Nigeria’s fuel subsidy conundrum


The concept of subsidies is neither inherently bad nor undesirable. In fact, it is a policy tool that’s often deployed to redistribute wealth and correct market failures. There are many examples of energy and food subsidies even in advanced economies.

In the case of Nigeria’s fuel subsidy regime however, the reverse is the case. Fuel subsidy continues to become a huge drain on Nigeria’s finances, making them both unsustainable and unreasonable.

There’s a school of thought that thinks the problem is fuel subsidy corruption and not fuel subsidy in itself, that doing away with fuel subsidy is akin to throwing away the baby with the bath water, and that government should tackle the corruption in the oil and gas sector instead of removing subsidies altogether and shifting the burden to the poor.

I once subscribed to that school of thought and I wish it were that simple.

Nigeria’s daily average PMS consumption is around 30 – 33 million liters daily. Interestingly, the NNPC pay subsidy claims on about 90-95 million liters. Simply stating, an excess subsidy payment on about 60 million liters, almost double our actual daily consumption, is unaccounted for.

But here is the catch: the average PMS price in West Africa hovers around 500 – 600 naira per liter. That means as there’s huge incentives in taking Nigeria’s PMS at 199 naira per liter across the border to Cameron, Niger, Benin or Chad, where you stand to make between 250 – 350 per liter, bar other expenses.

This creates enough rents for our marketers to smuggle cheap Nigeria’s oil to our neighbors and make super profit. This also partly explains why we pay subsidy claims to over 90 million liters when our daily consumption is little above 30 million liters.

This burgeoning fuel subsidy pie keeps exerting significant pressure on our finances. For many months, the NNPC has was unable to contribute a kobo to the federation account because proceeds from crude oil sales go into paying subsidies, leaving a huge void in the federation account and affecting the abilities of the FG and States to meet their financial obligations.

Last year alone, the government spent over 7 trillion naira in subsidies. This year, another 3.36 trillion was budgeted for the first half of 2023. Simply speaking, in the name of fuel subsidy, Nigeria is hemorrhaging its way towards fiscal collapse.

The question is, how do we deal with that? Some may argue the NNPC should pay only subsidy on our actual consumption (30 – 35 million liters), but oil marketers would still smuggle out whatever little they get to make bigger profit, creating scarcity at home.

It is also impossible to stop fuel smuggling as we lack the resources (both human and technological) to police our borders effectively. In fact, it would create another layer of corruption in the form of high cost of enforcement. As long as there are huge incentives for rent-seeking, economic actors will go to any length to game the system. The US, with all its advancement, is still struggling to curtail drug smuggling across its border.

Make no mistake, fuel subsidies benefit the poor and its removal will have devastating consequences on poor people. The argument that it benefits the rich more than the poor is misleading because it mischievously ignores the per capita effect of fuel subsidy using the purchasing power of the two income groups.

A person on a 30,000 minimum wage consuming 20 liters per month still gains more through fuel subsidies (per purchasing power) than a rich man consuming 200 liters per month. Therefore, there’s equity justification for fuel subsidies as it is one of the only few ways that ordinary Nigerians directly benefit from the government even if the upper class gains more on aggregate.

The major dilemma in economic policy is the trade-off between equity and efficiency. Allowing subsidies to remain serve equity (by helping the poor with below market-rate energy cost) and harms efficiency (by increasing waste, corruption and fraud). The solution is, if the efficiency gain is greater than equity loss, then subsidy should go. Likewise, if the equity loss is greater than efficiency gain, then subsidies should remain.

The truth is, it is a lot harder than economics 101 because it touches on the foundations of politics, public trust and public interests. Ordinary Nigerians May understand the economic reasoning, but they don’t trust that the government would make honest use of the subsidy savings. They want to see the ruling class making similar sacrifices instead of always asking ordinary Nigerians to accept subsidy cuts, more taxes and other austerity measures.

Interestingly, all the 3 leading candidates (Tinubu, Atiku and Obi) have campaigned on the promise of subsidy removal. Nigerians minds have been prepared against subsidy removal. What has no been prepared is however Nigerian pockets. And here’s where I have problem with the drastic measure.

Government should lay out its plans for wage increase, some tax cuts, cuts in government overheads, investment in subsidised public transport, and other palliative measures that would help cushion some of the effects of subsidy removal.

Nigerians need to be told what to expect from the policy measure. How much are we going to save? How much is going to the FG and States, so that citizens can keep track of those promises and hold their elected leaders at both federal and state levels accountable.

Whichever way it goes, this is one bold policy move that’s going to define the Tinubu presidency.

Ahmed Musa Husaini writes from Abuja.

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