By AZUBIKE NNADOZIE
For the second time in four months, the International Monetary Fund has called on the Nigerian government to remove the controversial, vexed and wasteful subsidy on petroleum products.
Just last April, while addressing a press conference at the joint annual spring meetings with the World Bank in Washington DC, IMF President, Christine Lagarde, had said that with the low revenue mobilisation that existed in Nigeria in terms of tax to Gross Domestic Product, it was important for the country to remove fuel subsidy.
In Nigeria, fuel subsidy has become a subject of great controversy and discussion among stakeholders, from the regime of former President Goodluck Jonathan to the present President Muhammadu Buhari administration.
However, in what could be termed as her second attempt to save Nigeria’s economy last Wednesday, Lagarde reiterated the need for Nigeria and other countries that still retain the policy of subsidising fuel consumption to put an end to the policy.
In a recent blog post titled, “Fuel for Thought: Ditch the Subsidies”, the IMF stated that the fuel subsidy which some countries pay as an attempt to reduce the price of fuel for consumers, typically benefits the rich more than the poor. It added that halting fuel subsidy could add up to 4 per cent to the global Gross Domestic Product (GDP).
According to the blog post, “As the Fiscal Monitor in April 2019 shows, government policies on taxes and spending have to adapt and should shift to growth-enhancing investment. This means, for example, more money to build classrooms, hospitals and roads, while cutting wasteful spending, such as inefficient energy subsidies.
GDP is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
According to Wikipedia, global GDP, which is the same as gross world product (GWP), is the combined gross national product of all the countries in the world. Because imports and exports balance exactly when considering the whole world, this also equals the total global gross domestic product…. In purchasing power parity terms, world GDP has expanded by 2.46 since 1990, data in purchasing power parity (PPP) terms has been available since. Feb 24, 2019.
IMF’s ARGUMENT
Last April, Lagarde had argued that by removing the subsidy, Nigeria would be able to free up more funds it could channel into improving health, education, and infrastructure.
The IMF had in its 2019 Article IV Consultation on Nigeria noted that phasing out implicit fuel subsidies, while strengthening social safety nets to mitigate the impact on the most vulnerable, would help reduce the poverty gap and free up additional fiscal space in the country.
Lagarde had said, “I will give you the general principle. For various reasons and as a general principle, we believe that removing fossil fuel subsidies is the right way to go. If you look at our numbers from 2015, it is no less than about $5.2tn that is spent on fuel subsidies and the consequences thereof. And the Fiscal Affairs Department has actually identified how much would have been saved fiscally but also in terms of human lives, if there had been the right price on carbon emission as of 2015. Numbers are quite staggering.
“I would add as a footnote as far as Nigeria is concerned that, with the low revenue mobilisation that exists in the country in terms of tax to GDP, Nigeria is amongst the lowest. A real effort has to be made in order to maintain a good public finance situation for the country in order to direct investment towards health, education, and infrastructure.”
EXPERTS’ OPINION
However, economics experts opine that the time is not yet ripe for Nigeria to embark on total fuel subsidy removal as is being espoused by the IMF, arguing that the “strengthening of social safety nets to mitigate the impact on the most vulnerable, help reduce the poverty gap and free up additional fiscal space,” is not yet present in the country.
According to them, the ripple effects of hyper inflation and other negative side effects to be engendered by total fuel subsidy removal under the country’s present economic state may be too hard on the populace and too hot for the government to handle.
According to erudite Professor of Economics and Public Policy at the University of Uyo, Akpan Hogan Ekpo, PhD, the IMF assertion that the removal of subsidy by Nigeria and other countries would raise global GDP by 4 per cent should be taken with caution.
“For now, the global economy is experiencing sluggish growth of about 3 per cent. Is it subsidy that is holding back growth? No, there are other factors, for example, the trade war between the US and China. I hope the other countries would include developed economies which subsidise various sectors of their economies as well as give welfare programmes to the poor,” he added.
He argued that the issue about subsidy is whether an economy can afford it and also the matter of its long-run sustainability, adding that subsidy emanates from both the demand and supply side. “The demand side is what is somehow worrisome. Subsidizing the supply side of the economy would increase productivity and generate employment in both the short and long terms, he said.
He stressed that most developing countries cannot avoid subsidy because of the millions of poor people who need assistance to buy food, educate their children, and access to health facilities. Under this scenario, he advocated for targeted subsidy in favour of the poor.
