I started writing this article at the weekend, believing that the federal government had, at long last, decided to do away with the long standing and costly oil subsidy. Whatever its attractions, it is no longer financially sustainable. Worse still, it has led to long queues recently at the petrol stations right across the country. I was going to commend President Muhammadu Buhari for his courageous decision to remove the oil subsidy.
But half way through the article, my eyes caught some newspaper headlines that the federal government may not have dropped the oil subsidy after all. Both the Minister of State, Petroleum, Dr. Emmanuel Ibe Kachikwu, and the National Chairman of the All Progressives Congress (APC), the ruling party, Chief John Odigie-Oyegun, were simultaneously reported by the media in the course of the week as declaring that the wasteful and fraud ridden oil subsidy had indeed been removed. Not so, says the Vice President, Professor Yemi Osinbajo, who personally issued a press statement that there was no removal of the oil subsidy, but only an oil price hike to reflect the downward trend in the exchange rate of the naira. This is as a result of the falling dollar reserves and increasing pressure on the naira exchange rate. Demand for it is long, but supply is short. The independent marketers are now obliged to source their foreign exchange needs from the secondary market at a premium.
Obviously, there is some confusion and contradiction in senior official circles over this grave matter, with the ‘realists’ in the government urging President Buhari to remove the so-called oil subsidy once and for all, and the ‘romantics’ insisting on maintaining some form of oil subsidy, or the other. The government is being pulled in different directions on the issue by its top economic advisers. But I prefer to believe the Vice President on this matter as he heads the economic team of the government, of which neither Kachikwu, nor Oyegun, are members. He is in a better position to know exactly whether or not the federal government has finally taken a decision to bite the painful economic bullet by removing the oil subsidy once and for all. President Buhari has not been categorical about this. But then, if the oil subsidy had indeed been finally removed, there would have been no need for the federal government to fix the new price of N145 per litre for oil sales. In a fully deregulated and free market, prices are determined by market forces. Fixing the price of oil will seem to suggest that there is still some official subsidy on oil imports and sales. But then there does not appear to be any provision for oil subsidy in this year’s budget. Or is the price of N145 per litre merely a guide which the importers may, or may not, comply with? Either way, the public is entitled to know whether the subsidy stays, or not. Full deregulation, which is what a removal of the oil subsidy implies, means that market forces will determine the pump price of petroleum, and that the government will have little or nothing to do with price fixing, except in a regulatory sense.
If this is the case, that the oil subsidy stays, I think it is a pity that the Buhari government has again lost the opportunity to bring to an end the sordid state of affairs in our oil sector by not fully deregulating it. It should abandon the oil subsidy in response to compelling financial and economic considerations in our country. Ex-President Goodluck Jonathan made the same mistake in 2012 when, in the face of some domestic opposition, he abandoned his plan to end the oil subsidy. Had he done so then, it would by now have saved the nation about N6 trillion, about the size of this year’s federal budget.
In fact, this time, the reaction of the public to the news that the oil subsidy was being removed was overwhelmingly favourable, despite the pains involved. Even oil workers, including NUPENG and PENGASAN, agreed that it was time for the oil subsidy to go. This positive response to the media reports that the oil subsidy was being removed cut across all sections of our economy, including the industrial sector and independent marketers. The reason is that the scarcity of oil supplies in the market was beginning to hurt the economy badly. Consumers were already being forced to pay up to N150 per litre, or more, for oil in the parallel market. Better to have the oil at a higher price and keep business going than close it down because of oil scarcity.
It is a function of economic survival. No matter how acute the pain is, it is still far better than outright death. Businesses were beginning to close down right across the country because there was no fuel to run them. The NLC and the TUC should reconsider their plans to go on strike on this matter. They should think more carefully about embarking on a strike for which there is little public support. This is not to say that their anger about the awful mismanagement of the economy is not justified. But a general strike now will harm our country even more. It will lead to more job losses, as employers will be forced to shut down their businesses.
