit margin, for example, is higher than the price per liter as determined and fixed by government. If for example, the cost per liter plus the profit margin estimated by marketers is N100 and the price fixed by government is N80 per liter, then the government pays a subsidy of N20 per liter to enable Nigerians buy at the fixed (subsidised) price.
The problem with the subsidy regime lies largely in the calculation of the subsidy claims by petroleum marketers (particularly importers). Evidence shows that an unholy collaboration between the petroleum marketers and the relevant agencies responsible for the calculation and approval of the subsidy claims to the marketers has resulted to government losing hundreds of billions of Naira. Petroleum marketers benefited from payments to them by government, of huge amounts of money in false and over bloated subsidy claims.
The dwindling government revenue since 2015 and the anti-corruption stance of the present government, thus, highlighted the opposition of the government to payment of subsidy claims.
However, the subsidy issue is a double-edged sword; continuing with the payment of subsidy claims and the removal of it will register painful outcomes on Nigerians and the economy of Nigeria. Hence, subsidy remains controversial within the ambit of welfare economics. Although its removal is imperative, the hardships caused on Nigerians due to the removal is quite considerable.
Subsidy removal enables Nigerian government save at least $5billion dollars a year, approximately N2 trillion Naira (according to the Lagos-based Financial Derivatives Company) which could be used to develop infrastructure and even repair local refineries. On the other hand, high cost of petroleum products will stifle GDP and economic growth since most production units in Nigeria rely heavily on petroleum products to power machines. In addition, high cost of petroleum products will reflect on the cost of transportation for people and outputs making prices jump and thereby negatively affecting income and standard of living.
Such is the nature of the double-edged sword.
Be that as it may, economists may propose a balancing of the sword in a manner that will cause less injury.
I am want to agree that Nigerians deserve to have access to affordable petroleum products, for the simple reason that crude is available and abundant locally and Nigerians deserve to enjoy a certain comparative advantage both in production and consumption of the products.
It is not possible to enjoy any benefits of the local availability of crude oil as long as we continue to fail to refine crude oil locally. Like other essential products, petroleum will be expensive as long as Nigeria has to export crude and then import refined products from abroad. That is also what happens when you export agricultural raw materials and import processed foods. Obeying transportation and other import costs, these items will be expensive in Nigeria.
Thus, to enable Nigerians benefit from the availability of crude oil in their country, while at the same time affording the Nigerian government the opportunity to save trillions of Naira by refusing to pay subsidy of trillions of naira to a few, to the detriment of the rest of us, Nigeria must refine crude oil. Local refineries must be rehabilitated and put to work at optimum capacity.
By and large, if a principal objective of macroeconomics is welfare, then subsidy removal should become germane only when the government has rehabilitated the refineries and the products are available to Nigerians from local production. This is the ‘balancing’ that is required as far as this decision is concerned.
It is apt for any right thinking Nigerian to ask whether the first responsibility of the Nigerian government is to remove the subsidy, or it should instead have been to rehabilitate the refineries.
I must state emphatically that Nigerians would not have felt the negative effect of subsidy removal if local refineries were offering petroleum products for local consumption. Many commentators have pondered why Nigerian refineries have remained moribund for many decades.
The lack of political will on the part of the Nigerian leadership will be the most readily conceivable factor for their inability to rehabilitate local refineries. The leadership question, thus, is still begging for answers with respect to the crisis in the production and pricing of petroleum products is Nigeria. This conclusion is informed, and confirmed by two reasons:
- Successive governments have made it seem like rehabilitating Nigerian refineries is an impossible task. In spite of many public declarations by successive governments in Nigeria that local refineries will reopen for production, the refining of crude oil in Nigeria is yet to commence in local refineries since Nigeria’s return to democracy in 1999.
- It is even possible to sustain subsidy payments, but the enormous racketeering in the determination of the quantum of monies to be paid as subsidies has constituted perhaps the major reason why government can no longer bear the burden of subsidising petroleum products. Subsidy payments were as high as a daily average of N774million in March 2018 and a whopping N2.4billion per day in May of the same year.
Many oil companies and marketers with the collaboration of functionaries of relevant government departments have raked/off an unimaginable amount of money in the (mis)calculation of subsidy payments, and petroleum marketers have become stupendously rich overnight.
These two challenges, evidencing the crisis of leadership, have made it impossible for both the local production of petroleum products and the sustenance of subsidy payments by the Nigerian government.
It is safe, therefore, to assert that the debate on subsidy will continue to rage-on even as the immediate consequences of the subsidy removal continue to register on the Nigerian people and economy. Rising prices, the shrinking of household income and welfare as a result, will remain the nagging consequences that will continue to generate dissatisfaction amongst Nigerians and sustain agitations for the reinstatement of the petroleum subsidy. The only possible cushion to the sharp ends of the sword, will be the repair of refineries and the resumption of local refining of petroleum products.