A radical shift from years of prodigal spending of scarce resources on fuel subsidy needs little or no persuasion in the light of biting economic realities. But beyond Mr President’s ‘subsidy is gone’ slur, is the imperative of a clear-cut socio-economic plan and programmes to cushion the domino effects of the post-subsidy era. KINGSLEY JEREMIAH, COLLINS OLAYINKA, GLORIA NWAFOR, JOSEPH CHIBUEZE and WALIAT MUSA report that the Tinubu-led administration already has its work cut out with pump price at an average of N500 per litre.
For decades, the Nigerian economy has been in the doldrums bookmarked by tattered finances, anaemic growth, fiscal recklessness, official waste, local capacity utilisation, high inflation and extremely low labour productivity.
Many efforts have been made to pull it out of the cesspit but most handlers stop at the level of lip service and conceptualisation without the right courage. For eight years, ex-President Muhammadu Buhari lamented the challenges that held the economy hostage but did not demonstrate sufficient political will to tackle the most daunting ones.
The new President, Bola Ahmed Tinubu, could be accused of several things but not lacking the courage to act – at least as demonstrated in the few days he had been at the helm of the affair.
In his inaugural speech, he damned the political dilemma and declared an end to the touchy PMS subsidy, sending shockwaves across the country. He has also expressed his commitment to courting the oil companies to address the second leg of the petro-dollar nemesis – dwindling production.
For decades, Nigeria’s petroleum industry has contributed abysmally to the gross domestic product (GDP) as the contribution in 2022 stood at 5.67 per cent compared to 7.24 per cent in 2021, while the sector which had accounted for close to about 70 per cent of the nation’s total revenue accounted for about 41 per cent.
There are bold attempts by President Bola Tinubu-led administration aimed at reforming the downstream segment where the country has performed poorly over the year, considering overbearing control on the sector.
Coming amidst fear of monopoly, unclear policy implementation, lack of holistic alternative, profiteering, poverty, insecurity, energy transition, weak consumer protections as well as high cost of governance, most stakeholders have expressed divergent opinions on the president’s plans even as the odds are deafening.
A day after the speech and 30 days before the set date for the removal of the subsidy, the Nigerian National Petroleum Company Limited (NNPCL), on Wednesday, announced a new price template, which increased the pump price of Premium Motor Spirit (PMS) from N195 per litre to N557 per litre to signal the deregulation of the downstream industry.
N13.7 trillion-subsidy era
For decades, Nigeria, despite being a leading oil-producing country relies mainly on the import of petroleum products; the development had remained a major drainpipe on the country’s revenue and foreign exchange crisis as investment remained dismal in the sector.
The Nigeria Extractive Industries Transparency Initiative (NEITI) stated that from 2005 to 2021, the country spent $74.39 billion, translating to N13.697 trillion on importing PMS alone.
According to the NEITI report, a breakdown of these figures showed that in 2005, the government paid $2.6 billion (N351 billion) as a subsidy. In 2006 and 2007, it paid $1.99 billion and $2.176 billion (N257 billion and N272 billion) respectively.
The report further pointed out that subsidy payments more than doubled in 2008 and 2010 and witnessed the highest increase in 2011 to $13.52 billion (N2.11 trillion). A sharp decline was witnessed in 2012, 2013, 2014 and 2015 when it dropped to $3.34 billion (N654 billion) in 2012.
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The decline in subsidy expenditure continued in 2016 and 2017 to as low as $473 million (N154 billion) in 2017. The reduction was short-lived as the payments skyrocketed to over $3.88 billion (N1.19 trillion) in 2018 and in 2021 to $3.58 billion (N1.43 trillion). By these figures, Nigeria has spent an average of N805.7 billion annually in recent years, N67.1 billion monthly or N2.2 billion daily.
Subsidy payment and a weak downstream sector are a falling knife on an economy with many negative indices, heavy debt, high inflation, acute infrastructural shortage and high unemployment.
