Although many economists doubt the incoming administration of Asiwaju Bola Ahmed Tinubu will have the gumption to outright deregulate the oil and gas downstream sector, there seems to be a synergy between the outgoing and incoming administrations of the APC-led government to finally rid the federal government of what many consider a black sinkhole, fuel subsidy.
Already, as a demonstration of commitment, the federal government has obtained a loan of more than N386 billion ($800 million) from the World Bank.
The loan will be used to provide post-petroleum subsidy palliatives to over 50 million Nigerians, starting in June. The aim is to mitigate the potential increase in transportation and goods costs that could arise from the removal of fuel subsidy.
It would seem like the government’s palliative program is ineffective on arrival. The capacity to properly identify the neediest in the Nigerian society will largely depend on an accurate census exercise. Judging from antecedents an politicians’ inclination to distort census figures, it may prove dubious, the federal government’s capacity to accurately identify palliative-qualified Nigerians.
The federal government has also indicated its readiness to increase the minimum wage by a margin of between 5 and 10 per cent. That may also prove to be ineffective. The country’s civil service at the three tiers of government comprises less than two million. The World Bank reckons that the population of Nigeria is 219 million. The implication is that less than 4 per cent of Nigerians are employed in the civil service. With more than 40 per cent of Nigerians living on less than $2.00 a day, it is almost certain that the federal government’s palliatives provision will be insufficient. It also means that more Nigerians will be plunged into poverty this year.
Therefore, there can be no shred of a doubt that the government will find it difficult to remove the subsidy feeding bottle that Nigerians have been used to since the 1970s and counting. Indeed, the labour unions are already gearing up for a showdown, except the government can demonstrate an ability to give adequate palliatives to the public.
The chief executive of the Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, said the incoming government will need to have some engagements because it would not be good to start on a crisis note. He said while the policy of downstream deregulation is good, the consequences could be dire.
He cited the current situation in Kenya noting that the Kenyan president has the best of intentions, but his move has caused a backlash. He said if your political and social environment is not stable how do you govern?
He stated that there must be palliatives, which should be segmented into immediate, short term and medium-term deliverables.
“Immediate and short-term options include wage review in public service, electronic cash transfers to the vulnerable groups in our society, designation of few retail outlets (maybe 10 per cent of the outlets) as subsidy stations while all others will sell at deregulated prices for a transition period of one year; introduction of subsidised public transportation schemes across the country and reduction in import duties on intermediate products for food-related production to moderate food inflation.
“In the medium to long-term, there should be accelerated efforts to upscale domestic refining capacity, driven by private investments; accelerated investments in rail transportation by the government to ease logistics of fuel distribution across the country as well as domestic freight costs,” Dr. Yusuf proposed.
Consequently, Chinedu Nsofor, a member of the Alaba International Market Electrical Association, called on the federal government to look deeply into the issue of reducing the pain of the masses. Nsofor said inflation is already biting very hard, which is affecting the prices of food and every other thing. “If the government removes fuel subsidies, suffering will go haywire,” he said.
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. He however caveated 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.
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 for every litre to ensure that the price of petrol is similar across the country.
While all parties are in agreement that the expensive subsidy regime is a huge drain on the economy, all are also concerned about the hardship the deregulation will inflict on the masses. That’s why the labour unions insist that before the full deregulation of the downstream sector, the refineries must be up and running, and for obvious reasons.
The current landing costs of petroleum products are as high as they are because the country’s fuel needs are almost 100 per cent imported. So, there are cost implications of taking Nigeria’s crude oil out to be refined and imported back into the country, which have shipping costs attached, duties, storage, and distribution. Much of that cost would be eliminated if Nigeria’s crude were refined in Nigeria for consumption.
On the other hand, if subsidies were removed today, all of that cost would fall on the already multidimensional poor masses, with inflation already at 21.82 per cent, clearly, a recipe for social unrest.
Rachael Johnson, a civil servant in Lagos, said a sudden removal of fuel subsidies would be akin to taking the blanket off the body of a newborn child on a chilly night. Johnson said the federal government will either have to drop the idea of fuel subsidy removal or find a way to reduce the pains that may be the consequence of fuel subsidy removal. “Whatever the palliatives the government may be planning, it must be enough to lessen the pains on Nigerians across the country, including the price of food,” she said.
The chief executive of Anthill Concepts Limited, and member of the Board of Economists, NATIONAL ECONOMY, Dr. Emeka Okengwu, said he has nothing against removing the fuel subsidy. He said if it were left to him the subsidies should be removed much earlier than June. He however posed the question: “After removing the subsidies, what next?” He said if you remove the subsidies and the prices of goods and services skyrocket, as would be expected, how does that help the economy, considering that fuel is a major component of what drives the Nigerian economy?
