The next president’s fuel subsidy challenge

The next Nigerian president will have their job cut out for them. Whoever wins the February 25, 2023 presidential election will be taking over a country that is neck-deep in serious economic, political and security crises, assuming all goes well with the election in the first place. Daily Trust on Sunday spoke with over half […]

The next Nigerian president will have their job cut out for them. Whoever wins the February 25, 2023 presidential election will be taking over a country that is neck-deep in serious economic, political and security crises, assuming all goes well with the election in the first place.

Daily Trust on Sunday spoke with over half a dozen people familiar with the workings of government in Nigeria about what they consider the five most pressing policy issues the next president must face from day one.

Insecurity and the economy top the list of their selections. But other policy issues, among them education and health, the cost-of-living crises, unemployment, youth development, and the links between agriculture, food security and industrialisation also feature prominently. Some of the experts also mentioned the old but still unresolved questions of Nigerian federalism as a priority for the next government.

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For the economy in particular, the impact of skyrocketing fuel subsidy payments on government revenues, rising inflation, and the rapid devaluation of the naira over the past few years are clearly among the most immediate policy issues the next Nigerian president must deal with on assumption of office from May 29, 2023.   

The fuel subsidy challenge  

“The first is the place of subsidy in the petroleum sector. This is an issue that whoever comes to power would have to confront, whether the person likes it or not because the current delivery framework is not sustainable,” says Dr Hussaini Abdu, Country Director of Care International in Nigeria and a development and humanitarian specialist of more than 25 years.

“A situation where whatever you are getting, at least from what we see from the books, whatever we are getting from the sale of crude oil, we return that for importing and subsidising refined products. So virtually, the government is just doing trade by barter. And that is not sustainable,” he added.

President Buhari echoed these same concerns last month when presenting the 2023 budget to the National Assembly. “Petrol subsidy has been a recurring and controversial public policy issue in our country since the early eighties. However, its current fiscal impact has clearly shown that the policy is unsustainable,” Buhari told lawmakers and the nation.

Part of the controversy is a lack of clarity and context from both those who call for its removal, and those who are opposed to it. However, there are three core issues at play in the debate over fuel subsidy: its fiscal impact on the overall economy; the political cost of its removal; and the question of where the savings from removing subsidy will go within government.   

The fiscal impact of fuel subsidy on the economy in Nigeria is staggering indeed. Nigeria’s petrol subsidy payments reached a total of N10.4trn in the 13-year period between 2006 and 2019, according to data released by the Nigerian National Petroleum Company Limited (NNPC Ltd) in April this year. And in the 30-month period from January 2020 to June 2022, subsidy payments (N3.92trn) equalled the combined allocations for education and health (N3.96tn).

In addition, the Minister of Finance, Budget and National Planning, Zainab Ahmed, had said that going by current trends, the government would spend N6.7trillion on petrol subsidy payments in 2023 alone – almost all of it to be borrowed – indicating an astronomical raise from just two years ago when subsidy payments were N450bn in 2020.

Fuel subsidy thus takes public money away from much needed infrastructure projects and social services that benefit the poor, particularly education and health. It worsens the devaluation of the naira, deprives the government of ‘windfall’ during a period of high crude oil prices, and increases government debt. Therefore, continuing subsidy payments not only kicks the political burden of its removal to the next government, but also pushes the economic toll of trillions in debt to the next generation.

This is the crux of the policy argument for subsidy removal, and it is sound economics. But sound economics does not always make for good politics. Because it affects millions of Nigerians and has been around for so long, petrol subsidy has amassed a huge support, raising the political costs of its reform for any government. Virtually every government since 1999 has attempted a complete withdrawal from subsidy payments, but none has succeeded fully because labour unions, voters, and opposition politicians would quickly join ranks to kick against reform.