“For Nigeria, the issue has been on oil subsidy. Removal of oil subsidy in Nigeria must be supported with robust studies because the economy is heavily dependent on the oil sector, hence subsidy removal would immediately result in structural inflation in the short run. What is required is gradual subsidy removal with a framework to provide subsidy for the poor who may need to purchase kerosene, etc. However, the price of kerosene seems to have responded to the dictates of the market. Furthermore, perhaps what is being called subsidy may be massive corruption in the sector. There is no question that the gradual removal would free resources which, if used for infrastructural development could boost growth and generate employment. Its exact contribution to GDP remains an empirical matter. The IMF might have used a global model to forecast a 4 per cent increase in global GDP. Nigeria needs to utilize its forecasting model to determine the impact on GDP if oil subsidy is removed, he concluded.
In a recent chat with The Point Newspaper, renowned economist and Managing Director of Cocosheen Nigeria Limited, Lagos, Mr Henry Olujimi Boyo, stated that Nigeria is in dire straits with regard to the fuel subsidy removal issue. “If we are trying to curtail recurrent expenditure while at the same time paying over N3 trillion as subsidy annually, ultimately we may have to borrow to pay for subsidy and that would be really tragic, he stated.
In addition, you will find out that the advice by the IMF that we should remove subsidy is okay, but going by the present state of the economy, it would be very dangerous for us to embark upon it. Because, what would happen is that it would cause at least a 400 per cent increase in the price of petroleum products if subsidy is completely removed. You should know the implication of a 400 per cent rise in the price of petrol in Nigeria.
Notwithstanding that we as a country are losing so much by keeping the subsidy programme alive because we are told that our fuel consumption has jumped from 25 – 30 million litres a day, to about 50 million litres as reported by the Nigerian National Petroleum Corporation (NNPC), but there are no indications that there are more cars on the Nigerian roads.
So, we must accept that the petrol is going somewhere else, expectedly, to the neighbouring countries. And not surprisingly, the customs and immigration officials at our border posts have indicated that there are almost 2000 illegal entry points at the Nigerian borders. What I am saying is that we are borrowing to subsidise the petrol consumption in other countries around Nigeria. We are borrowing about N2 – N3 trillion and it is a tragic dilemma, but it is not such an insoluble problem if looked at from the right perspective.
The problem with the price of petrol is not the high price. It is related to the disadvantages of a naked cost, but the issue of subsidising petrol consumption in other countries can be related to the mismanagement of the naira exchange rate. That is the bottom line. If the naira is exchanged for about N150 to a dollar for instance, chances are that the price of petrol may remain at N145 without subsidy at all. If on the other hand the naira exchanges at N100 to a dollar, you may find out that the price of petrol may go below N100 per litre. The challenge of having to subsidise petrol prices in Nigeria can be directly traceable to the value of the naira. The reality is that if you do not find out why the naira exchange rate has continued to dip even in an era of excess foreign reserves, then you are not serious about solving the problem of the Nigerian economy. At a time when Nigeria had less than $2 billion as reserves, petrol was selling for less than 10 kobo per litre. So, how can it be that when you have over $40 billion in foreign reserves the exchange rate is dipping? It is dipping because the threshold on which you place the naira is inherently faulty and arbitrary. It may lead to a situation where it is difficult to remove subsidy from petrol. This process in counter-productive and is bound to have a negative effect on the consumer.
“My advice is simple; realign the naira rate with a system that does not involve erosion of the value. Otherwise the naira will continue to fall even in the next 20 to 30 years. That means that something is certainly wrong. Remember that the naira was stronger during the Abacha regime when the reserve was about $4 million and the value of the naira was pegged at N20 per dollar for almost four consecutive years. Now we have over $40 billion and the naira is on a free fall, having crashed from a little over N80 about five years ago to almost N400? It shows that something is definitely wrong and it appears that Nigerians are not thinking. So it is the process by which you determine the exchange that keeps subsidy alive. The moment you remove subsidy without addressing the exchange rate of the naira, it continuously grows weak even though you have extended imports demand to address it, then you don’t really care about Nigeria. What doesn’t make sense is the way the naira exchange rate is determined. It so happened that the more reserves that we have, the greater will be the challenge on the naira to further depreciate. That is the reality. I am not plucking what I am saying from the thin air. This is reality and I am backing them with cogent reasons and examples. So the advice by the IMF for fuel subsidy removal is good. In fact, we don’t have to make an effort to remove subsidy at all once we start having the right process for determining the naira rate. The subsidy will disappear by itself without anybody going into an elaborate process of subsidy removal.