He stressed that the government will have to look at alternatives because if you remove subsidies, there will be consequences, if you don’t remove them, what are the consequences? “Whichever way you look at it, it’s going to be difficult,” he said.
An economist, and social affairs analyst, Dr. Paul Omokaro, said the situation has negatives and positives. He said the percentage increase would be astronomical. He said if he were the president, in order to buy the goodwill of the people he would hold on a bit to gauge the economic situation and the environment before taking such a radical decision.
On the other hand, being into public financial management, Omokaro admitted that the country is bleeding, and doubts that the country can sustain the level of debt hanging on its neck. He noted that for the past two or three years the NNPC has not contributed to what is shared by the Federal Account Allocation Committee (FAAC). He stressed that subsidy removal is a two-way thing – “If you remove subsidies, you incur the wrath of the people. On the other hand, if you keep it, it’s not sustainable for an economy like ours.”
He noted that if you have a smart finance minister he can renegotiate the country’s debt and have a long moratorium.
Partner and chief economist at KPMG Nigeria, and former statistician-general, Oyeyemi Kale said, “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.
However, listing the benefits of subsidy removal, Dr. Yusuf said, “Fuel subsidy removal has enormous potential benefits. First, there is the revenue effect. The removal would unlock about N7 trillion into the federation account. This would reduce the fiscal deficit, and ultimately ease the burden of mounting debt.
“Second, is the investment effect. Currently, it is extremely difficult to attract private investment into our petroleum downstream sector because of the unsustainable subsidy regime and the stifling regulatory environment. The subsidy removal will eliminate the distortions and stimulate investment. We would see more private investments in petroleum refineries, petrochemicals and fertiliser plants.Post subsidy regime would also unlock investments in pipelines, storage facilities, transportation and retail outlets. We would see the export of refined petroleum products petrochemicals and fertiliser as private capital comes into the space. Quality jobs will be created.
“There is a foreign exchange effect. This would result from the import substitution as petroleum products importation progressively decline. This would conserve foreign exchange and boost our external reserves.
“Increase in investment would translate into more jobs in the petroleum downstream sector.
“Smuggling of petroleum products across the borders will come to an end with a market pricing of refined products,” he said.
many consider a black sinkhole, fuel subsidy.
Already, as a demonstration of commitment, the federal government has obtained a loan of more than N386 billion ($800 million) from the World Bank.
The loan will be used to provide post-petroleum subsidy palliatives to over 50 million Nigerians, starting in June. The aim is to mitigate the potential increase in transportation and goods costs that could arise from the removal of fuel subsidy.
It would seem like the government’s palliative program is ineffective on arrival. The capacity to properly identify the neediest in the Nigerian society will largely depend on an accurate census exercise. Judging from antecedents an politicians’ inclination to distort census figures, it may prove dubious, the federal government’s capacity to accurately identify palliative-qualify Nigerians.
The federal government has also indicated its readiness to increase the minimum wage by a margin of between 5 and 10 per cent. That may also prove to be ineffective. The country’s civil service at the three tiers of government is comprises less than two million. The World Bank reckons that the population of Nigeria is 219 million. The implication is that less than 4 per cent of Nigerians are employed in the civil service. With more than 40 per cent of Nigerians living on less than $2.00 a day, it is almost certain that the federal government’s palliatives provision will be insufficient. It also means that more Nigerians will be plunged into poverty this year.
Therefore, there can be no shred of a doubt that the government will find it difficult to remove the subsidy feeding bottle that Nigerians have been used to since the 1970s and counting. Indeed, the labour unions are already gearing up for a showdown, except the government can demonstrate an ability to give adequate palliatives to the public.
The chief executive of the Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, said the incoming government will need to have some engagements because it would not be good to start on a crisis note. He said while the policy of downstream deregulation is good, the consequences could be dire.
He cited the current situation in Kenya; he said the Kenyan president has the best of intentions, but his move has caused a backlash. He said if your political and social environment is not stable how do you govern?
He stated that there must be palliatives, which should be segmented into immediate, short term and medium-term deliverables.
“Immediate and short-term options include wage review in public service, electronic cash transfers to the vulnerable groups in our society, designation of few retail outlets [maybe 10% of the outlets] as subsidy stations while all others will sell at deregulated prices for a transition period of one year; introduction of subsidized public transportation schemes across the country and reduction in import duties on intermediate products for food-related production to moderate food inflation.