In the petroleum industry, the downstream sector deals with petroleum product refining, storing, marketing and distribution. The sector is an enabler of other critical industries such as petrochemical, construction, agricultural, and industrial sectors among others. Though it is a vibrant segment and a major revenue earner for most oil-producing countries across the world, the sector has remained in shambles in Nigeria.
While subsidy is not bad in itself, economically, there seems to be more sense in infrastructural development, strengthening of local industry and production through subsidy than supporting consumption. Apart from the retarded growth in investments and weak contribution to real GDP, regulation of the downstream sector limits the capacity of the industry, makes importation of refined products normal and leaves a huge economic burden on the country, experts have warned.
Slippery road to a deregulated downstream sector
Yet, stakeholders believe the deregulation may have been hastily done to dance to the tune of the capitalists, especially as the Dangote Refinery is due to pump out fuel within the next two months.
Now, there are calls on the government to clarify the $800 million taken by the former administration as palliatives. The loan was said to be ready for disbursement, but the new administration feigns ignorance about it.
This comes as the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) also remained silent on its roles as the regulatory body saddled with the responsibility of regulating activities in the downstream sub-sector of the Nigerian economy. These are some of the pitfalls of the road to deregulation.
Specifically, Section 206 (2) of the Petroleum Industry Act (PIA), said: “The authority shall have the power to monitor the bulk sale of petroleum products and may publish market-based prices to ensure that the transactions in a manner that transfer pricing between the supplier and wholesale customer are undertaken at transparent arms-length basis.”
Also, Section 205 (1) of the Petroleum Industry Act 2021 reads: “Subject to the provisions of this section, wholesale and retail prices of petroleum products shall be based on unrestricted free market pricing conditions.”
Industry players insisted that the masses are possibly being short-changed, stressing that the current subsidy regime was meant to end by the end of June, which is still a month from now.
Former chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Tunji Oyebanji, had earlier said marketers are currently in the dark as to how the Federal Government intends to manage the imminent deregulated market and the foreign exchange crisis.
“We are saying that there has to be a very clear roadmap so that all stakeholders can be carried along. For me, this is very critical. For example, at the point we will remove subsidies, will other products be imported? We can’t wait until the day subsidy will be removed before we know. If they are importing we need to have placed an order. If NNPC will be importing, we need to know. Everyone needs to be on the same page,” Oyebanji said.
An expert in energy economics at the University of Ibadan, Prof. Adeola Adenikinju said the increase in prices would create short-run discomforts.
“However, in the medium term, we should expect new investments flowing into the sector to create new refineries, new depots, etc, that will create jobs and revenues for the government,” Adenikinju said. He added that like the situation was with the liberalization of telecommunications in 2002, the prices would go down as new investors come into the sector.
Oil and gas governance expert, Dauda Garuba, said while deregulation of the downstream sector is overdue, “especially as subsidy only works in the cities and for a few fat cats that feed on it,” the current development remained unclear.
“What is, however, abnormal about the deregulation is that it is coming less than a month we have all set our minds on. NNPC Limited is technically the sole importer of petrol to Nigeria, I do not see its business fixing the price of petroleum products.
“In fact, its filling stations should be among the ones to be regulated by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA),” Garuba said.
Garuba added that the decision would be very painful for the majority of Nigerians, especially for small and medium-scale businesses because petrol touches everything in Nigeria.
Considering that Nigeria’s minimum wage is about N30,000, which can only buy about 60 litres of PMS and evaporates within a week for a salon car for a worker, who drives on average, 40 kilometres to and from work daily, energy expert, Ademola Adigun said the current situation would increase the demand for salary increase.
“There will be inflation. There will be agitation for salary increase. There will be negotiations with labour Unions. But the biggest challenge for me is why do we need to set prices when it is a deregulated market. The market should determine the price.
