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.
Myth One: Fuel 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 litre of 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 subsidising the cost of fuel. Nigeria spent over $35 billion between 2010 and 2014 to subsidise petroleum products.
Myth Two: Fuel Subsidy Favours Mostly the Poor
This is not true. By paying fuel subsidies, we were subsidising 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 percent of households take only seven percent of fuel subsidy, while the richest 20 percent take 43 percent. Nigeria’s fuel subsidy at some point accounted for 30 percent of total expenditure of the Federal Government and 118 percent of the capital budget. It also accounted for over 90 percent 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 subsidised 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 licences to private investors, not one refinery has been built. Rather than subsidising the consumption of imported petroleum products, we should support the private sector to build new refineries.
Fuel subsidy also took a disproportionate share of the dwindling foreign exchange allocated at the official rate. There was therefore an imperative to free the resources deployed towards the payment of fuel subsidy. Thankfully, the 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.
Myth Three: 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 are no subsidy regimes. Ghana, Cameroon, Mali, Senegal and Mauritania have petrol pump prices of N185, N218.9, N228.85, N234.82 and N256.71, respectively.
Fuel Prices Across West African Countries
Myth Four: Removing Fuel Subsidy Will Activate Inflation
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.
Myth Five: If Other Oil Producing Countries Like Saudi Arabia and Kuwait Are Paying Fuel Subsidies, Why Can’t Nigeria?
This is a fallacy. 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.
Umana Ikon Umana, an economist, was the All Progressives Congress governorship candidate in Akwa Ibom State in 2015.
