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Is Nigeria Incentivizing Corruption with Fuel Consumption Subsidy? I

by Olabisi Showole - 10 June 2021 235 Views
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There is nothing absolutely unusual or out of ordinary for a government to institute an assistance, aid or support program that will enhance the welfare and standards of living of, particularly, its vulnerable or disadvantaged citizenry, or that will aim at building the capability of its productive sector to meet the challenges of national growth and development. Such program is otherwise called subsidy - a support or incentive provided for citizens, including consumers and producers such that consumers enjoy low prices for consumer products while the producers produce goods and services at lower cost. Alternatively, subsidizing production of goods or services lowers their selling prices or the cost of their production. One other significant benefit of subsidy, apart from lowering prices or costs, is the encouragement it affords firms to produce more to meet consumer needs at subsidy-induced lower prices. This shows that subsidy policy is beneficial to consumers/buyers who can buy goods at lower prices or to producers who can also produce at reduced cost, subject however, to the underlining elasticity conditions of the goods and services as well as the prevailing exchange rate.  The elastic conditions and others, including exchange rate impact, will be discussed comprehensively in relation to fuel subsidy program in Nigeria. In the meantime, it suffices to say that, in the context of fuel consumption, consumers face price inelastic demand, the suppliers inelastic supply while the nation's currency exchange rate valuations have varying effects on production as well as on consumption of goods and services. In the context of Naira exchange rate, its depreciating value impacts both production and consumption negatively, particularly when the manufacturing sector depends on imported raw material inputs.


Let the truth be told, subsidy program is not new to Nigeria. The immediate post independence period of between 1960 to the 15th of January, 1966 revolution period, witnessed agriculture subsidy implementation at play without the controversies that are surrounding fuel subsidy implementation of today. I am saying in this regard, with a measure of certitude that subsidy payment has been part of Nigeria's  growth and development strategy, albeit without the tears we are witnessing in today's Nigeria despite the fact that Nigeria's development strategy of yore, placed emphasis on public sector dominance or pre-eminence in the management of the commanding heights of the national economy. In other words, industry, manufacturing, agriculture, mining sectors, et cetera were firmly entrenched in the hands of the governments of the federation, and different types of subsidies were paid for achieving the goal of rapid economic transformation that was, adjudged to have benefitted the country and its citizenry tremendously. For instance, during the first republic, the evolution of various Produce Marketing Boards for the agricultural sector was partly intended by the four regional governments to operationalize subsidy payments in the sector. It ultimately, stabilized agricultural produce prices by regulating the buying and selling of agricultural commodities, particularly the cash crops that included cocoa, palm oil, groundnuts, rubber, etc. The period was, indeed, the golden era of subsidy program in Nigeria when landmark achievements were recorded.  The overriding factors of discipline and patriotism that rule governance and government activity during that period could not be ruled out as factors responsible for the landmark achievements.


Unfortunately, good programs do not often last or are often bastardised in developing economies, including Nigeria. The coming of the crude oil into national economic reckoning gradually, proved this point in Nigeria. For instance, when crude oil became the mainstay of  the national economy, both the political and socio-economic dynamics changed; there were consequent unanticipated, inflows of huge petrodollars, induced of course by oil boom of that period just as the dominance or preeminence of the public sector in the economy was firmly, entrenched. Thus, various programs and projects were executed by governments of the federation. So also was subsidy program, including fuel subsidy, were introduced as a welfare package to reflect the reality of government having so much in its coffers. Fuel subsidy was in full swings, operating, initially without controversies. Perhaps plausible explanation for fuel subsidy payments without controversies during the period could be, found in the fact of the four refineries owned by NNPC operating fully subsidized and at optimal capacities. The four refineries are:  the two refineries of the Port Harcourt Refining Company (PHRC); the Kaduna Refining & Petrochemical Company Limited (KRPC), and the Warri Refining & Petrochemical Company Limited (WRPC). These refineries have a combined capacity of 445,000 bpd. Nobody was complaining that fuel subsidy benefitted the wealthy, that it was anti-market or anti-private initiatives; fuel was available at any given time.


