According to Mr President in his inauguration address of 29 May 2023: “The subsidy can no longer justify its ever-increasing costs in the wake of drying resources. We shall instead re-channel the funds into better investment in public infrastructure, education, health care and jobs that will materially improve the lives of millions.” According to NNPC Limited, pre-May 2023, we incurred about US$500 million per month on petrol subsidies. This means, assuming a total population of 220 million inhabitants, each Nigerian, man, woman, girl and boy, on average per year, “enjoyed” non-cash subsidy income of US$27.27. At an average current exchange rate of NGN 1,500 to the dollar, this translates to NGN 40,905 per person per year. It is important to note that this non-cash subsidy income was not evenly distributed. The principal beneficiaries of petrol subsidies were the middle- and high-income households that own many cars and thus consumed more petrol relative to low-income segments of the population.
There are different kinds of subsidies implemented by governments (a total of US$1.3 trillion in 2022, according to the IMF) the world over that benefit individuals, families and businesses. The subsidies are mainly agricultural, energy and technology subsidies. At COP26 and 27 in 2021 and 2022, countries agreed to accelerate efforts to phase out inefficient fossil fuel subsidies (coal, petrol, diesel, kerosene and gas). This piece focuses on potential areas for improving the implementation of petrol subsidy removal in Nigeria. Subsidy removal should not be an event. It is a process that has short-, medium- and long-term consequences, especially in terms of its impact on the low-income segment of our population, which is estimated by the National Bureau of Statistics to be no less than 132 million people.
First, we need to convincingly, definitively and conclusively resolve certain linked matters: is the subsidy of petrol permanently and irreversibly removed forever? Do we have the socio-economic capacity to withstand (and not contravene the PIA 2021 through the re-introduction of subsidies in any shape, manner or form) hard times when oil prices soar? Are prices of all refined petroleum products today fully determined by forces of demand and supply? What is the actual daily national requirement for petrol and other products? Adequacy of local refining to ensure zero importation of refined products. Supply of refined products to our neighbours (illegal supplies will not stop for as long as there is no price parity, and thus, we might as well have good neighbour discussions on legal supply the same way we provide electricity, especially if we cannot tighten land and sea border controls). Outstanding debt of about NGN2.8 trillion used to fund petrol subsidies over the years needs to be repaid. There’s probably more.
Next – specifically, how should the removed annual subsidy of about US$6 billion be redistributed so as to lessen the economic shock for the most vulnerable amongst us due especially to the compound effect of food and transportation inflation? The overriding objective of compensatory measures should be to attain poverty neutrality, i.e., the threshold at which direct cash compensation offsets increased petrol prices (and its corollary effects), such that the national poverty headcount is unchanged (or even improved) post petrol subsidy removal. Compensation strategies must be visible and sufficient, especially in the early months and years post the removal.
Read also: Nigerians bear brunt of FG’s petrol subsidy politics
Using the Research Support Team of the World Bank’s work on Angola as a benchmark, 30 percent of the savings generated from subsidy removal can be considered the upper limit of compensation or relief packages. When savings from subsidy removal are optimally and transparently used, citizens feel closer to the government and its institutions, thus strengthening the social contract.
In Indonesia in 2005, savings from subsidy removal were about US$17 billion, of which US$2.5 billion (14.7%) was reallocated to social policies benefiting low-income regions of the country. In 2010, subsidy reform in Iran was accompanied by a cash transfer of US$45 per person per month, and the transfers were almost universal, reaching 95 per cent of the population. Nigeria is a global leader in financial technology, and we have more than 100 percent mobile uptake. Surely, we can leverage these technology advancements for effective direct redistribution of subsidy savings to low-income population segments.
As for governance and oversight, transparent and extensive communication is key. Administrative capacity to deliver social transfers needs to be strengthened so that, for instance, there will be very low exclusion rates (it is estimated that there are only ten (10) million Nigerians in the social register versus more than 100 million people that are potentially eligible). There needs to be a whole-of-government coordination approach. We must also be careful not to make cash transfers permanent into perpetuity. Beneficiaries must have a path to self-sufficiency through jobs and/or business ownership.
Reasonable federal actions taken to date include an increase in minimum wage, the granting of loans to states, making loans available to students, the receipt of an US$800 million concessionary World Bank loan for the National Safety Net Program Scale-up (NSSP-SU), the rollout of compressed natural gas (CNG) fuelled vehicles, the release of grains, seedlings and fertilisers, etc. Reform of pre-existing cash transfer systems may be required, and focus should be on improving coverage, adequacy and efficiency of delivery. We should not add new schemes if the existing ones are defective.
There is a strong case for direct investment in ecological recovery of oil-producing areas, including but not limited to Rivers and Bayelsa. Promotion of rapid adoption of low-cost solar power (according to BCG, only 1.25 percent of Nigerian households have solar power installed) is also a viable way to reallocate subsidy savings. In terms of local refining for domestic sufficiency, shouldn’t all four (4) national refineries with a combined 400,000 bpd capacity be sold now to the most technical and financially capable buyers?
All in all, chapeau, Mr President, for breaking the subsidy jinx! But there’s still a lot for you and your team to do.
Bonus: Nigeria in BRICS should turn the economic bloc to BRINCS and make it a global force for good.
Mayowa Amoo is an investment banker.
