Subsidy removal: Bad economics for ineffective states

As Nigerian presidential candidates prepare for campaigns, the country reels under the crushing weight of fiscal deficit. Nigeria’s debt is spiralling out of control. It increased by N2.95 trillion from the last quarter of 2021 to stand at N41.6 trillion as of the end of March 2022. It means that between December 2021 and March 2022, Nigeria borrowed an additional $7.1 billion. Nigeria’s debt stock will continue to rise because of its weak productive base and incurable appetite to borrow. Expect more borrowing in a year to election as economic stagnation dries revenue flows.

The crisis is more complex. Nigeria loses money every day from the subsidy on petrol. By the first quarter of this year, Nigeria paid N4 trillion to the product’s marketers as subsidy was more than the annual budget for health, education, and social protection. By the end of the year, Nigeria may have spent N9 trillion on the subsidy – money that it should invest in health, education, and social services to reduce poverty and improve productivity. The minister of finance says Nigeria should invest about $100 billion annually for 30 years to bridge its infrastructure gap. Today, Nigeria produces 1.5 million barrels of crude oil per day, less than its production quota of 1.5 million and does not take advantage of the spike in global oil price.

A logical response to Nigeria’s fiscal crisis is to end the inefficient subsidy and invest the N40.1 billion daily payment for subsidy to boost productivity and wellbeing. That is exactly what the World Bank and the Nigerian Extraction Industry Transparency Initiative (NIETI) recommend. These institutions argue that Nigeria’s more than 100 million poor will benefit from such a policy switch. At the moment, they are hit hard by both the lack of investment in social protection and the acute fuel scarcity that shoots up costs of public transportation.

Pure economic logic is one thing and pragmatic policymaking is another. President Muhammadu Buhari has shot down the logic. We cannot remove petrol subsidy at this time of inflationary pressure unless we want a social crisis. And the president is right. Economics meets politics.

For years, the government has refused to expose Nigerians to the full cost of importing petrol for domestic uses. Petrol is the live wire of economic and social existence in Nigeria. The country, a leading global oil and gas producer does not have local refining capacity. Its four refineries are comatose. Discussions about removing petrol subsidy always end in a stalemate as the administration kicks the can down the road.

In 2014, President Jonathan took the boldest decision to remove fuel subsidy. Buhari as opposition leader then savaged him and mobilized civil society against subsidy removal. The protest helped him to defeat the ruling party in the presidential election a year after. Buhari had infamously claimed there was no subsidy payment on petrol and that the figures were fraudulent. Since becoming president, Buhari has made more subsidy payments than even Jonathan. Buhari’s finance minister now screams that subsidy payment is Nigeria’s ultimate nightmare.

The fact that Nigeria cannot stop paying subsidy for petrol is evidence of leadership failure. The fact that the sixth leading oil producer exports crude and imports petrol because it does not have a working refinery is a failure of leadership, That Nigeria’s suffering N100 million poor will bear the brunt of this failure is one of the features of Nigeria’s political economy. As marketers smile to the banks and share profits with corrupt public officials, Nigeria’s poor citizens queue at filling stations all day and pay exploitative fares to go to work. Also, electricity tariffs keep increasing with no improvement in supply. The World Bank also asks the government to allow electricity tariffs to increase to save the electricity market from collapse. Hikes in prices will hit the people without any policy buffer.

Proponents of subsidy removal focus on the efficiency of charging fair prices and investing in social protection for the poor. On paper, the idea of shutting down inefficient subsidies and investing the savings in infrastructural development is self-evident. But in reality, such savings mostly fritter away into the private pockets of bureaucrats. Talking of removing subsidies and investing savings in the poor in a country where the accountant-general of the federation embezzled over N90 billion in one instance, rings false. No one should believe that a country like Nigeria, in the present circumstance, has the capacity to convert subsidy saying to investment in critical social and physical infrastructure. No one who notes how President Buhari has refused to cut down the costs of governance in spite of the recommendations of the Oronsaye committee report will agree that they should pay N700 for a litre of petrol so that government will save N9 trillion to finance infrastructure. An inefficient government that cannot control the basics within its control cannot be trusted to properly reinvest subsidy savings.

We circle back to failure. The failure of the government to take courageous action to rid Nigeria of inefficiency will hurt the poor most. But it will also make it difficult to take any action to help the poor because, in an ineffective state like Nigeria, textbook logic will underserve the poor.

Amadi (PhD), a former chairman of the Nigerian Electricity Regulatory Commission, is the director of Abuja School of Social and Political Thoughts