Last Monday Joko Widodo, the newly elected Indonesian president, announced an immediate increase of more than 30 percent in the subsidised retail prices of petrol and diesel. The government’s subsidy bill for imported fuel for the year had been estimated at US$21bn or 13 per cent of the annual budget, and the finance minister has put the savings from the measures in 2015 at US$8.2bn. It acknowledges that the increases will dent consumption and push up inflation. Palliatives are on offer to cushion the blow for low-income Indonesians in the form of new education, health and welfare cards. The announcement was met with small-scale street protests.
The sequence of events sounds familiar in a Nigerian context. The parallel is apt because the two countries have common ground in their demographics, the structure of their economies and their ethnic diversity. Last month the Indian government of Narendra Modi, which won a landslide victory in elections in April/May, dispensed with diesel subsidies. So two leaders with a recent strong mandate have moved on fuel subsidies at a time when the consumer will not notice a huge difference at the pump as a result of the sharp fall in international oil prices.
Nigeria cannot now follow suit because its elections are yet to come. However, it has laid down a marker of its intentions. On Wednesday the presidency sent to the National Assembly its updated Medium Term Expenditure Framework to incorporate 2017. Plans for 2015 include reductions in the subsidies paid from N971bn to N459bn for premium motor spirit (petrol), and from N250bn to N156bn for kerosene.
Subsidy cuts, as the Indonesian government accepted, bring pressures on inflation and household consumption, and consume state resources inefficiently when they could be applied directly to poverty reduction. If we take inflation first, the impact in January 2012, when the FGN raised the official price for petrol from N65/l to N97/l, was less than feared. The consumer price index increased by 3.3 percent m/m and 12.6 percent y/y in the month. The second-round effect on general price levels was muted, and by December 2012 the y/y rate had eased to 12.0 percent, falling to 9.0 percent the following month.
For consumption, listed companies in consumer goods have attributed uninspiring sales growth over two years to the subsidy cuts and the insecurity in the north-east. This explanation sits uneasily with robust manufacturing growth, which reached 16.0 percent y/y in Q3 2014. As for FGN spending, the fuel subsidy amounted to N2.2trn in 2011 before easing to about N1.0trn in the two following years. This cost will have fallen dramatically with the slide in international oil prices since mid-2014.
The prizes for fuel subsidy reductions or, preferably, deregulation are very high. The rentier economy would be weakened, and transparency would be a winner. (We will merely note in passing the heated exchanges between the FGN and the assembly over the kerosene subsidy, and those between the NNPC and the CBN earlier this year over the corporation’s fiscal obligations.) Then there are the gains for the balance of payments since Nigeria has the potential to migrate from being a major importer of refined products under private swap arrangements to enjoying self-sufficiency with sub-regional export possibilities. In this process several private-sector proposals to build refining capacity would come to fruition. One of the largest is the Dangote Group, which said last week that its plant near Lagos for processing 500,000 barrels of crude oil per day was scheduled to begin operations by mid-2018 at the latest. This planned capacity is greater than that of the NNPC’s four ill-functioning refineries combined.
The FGN could secure the prizes if it acted swiftly after the elections and would probably still have international oil prices in its favour. Professor Anil Gupta of the University of Maryland, an authority on strategy and globalisation, argued at the FBN Capital investor conference on 11 November that the Indonesian president and Indian prime minister were well placed to deliver reform because they had established a track record with the electorate: Widodo as mayor of Jakarta and Modi as chief minister of Gujarat state.
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Gupta left the delegates to draw parallels with Nigeria. The administration formed after the elections in February will have to work harder without such a track record. Although the argument against fuel subsidies is in our view unanswerable, it will have to overcome the credibility gaps of successive governments. Financial intermediation is too low to copy the Iranian government’s ploy to pay money into citizens’ bank accounts as a palliative for deregulation. The welfare cards distributed by the Indonesian government may or may not work in Nigeria.
The FGN should have the ingenuity to come up with a set of palliatives to dilute the inevitable protest against subsidy cuts. It could expand the existing Subsidy Reinvestment and Empowerment Programme (SURE-P), which makes available more than N30bn per month for distribution between the three tiers of government. In addition, it could come up with an innovation to capture the popular imagination. (It so happens that this month the assembly has submitted a national health bill to the president including state-funded basic care.) The FGN has to think big, and think bold, rather than dwell upon the failure of several governments, military and civilian, to remove the subsides altogether.
Gregory Kronsten