The political economy of fuel subsidy

Nigeria is no exception to this problem. Many governments provide some form of fuel subsidies, either as production subsidies in the tax waivers and exploration grants to oil companies extracting oil and gas, or as consumption subsidies directly to the end-user at the pump. But the objectives of both subsidy policies are the same: to protect the poor, and to cushion the inflationary effects of high energy prices on the economy.

The G20 countries, for example, provided an average of $290bn annually in subsidies to oil companies during 2017-2019, while globally, direct consumption subsidies reached $320bn in 2019 alone, a report of the International Institute for Sustainable Development (IISD), an industry think-tank, has said.

Although figures on Nigeria’s subsidy payments are notoriously unreliable, some comparable economies pay even more in subsidies than Nigeria. In 2020, for example, Egypt provided $5.3bn (about N2.3tn) in fuel subsidies, making it 7th on the list of top 25 countries for most subsidy payments that year, according to data by the Paris-based International Energy Agency (IEA).

Nigeria paid N450bn (about $1.2trn) on fuel subsidies in the same year. In other words, Egypt paid five times more than Nigeria in fuel subsidies during a single year (2020), even though Egypt has just about half Nigeria’s population and ranks below Nigeria in both Gross Domestic Product (GDP) and daily oil production levels. Thus, Nigeria’s real subsidy problem may be the corruption associated with it, rather than the gross amount paid for it, since comparable oil-producing economies within Africa pay just as much or higher.

In Nigeria, fuel subsidy lies at the intersection of local refining capacity, total volume of domestic fuel consumption per day, and the foreign exchange required for the importation of refined products. But all of these policy points may be loopholes for massive corruption, as a litany of corruption panels and hearings over the past two decades have shown.

Nigeria’s four refineries, with a combined refining capacity of nearly 450,000 barrels per day, have gulped about $3.7bn (N1.6tn) in maintenance and rehabilitation costs since 2015; yet none of them pumps out much refined products, Daily Trust reported. Moreover, as the Reuters report shows, Nigeria imported 90 million litres per day in March and 83 million in April this year, against 64 and 63 million litres respectively during the same months in 2021. 

How have imports shot up by more than 20 million litres per day in just a single year? And why does the NNPC now claim to import about 98 million litres daily? The Comptroller General of the Nigerian Customs Service, Col Hameed Ali (retd) asks these questions most poignantly while querying NNPC’s import figures before a committee of the National Assembly only last month.

“How do we get to 60 million litres every day? These are my problems. If you say you release 98 million litres and then, we use only 60 million litres; the balance will be 38 million litres. How many trucks will that 38 million litres every day be? That will be almost 500 trucks; which roads are they following, where are they carrying them to?” he asked. Nigerians still await the answers.   

The candidates’ plans on fuel subsidy

But the perception of massive corruption around fuel subsidy, if not the reality of it, severely weakens the fiscal argument for its removal. More daunting still is the policy question of what to replace subsidy with, and how? If subsidy payments are no longer sustainable, as President Buhari said last month, what can be done about it? In short, where do the leading presidential candidates stand on this most pressing policy issue?  

While delivering a speech at an event in Kaduna barely three weeks ago, the deposed 14th Emir of Kano and former governor of the Central Bank of Nigeria, Alhaji Muhammadu Sanusi II, described the fuel subsidy, along with debt servicing, as among the most immediate policy concerns the next Nigerian president must face.   

Yet, the campaign documents of the leading presidential candidates in the election are almost entirely silent on fuel subsidy. The official manifesto of a former governor of Anambra State and the presidential candidate of Labour Party, Mr Peter Obi, was yet to be released to the public at the time of this report.

But a former vice president of Nigeria and the candidate of the main opposition Peoples Democratic Party (PDP), Atiku Abubakar, released his 2023 election manifesto as early as two months ago. The document, tagged, “My Covenant with Nigerians,” promises Nigerians a five-point agenda that will “restore unity in diversity, ensure safety and security of life and property, build a dynamic economy for prosperity, restructure the polity to foster unity and stability and provide qualitative education.”