“Manufacturing is diesel based. The effect might be minimal directly but considering other supporting factors, it also rises. There will be pressure on salaries and wages. Demands and agitation by private sector workers. I expect Trade Unions to give notice of the strike. It’s going to be tough on all of us in the short run. But we will survive as we adjust gradually,” he stated.
Adigun said the consumers must be protected from vulnerabilities, adding that the NMDPRA as well as the Consumers’ protection council must up their games. He said the market would not thrive if NNPCL has a preference in terms of foreign exchange, adding that a level playing field is critical for all the operators.
Chief Executive Officer (CEO) of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said subsidy removal would unlock about N7 trillion into the federation account and reduce the fiscal deficit while easing the burden of mounting debt.
“Currently, it is extremely difficult to attract private investment into our petroleum downstream sector because of the unsustainable subsidy regime and the stifling regulatory environment.
The subsidy removal will eliminate the distortions and stimulate investment. We would see more private investments in petroleum refineries, petrochemicals and fertiliser plants. Post subsidy regime would also unlock investments in pipelines, storage facilities, transportation and retail outlets. We would see the export of refined petroleum products, petrochemicals and fertilisers as private capital comes into the space. Quality jobs will be created,” he said.
Yusuf said there must, however, be palliatives, which should be segmented into immediate, short term and medium-term deliverables He said: “Immediate and short-term options include wage review in public service, the introduction of subsidised public transportation schemes across the country and reduction in import duties on intermediate products for food-related production to moderate food inflation.
“In the medium to long-term, there should be accelerated efforts to upscale domestic refining capacity, driven by private investments; accelerated investments in rail transportation by the government to ease logistics of fuel distribution across the country as well as domestic freight costs.”
Shrinking monetary, fiscal options
Like in the case of the oil sector, the government is running against time to regain monetary sanity. The new policy direction aims at unifying the exchange rates as disclosed by Tinubu on Monday. That is not far from the policy thrust of the CBN initiated three years ago but kneecapped by political exigencies.
If achieved, the government will be able to raise the volume dollar inflow. Today, the premium on black market rates is about 60 per cent. Last year, it hit 100 per cent for the first time since the return to civil rule as against the IMF-recommended less than five per cent.
With Tinubu’s “housecleaning” exercise, the CBN may not need to give incentives and rebates to attract foreign exchange remittance through the official window.
Speaking on the roadmap, the Chief Executive Officer, Dairy Hills Limited, Kelvin Emmanuel, said: “I, however, do not subscribe to the idea of setting up a single-digit rate for consumer lending and mortgage rates. What the Central Bank should work on instead should be decoupling the inflationary drivers to enable MPR to come within a single digit, as a tool to ensure that it does not need to provide the difference in mortgage and consumer-backed direct intervention subsidies, through the expansionary monetary policy that the apex bank has been known for.”
Meanwhile, the quest by Tinubu to see Nigeria attain higher gross domestic product (GDP) rates as soon as possible is attainable, according to experts, if the administration would have the willpower to follow through with its economic agenda.
That is the position of a cross-section of Nigerians who also said that the nation’s problems are not about the formulation of policies, but actual implementation. The new President had during his inaugural speech stated that his administration targets a higher GDP growth and to significantly reduce unemployment.
Outlining the steps it will take to accomplish this, the President said he would embark on budgetary reform that would stimulate the economy without engendering inflation as well as put forward an industrial policy that will utilise the full range of fiscal measures to promote domestic manufacturing and lessen import dependency.
The President also promised that electricity would become more accessible and affordable to businesses and homes alike. According to him, “Power generation should nearly double and transmission and distribution networks improved. We will encourage states to develop local sources as well.”
Last year the World Bank said that Nigeria needs to make urgent business-unusual choices to avoid a scenario in which up to 80 million working-age Nigerians do not have a full-time job by 2030 and that up to 23 million more Nigerians could be living in extreme poverty.
