Why And How Petrol Subsidy Must Go – Prof Kingsley Moghalu

• Why I quit partisan politics in Nigeria

For Nigeria to exit from its national fiscal crisis, create prosperity for its citizens and fulfil its obligations to those citizens, we must end the decades-old drainpipe of petrol subsidy.

There is no good time to do it. Postponing the evil day (as we have done for too long) beyond the next three months – and even then, only to prepare well for how to do it and the aftermath – would be unwise. A large majority of Nigerians oppose ending the subsidy despite the overwhelming economic arguments against it. Many, though, have accepted this inevitable outcome as our fiscal crisis has progressively gotten worse. We have been locked in a battle between economic rationality and the “superstition” of petrol subsidy for four main reasons. First, Nigeria has a literacy rate of 62 per cent – quite low, relative even to several other African countries.

From this foundational statistic we can extrapolate that the rate of economic literacy – a basic understanding of economics and the public policy that should drive its application on a national scale so it can work to our ultimate individual benefit – is infinitesimal. And yet, we are a people of strong opinions on anything under the sun! Secondly, and perhaps even more importantly, Nigerians simply do not trust their governments and the political elite to act in a manner that is remotely in the interest of the average Nigerian.

Gvernance failure

This breakdown of trust is deep, and complete, and has evolved over several decades of governance failure marked by a combination of industrial-scale public sector corruption and a vanishing capacity to exercise the basic functions of the administrative state. Nigerians, therefore, cling to a belief that “cheap” petrol – increasingly a myth – is their basic human right as citizens of a petrostate. It is a “minor” matter that we are one of the very few oil-producing countries in the world, such as the august company of war-torn Libya, that exports crude petroleum and then imports refined and expensive petrol to which value has been added in foreign countries.

The third reason we have remained in this dilemma is economic populism. This doctrinal approach has led successive governments to pretend they love their poor compatriots by “subsidizing” the difference between the landing (real) cost of imported refined petrol and the price consumers pay at the gas station. It is, again, a minor matter that this market inefficiency has created a class of corruptly wealthy businessmen and women and the public servants with whom they collude to inflate consumption figures that determine the rates of subsidy payments. Meanwhile, elite corruption and inefficiency have crippled our national refineries for several decades.

Economic populism is a phrase that has its origin in Latin America in the 1970s and ’80s, and from failed economic policies in Chile under its President Salvadore Allende (1970-1073) and Peru in the first term of President Alan Garcia (1985-1990). It is a policy approach that panders to uninformed popular opinion to create ultimately unsustainable obligations on the part of the government (and sometimes a period of economic or wage growth). The economy then crashes, and the citizens are returned to ground zero where they were pre-populism. Sometimes they are returned to “underground zero” which is worse and, I would argue, our situation in Nigeria. Populism is what led President Nana Kufo-Addo’s government of Ghana to chalk up massive public spending, a huge import bill on the back of newfound oil wealth, eventual foreign exchange scarcity and an unsustainable debt of $58 billion, on which our West African neighbour has defaulted and is now borrowing from the International Monetary Fund, IMF, for the 17th time in Ghana’s history. Nigeria has similarly been afflicted by the oil “curse”.

Fourthly, the oil subsidy cabal in Nigeria has become a very strong vested interest with political and other clout. When President Goodluck Jonathan’s government attempted to remove oil subsidy a decade ago, Finance Minister Ngozi Okonjo-Iweala’s mother was kidnapped, but fortunately subsequently released. As we cannot solve problems in a durable manner if we fail to understand their root causes, we must keep the foregoing factors in mind as we grapple with the petrol subsidy challenge in our national public policy. The keys to resolving the subsidy conundrum, therefore, include a transparent demonstration (with clear safeguards) that savings from removing petrol subsidy will not be stolen by corrupt public officials, a concrete plan for how these savings will be utilized for the benefit of Nigerians and the economy, and a plan to address subsidy removal’s inevitable – but hopefully temporary – inflationary impact. All of this must be anchored by a strong, simple but effective programme of public education of Nigerians on radio, television, and social media.