While the oil boom lasted, and in order to hasten the pace of national growth and development, import substitution policy was embraced as a strategy for transforming manufacturing sector from its rudimentary state to one of pervasive economic importance, operating optimally to transform the entire economy. There was however, a missing link - the policy did not take into account the underdeveloped state of the agricultural sector, which would have, otherwise, supplied the raw material input-needs of the manufacturing sector. Consequently, the sector had to depend on imported inputs for its operation. The policy was facilitated by an overvalued national currency (Naira) vis-a-vis US dollar and other convertible currencies of our trading partners. The policy made access to imported inputs easier and cheaper, but not without justified concerns about the sustainability of the over - valued exchange rate policy that is dependent on the oil sector, which performance is also subject to shocks (both positive and negative), or for allowing the importation of all manner of goods at a huge cost to the nation, including the depletion of the country's foreign reserves.


As long as the shock is positive, there is nothing to worry about. There are, however, lots to worry about in respect of negative oil shock. That was what eventually happened between 1979 and 1983 when, unfortunately but expectedly, the good times of the oil-boom came to an abrupt end; the oil boom busted. The hitherto huge earnings from oil dropped sharply from about US $25 billion in 1980 to US $10 billion in 1983. The end of the oil boom and the accompanying sharp drop in revenues from oil, culminated in adverse economic consequences such as severe manufacturing capacity underutilization, extensive plant closures, retrenchment of workers, high unemployment, high price inflation with attendant social anomie and large drops in living standards of the citizenry.


The oil bust-induced "general slow down in economic activity, otherwise called economic recession, general inflation and the resulting decline in the welfare and living standards of the citizenry had, elicited from Shagari Administration the imposition of economic policy measures called Austerity or Economic Stabilization measures - a mainly demand management measures, involving increases in tariffs and rate of taxation; import licence imposition and placement of ban on consumer items. The policy was unsuccessful because it was only addressing the symptoms and not the disease- the dislocation of national economic structure. It calls for the institution of a wholesale restructuring of the economy, which had been damaged by the preeminence of the public sector in national economic management, economic policy misalignment as well as the mismanagement of the oil boom. The failure of the Shagari Austerity measures, heralded the Babangida administration structural adjustment programs (SAPs) -economic policy realignment or economic structure adjustment measures which most important goal was to restructure the productive base of the economy that had been, battered by years or decades of  public sector dominance, political and economic policy misalignments and fiscal indiscipline. The economic restructuring is simply the ultimate reliance on the private sector or market/price mechanism as the driver or the motive power of Nigeria's economic growth and development. In other words, the hitherto dominance by the public sector has to give way to private sector initiatives in the implementation as well as in the actualization of the self-reliant and self-sustaining development objectives of the country.


It should be acknowledged that the oil boom that had brought in its wake the onset of national economic disequilibrium, fiscal indiscipline and economic policy misalignment must necessarily bring its antithesis in the oil bust, which brought about a fundamental paradigm shift from the hitherto public sector dominance of the economy to a profound structural re-engineering of the economy that placed utmost emphasis on the role of Market forces/price mechanism/forces of Supply & Demand in economic production and management as well as in the determination of the Naira exchange rate. That was what happened in 1986. The economic structural re-engineering, however, did not also foreclose the role price mechanism could play in the production and consumption of fuel in order to bring to an end the controversial fuel subsidy program in Nigeria. The strategic reliance of SAPs on market forces also provided for the government the opportunity to come up with policy relevant to addressing the recurrent and contentious issue of fuel subsidy. But government failed to take advantage of the opportunity. The failure elicits the following policy options from me as a recommendation for the government:

i) sale/privatisation of NNPC as well as the four moribund refineries to Nigerian or foreign investors;

ii) revamping the operations of the existing 4 government-owned and operated refineries in favour of full subsidization of their operations with a view to achieving optimal outcomes- increased outputs, lower prices of refined fuel for domestic consumption and the export of balance to neighbouring countries in the West African subregion after meeting domestic demand.  Such action will block refined fuel smuggling to Nigeria's neighbor-countries and recoup the financial losses from subsidy implementation. The drawback of the option is that government will still be on the control seat with its inherent mismanagement, profligacy and inefficiency intact;

iii) government to continue importing all of our refined fuel needs from abroad through NNPC thus, subsidising the operations of foreign refinery at a huge cost and negative implications for our foreign reserves, and iv) liberalising the importation of the refined petroleum products thus, allowing stakeholders like Independent Petroleum Products Marketers to import refined petroleum products while market/price mechanism or competition plays its role in the determination of the pump price of the premium motor spirit (PMS) as well as prices of other petroleum products. In this case, government/NNPC will not be obliged to continue with dubious fuel subsidy payments that often constrains government's fiscal potency. Instead, government will engage itself in transfers to the needy while, ensuring that there are no collusions amongst the Independent Petroleum Products Marketers.

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