Muhammad Akaro Mainoma, a professor of accounting and finance and a one-time Vice Chancellor, Nasarawa State University, said, if the administration could faithfully implement what it promises Nigerians, the economy would bounce back.
Speaking on some of the pronouncements of the new President, especially the fuel subsidy removal, he said it is a major decision that needed to be taken.
On the likely hardship the increase in fuel prices could cause the citizens, Prof. Mainoma said: “Yes we know that we need to take some hard decisions to grow the economy, but there is a lot the government can do to mitigate the effect. The government needs to intervene in the area of transportation and in the area of food supply.
“If the government is going to help the situation, two things are very essential, let the government provide transportation so that those in the transport sector will not increase their fares beyond the reach of the ordinary citizens which will also push food prices in the market higher. This is also the time when the government should supply food to the market to force prices down.”
It is believed that the two issues of fuel subsidy removal and the unification of the exchange rate will positively move the economy to a quick recovery.
National President, All Farmers Association of Nigeria (AFAN), Arc Kabir Ibrahim said that one of the best moves the new President has made so far was to address the monetary policy issues which are responsible for the weak purchasing power of the naira.
According to him, “It is the weak purchasing power of the naira that is responsible for the challenges of inflation. But I am glad the new President mentioned that he is going to do something about the monetary policy to see how they will strengthen the currency. Once the purchasing power of the naira improves, things will normalise.”
Powering economic growth
Indeed, access to reliable and affordable power is critical to the functioning of any economy, from powering homes and businesses to supporting transportation and healthcare. This makes electricity an essential resource.
The challenge of ensuring resource adequacy and maintaining infrastructure is only becoming more pressing as the world becomes more electrified. In Nigeria, a country with a dreary power sector, the President understands the economy could only kick with an adequate power supply. Previous commitments were made but poor follow-ups scuttled the plan. Can Tinubu get it right this time?
Speaking with The Guardian, power analyst, Lanre Elatuyim said the path to having accessible power is by ensuring there is resource adequacy and adequate infrastructure such as transmission and distribution networks that are resilient enough to connect all consumers irrespective of their communities and their socio-economic status.
Ensuring that there is enough power to meet demand, particularly during peak usage times, could be a challenge. This is where resource adequacy and infrastructure play a crucial role. The newly-reworked power investment template allows states to participate in the entire value chain, unlike the rigid past. But the states would need the right incentives to move their fingers, experts have said.
On the possibilities of accessible power, Elatuyi said massive investments, especially in distribution networks and also the availability of mini-grids in rural areas where the larger grids do not extend to, drive power accessibility
Resource adequacy requires a careful balance of supply and demand, which can be difficult to achieve given the constantly changing nature of energy usage, he said.
Also, building and maintaining a robust infrastructure is essential to ensuring reliable power delivery, he added. Speaking on the path to the affordability of power, the analyst said generating electricity at least cost from diversified generation resources as the price of power must be cost-effective and within the financial means of the consumers, depending on the pricing mechanism and how generation resources are dispatched in real-time.
“The customers must pay so that revenue can flow within the power value chain, also, regulation must be in place to ensure fairness and transparency,” he said
The expert said the two can be achieved at the same time as the goal of any power system is to ensure reliable, accessible and affordable electricity to the consumers, depending on how an optimum balance is created among the objectives.
“The two can be achieved with the current administration if focused, the goal of any government and regulator is accessibility and affordability of the power sector but the challenge is how to ensure that in policy and market design,” he said
Adding that increased generation and more diversified generation resources must be matched with adequate infrastructure for transmitting and distributing power to the consumers.
“In Nigeria, our generation portfolio is limited and also dominated by inefficient peak plants, when half of the generation portfolio is Open Cycle Gas Turbine, then it is difficult to expect cheap electricity,” he said
Meanwhile, on cost-reflective pricing, he emphasised that tariffs should be cost-reflective, depending on the pricing mechanisms and available data. He added that there is not enough data to determine whether tariff is cost-reflective or not, urging transparency in pricing.