Facts and fallacies of fuel subsidy

Umana Okon Umana, an economist, is the former governorship candidate of the All Progressives Congress (APC) in Akwa Ibom State. In this piece, he highlights the fallacies associated with the fuel subsidy and what can be done to guarantee regular fuel supply for domestic consumption.

Many boisterous and healthy debates have broken out on social media platforms and, indeed, other fora on the recently adjusted price of petrol. But quite unexpectedly, some of the arguments are grounded in myths. Here are a few and my attempt to burst them.

The first myth is that subsidy does not exist.

There is a subsidy when the pump price of petrol is below the effective cost. The effective cost is the landing cost plus the distribution cost plus margin. Subsidy is the difference between effective cost and the pump price of fuel. Landing cost for a litre of refined petroleum depends on the price per barrel of crude oil. When government fixes the pump price of fuel below the effective cost, distortions are created.

In elementary Economics, when a price is fixed below the equilibrium price, there will be a shortage and a black market will be created. The government in Nigeria was paying for the difference between the effective cost and the pump price. Government was therefore subsidizing the cost of fuel. Nigeria spent over $35 billion between 2010 and 2014 to subsidise petroleum products.

The second myth is that subsidy favours mostly the poor.

This is not true. By paying fuel subsidies, we were subsidizing the consumption of imported petroleum products. We were therefore supporting production abroad and creating jobs abroad at the expense of Nigerians. Besides, outside Lagos and Abuja and other major cities where the controlled price of N86 was enforced, fuel was sold at between N150 and N180 in the rural communities.The government guaranteed price of N86 was therefore a myth as the poor people outside Lagos and Abuja had always paid N150 or more for a litre of fuel.

The reality is that it is the rich and not the poor who benefit the most from Nigeria’s fuel subsidy. Findings by the IMF show that globally, the bottom 20% of households take only 7% of fuel subsidy while the richest 20% take 43%. Nigeria’s fuel subsidy at some point accounted for 30% of total expenditure of the Federal Government and 118% of the capital budget. It also accounted for over 90% of annual oil revenues.

Payment of oil subsidies was not only not sustainable, it crowded out spending on core infrastructure projects such as roads, railways and power with grave consequences for the standard of living of Nigerians. Besides, the artificially low and government guaranteed and subsidized price of fuel was a disincentive to private investment in the oil sector.

It is not surprising that although the Federal Government approved over 20 refinery licenses to private investors many years ago, not one refinery has been built. I must however commend Aliko Dangote for his entrepreneurial acumen in this regard. His new refinery being built in Lagos and scheduled to becompleted late 2018 will enhance local refining capacity.Rather than subsidizing the consumption of imported petroleum products we should support the private sector to build new refineries.

Fuel subsidy also took a disproportionate share of dwindling foreign exchange allocated based on official rate. There was therefore an imperative need to free the resources deployed for the payment of fuel subsidies. Thankfully, government has made meaningful appropriations in the 2016 capital budget to upgrade infrastructure in the areas of roads, railways, agriculture, education, and provide support for small businesses.

The third myth is that at N86 per litre, Nigerians were already paying too much for fuel.

The facts do not support this position. The Table below shows that at N145 per litre, the petrol price in Nigeria is about the lowest in West Africa. It is now clear why, at the old price of N86, the opportunities existed for arbitrage and corruption as fuel for which Nigeria already paid subsidy was smuggled to Niger, Cameroon, Ghana, etc, where there is no subsidy regime. Ghana, Cameroon, Mali, Senegal and Mauritania have petrol pump prices of N185, N218.9, N228.85, N234.82 and N256.71, respectively.

Removing fuel subsidy will fuel inflation is the fourth and the commonest of the myths.

While it is true that the upward adjustment in the price of fuel will affect some components of the Consumer Price Index, the overall impact on prices will be cushioned by activities in other sectors of the economy, upgrade in public transportation and improved fiscal discipline. Over time, the efficiency of the market will drive down prices.

The fifth myth is also a fallacy. It states that if other oil-producing countries like Saudi Arabia and Kuwait are paying fuel subsidies, why can’t Nigeria pay?

Saudi Arabia pays out of a huge surplus after meeting the expenditure needs of the country. Nigeria’s revenue is not enough to cover basic expenditure requirements. We cannot continue to run a country that spends more on subsidies than on the total capital budget. Other countries like Malaysia, Indonesia, Ghana and Angola already took the bold step to remove subsidies on fuel prices. We should commend President Muhammadu Buhari for taking a decisive action to deregulate the downstream petroleum sector in the face of dwindling oil revenues and the pressure on the Naira.

The Nation