“In the medium to long-term, there should be accelerated efforts to upscale domestic refining capacity, driven by private investments; accelerated investments in rail transportation by the government to ease logistics of fuel distribution across the country as well as domestic freight costs,” Dr. Yusuf proposed.
Consequently, Chinedu Nsofor, a member of the Alaba International Market Electrical Association, called on the federal government to look deeply into the issue of reducing the pain of the masses. Nsofor said inflation is already biting very hard, which is affecting the prices of food and every other thing. “If the government removes fuel subsidies, suffering will go haywire,” he said.
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. He however caveated 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.
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 for every litre to ensure that the price of petrol is similar across the country.
While all parties are in agreement that the expensive subsidy regime is a huge drain on the economy, all are also concerned about the hardship the deregulation will inflict on the masses. That’s why the labor unions insist that before the full deregulation of the downstream sector, the refineries must be up and running, and for obvious reasons.
The current landing costs of petroleum products are as high as they are because the country’s fuel needs are almost 100% imported. So, there are cost implications of taking Nigeria’s crude oil out to be refined and imported back into the country, which have shipping costs attached, duties, storage, and distribution. Much of that cost would be eliminated if Nigeria’s crude were refined in Nigeria for consumption.
On the other hand, if subsidies were removed today, all of that cost would fall on the already multidimensional poor masses, with inflation already at 21.82%, clearly, a recipe for social unrest.
Rachael Johnson, a civil servant in Lagos, said a sudden removal of fuel subsidies would be akin to taking the blanket off the body of a newborn child on a chilly night. Johnson said the federal government will either have to drop the idea of fuel subsidy removal or find a way to reduce the pains that may be the consequence of fuel subsidy removal. “Whatever the palliatives the government may be planning, it must be enough to lessen the pains on Nigerians across the country, including the price of food,” she said.
The chief executive of Anthill Concepts Limited, and member of the Board of Economists, NATIONAL ECONOMY, Dr. Emeka Okengwu, said he has nothing against removing the fuel subsidy. He said if it were left to him the subsidies should be removed much earlier than June. He however posed the question: “After removing the subsidies, what next?” He said if you remove the subsidies and the prices of goods and services skyrocket, as would be expected, how does that help the economy, considering that fuel is a major component of what drives the Nigerian economy?
He stressed that the government will have to look at alternatives because if you remove subsidies, there will be consequences, if you don’t remove them, what are the consequences? “Whichever way you look at it, it’s going to be difficult,” he said.
An economist, and social affairs analyst, Dr. Paul Omokaro, said the situation has negatives and positives. He said the percentage increase would be astronomical. He said if he were the president, in order to buy the goodwill of the people he would hold on a bit to gauge the economic situation and the environment before taking such a radical decision.
On the other hand, being into public financial management, Omokaro admitted that the country is bleeding, and doubts that the country can sustain the level of debt hanging on its neck. He noted that for the past two or three years the NNPC has not contributed to what is shared by the Federal Account Allocation Committee (FAAC). He stressed that subsidy removal is a two-way thing – “If you remove subsidies, you incur the wrath of the people. On the other hand, if you keep it, it’s not sustainable for an economy like ours.”
He noted that if you have a smart finance minister he can renegotiate the country’s debt and have a long moratorium.
Partner and chief economist at KPMG Nigeria, and former statistician-general, Oyeyemi Kale said “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.
However, listing the benefits of subsidy removal, Dr. Yusuf said, “Fuel subsidy removal has enormous potential benefits. First, there is the revenue effect. The removal would unlock about N7 trillion into the federation account. This would reduce the fiscal deficit, and ultimately ease the burden of mounting debt.
“Second, is the investment effect. Currently, it is extremely difficult to attract private investment into our petroleum downstream sector because of the unsustainable subsidy regime and the stifling regulatory environment. The subsidy removal will eliminate the distortions and stimulate investment. We would see more private investments in petroleum refineries, petrochemicals and fertiliser plants. Post subsidy regime would also unlock investments in pipelines, storage facilities, transportation and retail outlets. We would see the export of refined petroleum products petrochemicals and fertiliser as private capital comes into the space. Quality jobs will be created.
“There is a foreign exchange effect. This would result from the import substitution as petroleum products importation progressively decline. This would conserve foreign exchange and boost our external reserves.
“Increase in investment would translate into more jobs in the petroleum downstream sector.
“Smuggling of petroleum products across the borders will come to an end with a market pricing of refined products,” he said.
