The unending debate about the removal or sustenance of subsidy on petroleum motor spirit has been with the Nigerian economy for over 35 years. It comes to the fore especially in times of lean government revenues and fiscal challenges which compels governments to look for new sources of revenue to fund public expenditure. Is it possible to remove fuel subsidy as we understand it today and still keep the price of PMS at the current level or just marginally increase the price? The answer is in the affirmative. This discourse reviews the PMS subsidy challenge and proffers a pathway that will free up resources for public expenditure whilst retaining the price of PMS at current levels.
What exactly is a subsidy? The Corporate Finance Institute defines a subsidy as “an incentive given by the government to individuals or businesses in the form of cash, grants, or tax breaks that improve the supply of certain goods and services. With subsidies, consumers are able to access cheaper products and commodities”. Also, governments can literally pay for the difference between the market price and the lower price of the subsidised product. Subsidies are instituted for several purposes. They may be economic, social, political, etc. Subsidies keep the prices of goods and services low so as to enhance affordability for citizens or the target group of the subsidy. There are several types of subsidies and they include production subsidies which encourage the production of certain types of goods and services. This will likely create employment in subsidised industries, generate more outputs as well as enhance productivity in the sector. The industries in the sector will still be liable to corporate income tax if the subsidy is not in the form of a tax break. Also, their employees will still pay personal income tax.
There is consumption subsidy which is the case when government directly offsets a percentage of the price of designated goods and services. This is the type applicable to the Nigerian PMS subsidy. The subsidy is either directly provided for in the federal budget or the Nigerian National Petroleum Corporation withholds the funds it should have remitted to the Federation Account to pay for the difference between the commodity price and the approved pump price. There is also an employment subsidy given to certain industries to enable them to keep existing jobs or to create new jobs.
Subsidies without their context can present a misleading picture. Subsidies, just like borrowing, are not inherently good or bad. But their context presents a story to reach a reasonable conclusion on whether they should continue or be discontinued. The advantage of subsidies includes lower prices, lower inflation, improved supply of goods and services, and encouraging the growth of specific industries and their allied services. The disadvantages of subsidies are mainly on their market-distorting effect, the difficulties in measuring the success of policy goals and the public facilitation of production and procurement modules that are not in tandem with value for money, especially the cardinal parameters of economy, efficiency and effectiveness. In every decision for or against a subsidy, there will always be winners and losers. But the central challenge is how to ensure that the majority of the population wins in any decision made by the authorities.
The argument in favour of continuing PMS subsidy is the recognition that the price of PMS impacts on the price of virtually all goods and services needed by the population. An increase will practically increase the cost of food, transport, house rent, school fees and the cost of production of goods and services in factories will shoot up. Considering Nigeria’s poor macroeconomic indicators including high levels of inflation powered by food prices, 33.3% unemployment rate and the massive unemployment figures among youths, very high bank interest rates and the very low standard of living among the majority of citizens who are poor, it will be very difficult for the majority of Nigerians to accept a further increase in the price of PMS. This is the worst economic performance by any government since independence.
The case for the removal of PMS subsidy has been made as follows. The Medium-Term Expenditure Framework 2022-2024 states that the Federal Government’s share of oil revenue underperformed by 43.7% despite the oil price benchmark of $40 per barrel which was exceeded by an average actual price of $65pb. The above performance was facilitated by shortfalls in production as well as significant cost recovery (subsidy) by NNPC to cover the shortfall between the cost of importing petroleum products and the pump price. For the medium term, if the trend of fuel subsidy and production shortfall continues, the revenue target may not be met particularly if the relatively high oil price is sustained as it will also require increased subsidy. The MTEF described PMS subsidy as a fiscal drainer and made a statement in favour of discontinuing same. But there is a challenge to this narrative. NNPC claims to be subsiding between 55 million and 60 million litres of fuel consumption every day. This cannot be true in an economy that has gone through two recessions since 2015 and the gross domestic product has been drastically reduced. In 2015, the NNPC management claimed subsidy on not more than 35 million litres of PMS a day. The current claim of an extra 25 million bpd is hyperinflated, a product of massive corruption and needs to be drastically reduced and the perpetrators of the fraud prosecuted.
So, how do we ensure a win-win scenario for everyone? In this scenario, the people will continue to pay the current price of PMS and the government gets the revenue needed to run public expenditure. The recommendation is to shift the subsidy from consumption to production. So, FGN has to wait until Dangote Refinery comes on stream. The subsidy to be offered to the new refinery is to get crude oil at half the world market price or at any other reasonable rate that sustains the subsidy. The crude oil to be allocated to the refinery will simply be for the satisfaction of local consumption. It will not form part of our OPEC quota as we still continue our exports. The cost of producing a barrel of crude oil is far less than the market price and even at half the cost of today’s market price, the oil extracting company will still make some profit. This is very reasonable considering that most advanced countries have started planning to phase out the internal combustion engine that runs on fossil fuel and as such, our crude oil in the ground would soon be worth nothing. Government has to find the money to make the necessary speedy investments to increase crude oil production as the current data on oil production is not encouraging. The country has consistently failed to meet its low OPEC quota. It may also leverage private sector resources for this purpose.
A win-win scenario is possible to avert the impending and unnecessary clash between the impoverished majority of Nigerians and a government that is almost bankrupt. The suggestion of the Federal Government to pay cash stipends to poor Nigerians is childish and it will promote grand corruption. It should not be given a second thought.
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