Yet, the 74-page document does not contain a single reference to fuel subsidy, raising the question of how any Nigerian president can build a dynamic economic without addressing fuel subsidy at the present time.  

The 164-page manifesto of Dr Rabiu Musa Kwankwaso, the presidential candidate of the New Nigeria Peoples Party (NNPP), tagged, “My Pledges to You: The RMK2023 Blueprint,” generally consists of a series of pledges and a corresponding “Plan of Action” for each. But for most policy issues, the document is longer on the pledges than the action plans. 

On subsidy, the former governor of Kano State promises to “examine and review all subsidy regimes in the overall interest of Nigeria and Nigerians” by bringing to an end, the “unfortunate and persistent culture” of, among other things, “underreporting, corruption and all such other under-hand tricks that are being used to short-change the country and make the environment unsafe for operation.” 

An approach that tackles corruption in the subsidy regime is sorely needed for Nigeria, even if the details of Kwankwaso’s action plan remain to be clearly spelt out in this manifesto. Still, the document proposes to “Fully de-regulate the downstream sector,” which in effect means a complete withdrawal from subsidy payments. But how the withdrawal would be achieved and which sectors would benefit from the savings from subsidy removal were not mentioned.  

The 80-page policy document of the candidate of the ruling All Progressives Congress (APC), Asiwaju Bola Ahmed Tinubu, titled, “Renewed Hope 2023” talks about fuel subsidy, but only just subsumed under the “goal” of ensuring the “Stability of Petroleum Product Supply,” Tinubu promises to “phase out the fuel subsidy, yet maintain the underlying social contract between government and the people.

“We do this by dedicating the money that would have been used on the subsidy to fund targeted infrastructural, agricultural and social welfare programmes, ranging from road construction, to boreholes, public transportation subsidies, education and health care funding programmes. In this way, the funds are more directly and better utilised to address urgent social and economic needs,” the document states.

This is the standard practice for reform in many countries. In Indonesia, for example, a $15bn savings from energy subsidies in 2015 were ploughed into increased spending on portable and irrigation water in rural areas, food subsidies, education, health, and direct benefit cash transfers to the poor and the near poor, thus significantly reducing the resulting impact of high fuel and electricity prices, according to another report by the industry think tank, IISD.    

Tinubu’s plan is, therefore, broadly similar to the Indonesian success story on fuel subsidy removal. However, details matter for serious policy planning, even for election campaign purposes, and the Tinubu plan for fuel subsidy is glaringly short on the details.

Over how many years, for example, will fuel subsidy be phased out? Which of the numerous programmes listed in the Tinubu plan – from road construction to boreholes, education and health, and from public transport to agriculture and social welfare – will be prioritised for the savings from subsidy removal? Most importantly, how will it be done, how much will it all cost, and when should Nigerians expect them? The Tinubu plan does not state.

But as Professor Jibrin Ibrahim, a former Director of the Centre for Democracy and Development (CDD), a think-tank in Abuja said in an interview for this report, presidential candidates must spell out their policy plans clearly and in detail to be taken seriously by the voters.

“For me, however, the most important thing to bear in mind is that politicians will always promise to solve all the problems in this country. So, just because they say they will solve these problems doesn’t really mean anything. I think that as Nigerians we should always have a critical approach to campaign promises. Don’t tell us you will solve problems A, B, C, tell us how you will solve them. Tell us where you will get the resources. We want concreteness in terms of plans. We want concreteness in terms of budgets and costs. We want concreteness in terms of prioritisation. That is my position,” he added.

Dr Abdu, a development and humanitarian specialist said, “What Nigerians are saying is the ‘how’ question. I think the ‘what’ question has been fully settled. It is easy for anybody to come and tell you what he or she is going to do, but I think what we don’t often get is how they are going to do it,” he said.

Nigeria’s recent experience of failed social policy programmes – the botched COVID-19 lockdown palliatives and the school feeding policies, for example, signal a warning about the candidates’ rather sketchy promises on fuel subsidy that affirm both of these expert views.