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Taming the fuel subsidy monster

.The dilemma of FG, Nigerians

By Emeka Okoroanyanwu and Babajide Okeowo

Christine Lagarde, the outspoken Managing Director of International Monetary Fund (IMF) stirred the honest nest last week when she called on Nigeria to remove fuel subsidy which reached an unacceptable high of N1.2 trillion in 2015 and N626 billion in 2018.

 Lagarde spoke at the just concluded IMF/World Bank Group Spring Meetings which held in Washington DC, United States of America. She revealed that Nigeria and some other countries have spent a total of $5.2 trillion on fuel subsidy in four years, calling for its removal to free resources for the development of other sectors of the economy.

She said that the huge amount spent on subsidy would have been utilized on infrastructure development and in the provision of other social services.

She said: “If you look at our numbers from 2015, it is no less than about $5.2 trillion that are spent on fuel subsidies and the consequences thereof. And the Fiscal Affairs Department has actually identified how much would have been saved fiscally but also in terms of human life if there had been the right price on carbon emission as of 2015. If that was to happen, then there would be more public spending available to build hospitals, to build roads, to build schools, and to support education and health for the people.”

Calling for a sustained effort to maintain good public finance situation for the country, Lagarde said with the low revenue mobilisation that exists in Nigeria in terms of tax to Gross Domestic Product (GDP),, the country is amongst the lowest in terms of revenue to GDP.

Just two days after Lagarde spoke in Washington DC,  fuel queues suddenly emerged at filling stations in Lagos and other nearby states as motorists engaged in panic buying of petrol, fearing perhaps that the Federal government was likely to take a cue from the IMF boss suggestion to increase the pump price of premium motor spirit (PMS).

There was also apprehension that the government may eventually remove the contentious subsidy on PMS.  It took the intervention of the Federal Government and the Nigerian National Petroleum Corporation (NNPC) for tension caused by the Lagarde speech to be doused.

While denying that there was no truth in the rumour that the government was planning to remove oil subsidy following the advice from the International Monetary Fund (IMF), Minister of Finance, Mrs. Zainab Ahmed, said the federal government could not remove fuel subsidy since there was no alternative to cushion the effect yet. She did not, however, say whether subsidy would be removed at a later date.

According to her, “We are here to discuss with the global community on various policy issues. One of the issues that always come up in the reports, especially IMF Article IV Report is how we handle subsidies. So, in principle IMF will say fuel subsidy is better removed so that you use the resources for other important sectors, and in principle that is a fact but in Nigeria, we don’t have any plan to remove subsidy at the time.

“This is because we have not yet designed buffers that will enable us remove the subsidy and provide cushions for our people.

“So, there is no plan to remove subsidy. We will be working with various groups to find what will be if we have to find what the alternative is. We will discuss this at the EMT. We have not yet found viable alternative, so, we are not yet at the point of removing subsidy,” Ahmed said.

Even as the minister spoke to allay peoples’ concerns, there is still apprehension in some quarters that fuel subsidy would still be removed sooner or later by the government. This is because for over 30 years now, Nigeria has been battling with the problem of fuel subsidy to the extent that no one can say exactly how much the country has spent on the monster.

A document submitted to the Federal Account Allocation Committee (FAAC) last November by the NNPC, revealed that Nigerian incurred about N623.17 billion on petroleum products supply under-recovery cost between January and November last year.

The NNPC said costs included under-recovery under the direct sale-direct purchase (DSDP) refining arrangement between January and November as well as the local refining cost between January and September this year.

Under recovery is the name coined by the Muhammadu Buhari administration to represent the amount of money it is spending to subsidise the importation of refined petroleum products, majorly PMS to sale at the pump price of N145 per litre. This is after it had criticized previous governments on the huge amount spent on payment of fuel subsidy.

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The document dated December 19, 2018, showed that cumulative outstanding under-recovery cost brought forward from 2017 stood at about N78.4 billion, with arrears of about N67.23 billion, while total reimbursement or FAAC deduction was about N676.49 billion for the period under review.

Of the N676.49 billion, about N599.7 billion was incurred as under-recovery under the DSDP arrangement, while about N23.4 billion was under-recovered from the operations of the four local refineries in Warri, Port Harcourt, and Kaduna.

A review of the document submitted to the FAAC showed that about N51.3 billion was incurred as under-recovery cost in January, while February, March, and April recorded N58.7 billion, N36.1 billion, and N82.4 billion respectively.

In May, the document showed the cost of under-recovery on PMS by NNPC dropped to about N36.9billion, before increasing to about N53.4 billion in June, N52.4 billion in July and N63.2 billion in August.