Nigerians need to be made to understand that continuing the petrol subsidy works against their interest. To begin with, subsidies are not, in and of themselves, a crime. They can be found even in strongly capitalist societies. But it makes far more economic sense to subsidize production and productivity, which is what has happened in successful economies than to subsidize individual consumption – which is what we do in Nigeria with petrol subsidy. Also, where consumption is subsidized, this almost always is for essential goods such as public transportation with buses, railways, and waterways.

Moreover, this can work well where an efficient, effective administrative state exists. To pretend that we have such a reality in Nigeria, with a few enclave exceptions, would be to delude ourselves. Because of this foundational weakness, most programmes or services run by governments, federal or state, are often abused with massive corruption by public officials. Reducing the role of the government and allowing market dynamics to allocate most resources is thus a necessary first step while we rebuild the Nigerian state and imbue it with capacity. Petrol subsidies distort markets and their supply chains.

Think of our interminable queues at petrol stations. It encourages the smuggling of petrol across our borders with West African neighbours where petrol is more expensive because it sells at market prices. The profit motive is a strong one. Marketers who can make double profits in cross-border markets as opposed to the internal Nigerian market where the petrol price is capped, will do so. This phenomenon frequently leaves us standing, sitting, or sleeping in long lines for petrol at fuel stations because of supply chain disruption-induced scarcity.

Nigerians – and most people in any country, developed or underdeveloped – will exploit any opportunity for arbitrage. The best way to make things work well is to eliminate such opportunities. If the subsidy is removed, petrol supply, whether even by importation for now until the Dangote and other refineries work, or from domestic refining capacity, will become more competitive, driving down costs over time. It also is artificial to expect the price to be the same everywhere in Nigeria. Even with price regulation, that is not what has happened.

Petroleum consumption and the number of vehicles in Nigeria have been significantly inflated to serve the interests of the subsidy cabals because this is the basis on which subsidy payments are calculated and made to petrol marketers. This means that public funds are going directly into private pockets with no value received for those funds. It also is a massive waste of public resources for the Federal Government of Nigeria to spend N5 trillion on petrol subsidy, which is of benefit far more to the rich and their SUVs than to the often carless poor, while the FGN cannot afford to pay public universities and their teachers an outstanding N800 billion in agreed support while millions of Nigerian youth are idle at home for months on end from Academic Staff Union of Universities, ASUU, strikes.

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And yet, many, suffering from some sentimental hangover, continue to clamour for the continuation of petrol subsidies. As a proverb of Turkish origin says: “The forest was shrinking but the trees kept voting for the axe, for the axe was clever and convinced the trees that because his handle was made of wood, he was one of them”. This allegory applies to all four of our subsidy conundrums in Nigeria. The subsidy scam became so embedded that Nigeria, our revenues depressed from oil price shocks and weak fiscal management, especially a low ratio of tax to GDP and profligate borrowing, has for years also been borrowing to pay subsidies on petrol importation. We are now debt-distressed as repaying our debt is consuming 96% of our earned revenues according to the IMF. What do we call borrowing to pay subsidies that generate nothing we can utilize to repay our debt?

Savings from subsidy removal should be invested in subsidized public transportation across our 36 states and the Federal Capital Territory. From a back-of-the-envelope calculation, such a scheme should not cost more than N200 billion per annum overall (compare that with N5 trillion!) at not more than N5 billion per state per annum multiplied by 37 states and the FCT. This scheme should be a public-private partnership anchored in private-sector transporters and not become another “government programme”. This is to avoid any “wuruwuru” in which the “younger” transport subsidy swallows the “senior” petrol subsidy, and the “solution” becomes a worse problem than the original one.

Other investment focus areas include education (especially Technical and Vocational Education and Training, TVET, to produce skilled human capital in our young population on a massive scale), health insurance, and the savings pool of the Nigerian Sovereign Investment Authority, NSIA. The devil is in the details, but where there is a will there is a way. The incoming government of Nigeria has signposted the political will to grab this bull by its horns. If previous governments had done so, Nigeria would have been sparred this poisoned chalice.

Moghalu, a former deputy governor of the Central Bank of Nigeria, is the CEO of Sogato Strategies, a macroeconomic and investment advisory firm, and the President of the Institute for Governance and Economic Transformation, IGET, a public policy think tank.