It was never going to be an easy decision for the federal government to abandon the oil subsidy. When he came to power last year, President Buhari was not keen at all to increase the pump price of oil. A senior adviser of the government with whom I brought up the matter told me bluntly that President Buhari was totally against dropping the oil subsidy. He rejected all advice that he should do so. For him, the removal of the long standing oil subsidy was both an emotional and sentimental issue. He believed that doing so would hurt the poor more, in a situation of mass poverty. But as the IMF has pointed out, only seven per cent of the poorest 20 per cent in our country derive any benefit from the existing oil subsidy. In fact, President Buhari first tried the option of giving the NNPC, which accounts for some 50 per cent of total oil imports, a monopoly on oil imports to reduce the vast corruption in the sector.
But this did not work out as planned, due partly to the fabled inefficiency of the NNPC, its abject lack of the needed logistics and infrastructure, and the determination of the oil majors and independent marketer not to offer the NNPC their cooperation. This led to a supply gap and the long queues in the filling stations.
The NNPC had to admit that it could not perform as expected without the support of the big oil marketers. This was what persuaded President Buhari to bring the independent oil marketers back. The alternative option, a price hike, is indeed courageous as it could have political costs. In the short run, it could make the government unpopular. .
Yes, the full removal of the oil subsidy will definitely hurt the poor, at least in the short term, as it will increase the cost of living, and this will worsen the prevailing mass poverty in our country. But the government’s options on subsidy for oil imports were limited. This subsidy accounts for over 20 per cent of the entire federal government budget. It was clear that it could no longer be sustained with falling oil revenues. Savings from the removal of the oil subsidy will be substantial and will fill some of the gaps in our huge budget deficits. More financial resources will be released to meet our huge infrastructure deficits and more jobs will be created as the economy adjusts to a deregulated oil sector.
The oil subsidy was first introduced at a time when there was a surge in oil revenues. This surge has not been consistent leading to volatility in oil revenues and a heavy and unsustainable burden on the finances of the federal government. Subsidies can in the long run only be met by budgetary surpluses, not deficits. This year, the federal government will be looking to borrowing internally and externally some N2 trillion to balance its budget. Half of this borrowing is expected to be from external sources. But it is unlikely that it can successfully tap external sources for this huge borrowing, not for investment, but for budgetary support. If the subsidy is dropped, the government will be able to save nearly N1.5 trillion, or more, this year. This will reduce its huge budgetary deficits and the need to borrow abroad by nearly half. In fact, with more prudent management of its finances, including the introduction of practical measures to reduce the cost of governance, the federal government can easily balance its budget next year. Oil prices are beginning to rise again and this trend will, if sustained, lead to higher oil revenues. But this favourable trend should not be frittered away again on the wasteful oil subsidy.
In fact, the federal government should avail itself of this opportunity to undertake a comprehensive review of its entire subsidy programme and strategy. As it is now, it is totally confusing, inconsistent and ad hoc. It must be based on clearer, more coherent and more consistent principles and objectives. That is not the case now. The focus and target of any future financial bailouts and subsidies should be more on production and less on consumption. Financial subsidies on consumption cannot be sustained when the national revenue and economic growth rate are both declining. This year, our growth rate will fall from six per cent to less than three per cent. The oil subsidy is a subsidy on consumption, not production. And there is really no evidence to support the view that it promotes economic growth in our country.
For most of the time, oil was being sold to the public at a price exceeding the subsidised price. In fact, as we have seen in recent years from the scandals in the oil industry, the so-called oil subsidy was largely a mirage, a big scam from which the oil barons and importers made scandalously high profits. Next to the huge scam in defence expenditures, most of which as we now know, actually ended up in private pockets, the biggest source of public corruption in our country is in the oil sector, where the fall in global oil prices are not reflected in local prices of imported fuel, and where some fictitious oil importers are paid for oil that was not actually imported. A deregulated oil sector will end all that.
Now is the right time to address the problem squarely. President Buhari should go the whole hog now by ending the wasteful oil subsidy. The advantages in the long run should make the short term costs and pains more bearable.
NATION
END
Be the first to comment