Again, the amount incurred as under-recovery by the corporation rose to N71.8 billion in September before dropping to N51.2 billion and N65.9 billion in October and November respectively.

In March, last year, NNPC reported that it was losing N774 million daily on under recovery due to increased supply and consumption of petrol in the country.

The corporation said it was soaking up the cost as part of its operational cost as the supplier of last resort and denied receiving any support or assistance from the government.

Tracing the genesis of fuel subsidy

Mr. Sina Amao, Chairman, Independent Petroleum Marketers Association of Nigeria, IPMAN, Ondo state chapter, said it was important to trace the genesis of the issue before proposing a solution.

According to him:“Nigeria, despite being the largest producer of crude oil in Africa with about two million barrels a day, yet, we are still one of the world’s largest importers. This is because our refineries which can be used to transform Nigeria’s crude oil into useful petroleum products are not working at full capacity. As such, we depended solely on importation. The landing cost of Premium Motor Spirit, PMS is about N180, and it costs another ₦20 extra for it to get to filling stations as a result of fixed margins like bridging margin and transporters’ allowance which totals up to about N200 and the selling price is pegged at ₦145, so, who pays the extra N55, this is where subsidy comes in,” he explained.

Similarly and as if giving a tacit approval for the removal of fuel subsidy, Dr. Ibe Kachikwu, Minister of State for Petroleum Resources while speaking as a guest on the NTA Good Morning Nigeria programmea few days ago said that anything that the country would do on subsidy removal requires very efficient management of information and getting everybody who is stakeholders to tie into it.

“Any attempt to remove the subsidy must be very well-managed, when there was a consensus on how we were going to do it in 2016, we still had an issue at the very tail end of the moment; NUPENG and PENGASSAN supported but, of course, the other members of the trade unions pulled out.

“Eventually, thankfully, Nigerians saw through what we were trying to do and let it happen. And thank God that happened at the time because when you look at the gap today, the landing cost is about N180 per litre and the sale price is N145. Imagine if it (pump price) was N90-something; we will literally be a bankrupt country.”

“Should we deal with the removal of subsidy? I was gung-ho when I assumed this position that there was no way I was going to tolerate a subsidy regime at the time in 2015 of about N1.2tn-N1.3tn. There was just no way; we didn’t have the capacity to continue to pay.”

“So, I convinced the President that this needed to happen; thankfully, he listened, he agreed and we did. Now, we then had an over-recovery period for quite a while and then we went into this upswing in prices that has now taken us again into under-recovery.”

He said, “I think, first and foremost, we need to find a way of fixing refineries quickly, whether it is government-funded or whatever – my preference is always private sector funding.

“I think the labour union has never really said they would not be supportive of an attempt to take away this subsidy element; the union has always said, ‘If you are doing it, show me what you [will] do with those new receipts of income. Two, what do you do with the refineries?’ Therefore, we need to address those to even get their buy-in.

“Secondly, we need to segregate between those who need subsidy and those who don’t; you will find that 80 percent or more of those who get subsidy today do not need it. There is nothing necessarily bad with some element of subsidy if it is well-managed and is very little, and if the private sector can take it away completely; that is fantastic. That is the most ideal situation.”

Getting private sector involvement is key- LCCI

To Muda Yusuf, Director-General, Lagos Chamber of Commerce and Industry, LCCI, getting the private sector to participate in the downstream sector is the key to solving the issue of fuel subsidy.

“The advice I will give is that government should encourage private sector players to take over the downstream sector of the petroleum business and when this is done, most of the challenges we see as regards subsidy, refineries and others will be adequately addressed. The government should only play a regulatory and not an operational role. Government has no business refining petroleum products, retailing or distributing fuel, as well as the marketing of these products.

“That is not the function of government. Look at the leakages in that sector, it’s humongous. The inefficiency in that sector is also humungous. We cannot continue to carry that kind of burden in the oil sector. The government should desist from such business because there are more important things to do that have a social impact. Look at our educational system, health sector, roads, rail; those are areas the government should channel its attention,” he said.

Speaking further, he asked the government to disengage totally from the business of fuel subsidy. “I think the government should just disengage from all this business in the oil sector and any other business that is not a social activity. It should disengage completely, as these businesses are not functioning properly because of governance and corporate governance problems, political interference and more. And for as long as these businesses remain within the domain of the public sector, they can’t function well. If they function at all, they can’t function efficiently. So, the best thing is for the government to just let go and allow the private sector to take over’ he added.

Nigerians are being taken for a ride- Concerned Nigerian

A Nigerian, Remi Adeoye has however expressed his disappointment in the federal government over the issue of fuel subsidy.

“I am highly disappointed in the FG on the management of our oil. There is nothing they can say now that will make Nigerians trust them. They are deceitful. Years back, we all knew we were spending more on subsidy and this government came up with a policy of removing it and jacking up pump price. Nigerians took this policy hook, line and sinker with the hope that we are conserving funds and subsidy has gone for forever. After some months, marketers voiced out to say N145 was not feasible and they might hike the price. But our NNPC castigated oil marketers and volunteered to procure fuel from the same seller’s marketers we buy from. For over two years, NNPC has been the sole importer of fuel. My worry is, why didn’t federal government tell Nigerians that we have reverted to a subsidy, rather they covered it up and called it “under-recovery,” an under-recovery fund that was never budgeted for by National Assembly. Who was approving the huge amount? Now, we were forced to buy fuel at 145 and the country is still paying subsidy they kicked against during previous administration. This is really bad and does not portray the integrity the Minister of Petroleum cum President Buhari is known for,” he said.

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Director General of Nigeria Employers’ Consultative Association (NECA), Mr. Timothy Olawale, has said the country is where it is today because “despite past sound counsel, government has not been faithful to the deregulation of the PMS market of the downstream sector of the oil and gas. Let us ponder and ask ourselves where the non-deregulation of the petroleum sector has led our economy. Continued dependence on offshore sources for petroleum products, supply perennial shortage of petroleum products, loss of productive man hours, as a result of endless hours spent at filling stations, massive and unimaginable corruption in the management of the subsidy dispensation are not sustainable.”

Giving insight into the need for urgent deregulation of the downstream oil sector, the NECA boss stated that “over the last decade, the country has spent over N9 trillion on fuel subsidy, about N15.5 trillion on capital expenditure, N2.1 trillion on health and about N3.9 trillion on education. This is a misplacement of priority and shows that critical developmental items, such as education, health and infrastructure have suffered due to the expenditure on fuel subsidy. He noted that “by and large, the fuel subsidy regime has succeeded in creating phony and emergency billionaires at the expense of millions of pauperised Nigerians.

In the same light, Mr. Olawale expressed concern at the growing debt stock of the nation with huge percentage of the budget, over the last decade going to debt servicing. He opined that “borrowing could have been permissive, given the state of the economy in 2015 but not to the clearly humongous level it has turned out to be. Incurring debt for developmental purposes is not in question, but the over 24.39 trillion debt stock, taking over 20% of annual national budget to service, should be enough source of worry. Though the argument of debt to GDP ratio is tenable, the IMF warned that Nigeria’s Debt-to-GDP Ratio, though good, is risky and cannot be guaranteed going forward.” He noted that “government should do well to manage the rising debt profile, both at the states and federal level, as this trend portends a gloomy future for the nation.”

He said: “Increasing debt profile and the corruption-ridden fuel subsidy regime are twin-evils that have clogged the wheel of the nation’s march towards development in the last decade. Government should do the needful by immediately putting in place a process and enlightenment machinery that will lead to the deregulation of the downstream oil sector and a deliberate disengagement from the debt burden.”

But the Peoples Democratic Party (PDP) has opposed the proposition by the IMF to remove fuel subsidy. The party’s Deputy National Publicity Secretary, Mr. Diran Odeyemi, said that the President Muhammadu Buhari administration would be committing a sin to remove subsidy on PMS, as this would inflict more hardship on Nigerians. He said the advice by the IMF would not be helpful to Nigerians.

According to him: “It is a sin to add to the burden of the suffering masses of Nigeria, especially at this time when food, employment and security of lives and property have been a problem in the country. The IMF dictation for whatever reason, cannot work in Nigeria and I am sure Nigerians will reject any hardship this time around.”

For the Nigeria Union of Petroleum and Natural Gas Workers (NUPENG) and the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), the IMF was giving the Nigerian government “poisonous” advice on removal of fuel subsidy. He said that the advice had created panic in the country with associated hoarding of petroleum products, panic buying, skyrocketed increases in prices of goods and services in the country.”

 “It is quite bewildering and baffling that the IMF is not considering the pains and agonies Nigerians went through even to achieve the acknowledged gains of 2018, with almost two-thirds of the world’s hungriest people among Nigerians.

“One wonders why the IMF is still callously and wickedly advising the government to inflict more pains and harm on the people.

“This IMF statement is embellished and loaded with poisons, considering the antecedents of the IMF in our economic challenges and struggles over decades of our nationhood. The various devaluations of our currency on the strength of advice of the same IMF have been a very big burden on our nation for several years now,” they said.

The leadership of NUPENG and PENGASSAN said they were aware of what Nigerians are going through, adding: “We empathise with them and will not turn a blind eye to any further attempt to increase their pains and impoverish them further.”