Effect of fuel subsidy Removal in Nigeria Economy

SUBSIDY  is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.

The Subsidy is a form of price manipulation where by the government fixes the price for sale to consumers and pays the retailer difference between the actual market price and the regulated or official price per liter.

Meaning and effect of subsidy removal 

INTRODUCTION     

Nigeria is a country endowed with vast mineral resources prominent among which are the oils and gas reserves. The country possesses 28% of African’s proven oil reserves, second only to Libya; and is the largest producer of crude oil in the region, producing 2.4 million barrels per day in 2010 which is about 24% of the continent’s petroleum Siddig et al 2014.

WHAT SUBSIDY IS?

A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.

The Subsidy is a form of price manipulation where by the government fixes the price for sale to consumers and pays the retailer difference between the actual market price and the regulated or official price per liter.

 BENEFITS OF FUEL SUBSIDY REMOVAL.

The federal government’s partial deregulation of the downstream sector will, no doubt, be an incentive to private refiners, and boost capacity utilization, as well as employment generation in the sector, many believe the move is long overdue and will go a long way to freeing enormous resources into infrastructure development, Ejiofor Alike reports.

The federal government recently removed petrol subsidy and ushered in a regime of partial deregulation in the downstream sector of the Nigerian’s oil and gas industry.EFFECT OF SUBSIDY REMOVAL

Through the sector would have preferred full deregulation, the action is a right step, which will eventually lead to the ultimate goal if the government could muster the political will to move a step further  in the future. This belated action is however coming when the crude oil price has hit the bottom level, with corresponding drop in the price of refined products. But for the high cost of foreign exchanged, which has led to high cost of product, the drop in the crude oil would have made more of the subsidy removal as there would have been nothing to subscribe.Subsidy removal would have made economic sense when crude oil price was high to source the millions of naira wasted on payment of subsidy.

But when former President Goodluck Jonathan attempted to remove subsidy on January 1, 2012, the then opposition All Progressives Congress (APC) used the organized labour and other civil society groups to ambush and frustrate him, forcing the former administration to reverse it.

However, even through the price of refined products has dropped but  with the high cost of  sourcing for forex at the official exchange rate of #197, which is far below the #315 black market price. Apart from the trillions of naira spent over the years in payment of subsidy and its attendant corruption, perennial crisis in the downstream sector occasioned by governments’ interference in the market through the management of subsidy regime has also fueled the need for deregulation, be it full or partial.

The new pricing regime will no doubt resolve the recurrent fuel scarcity crisis by ensuring availability of products as marketers will now import product to their full capacity without government’s restriction in the form of import approval.

It will also reduce hoarding, smuggling and diversion substantially and stabilize price at the actual product price.

The new regime will also ensure market stability and improves fuel supply situation through private sector participation.

Most importantly, It will create labour market stability, potentially creating new jobs through new investment in private refineries and retails and at the same time prevent potential loss of jobs in existing investments, which were threatened in recent years.

THE REMOVAL OF NIGERIA’S FUEL SUBSIDY AND IT’S RIPPLE EFFECTS. 

The announcement by the Federal Government on the removal of the long-standing fuel subsidy has triggered a deluge of reactions from Nigerians. And they have come in diverse forms and hues-from people who have clapped excitedly at what they term a long overdue policy change, to those who fiercely argue against it. The representatives of the various positions have presented reasons for their stance, and the media is awash with opinions, analysis and speculations.

The announcement was made following a meeting chaired by Nigeria’s vice president, the leadership of the senate, House of Representatives, Governors forum and labour unions such as the NLC, TLC, NUPENG and PENGASSAN.

According to the minister of state for Petroleum Resources, Dr Ibe Kachikwu, the maximum price for PMS (Premium Motor Spirit or fuel as generally termed) is to be fixed at #145.

In addition, all willing and capable Nigerian entries will be able to import the product if they meet the quality specifications and other requirements of the Regulatory Agencies. The Federal Government’s decision to end the payment of subsidy to Petroleum product marketers appears to be partly informed by the difficulties encountered by marketers in meeting up with the required amount of PMS.

The possible effects of this policy on Nigeria’s economy are the subject of heated debate.

Those who support the removal of the fuel subsidy have pointed out among other things that the subsidy regime was blighted by corruption and waste. It has been alleged that a large fraction of the subsidy funds have been collected by marketers who end up selling the products to customers in neighbouring countries where the product is sold at much higher prices than has been obtainable in Nigeria. Eliminating the subsidy they say would discourage this practice by erasing the profit margin that encourages the thriving of such activity. It will also mean that more of the product will end up at fuel stations in Nigeria. The government of the day talks about funds which could be freed up and used to provide the infrastructure which will enable business to thrive.

But opponents of the move by the government to remove the subsidy on petroleum products to make the point that the short-term effects of this policy reversal may prove too difficult for households and businesses to bear. Prices of goods may shoot up further, as the string of cause and effect courses through the country’s economic landscape. Businesses may find it difficult to bear these changes along with electricity tariff hikes’ low demand, and other challenges. Production costs may rise, jobs lost, and business establishments go belly-up. And there is also the threat of increasing unrest, as was witnessed following a previous attempt at removing the subsidy in 2012.

The impact which this policy has upon Nigeria’s economy is not merely to be speculated or spoken about, but witnessed and taken note of, for the lessons it might hold for us all.

IMPERATIVES FOR NEW REGIME.

This new regime been brought about by the non-availability of foreign exchange to import petroleum products.

Marketers have drastically reduced their importation since third quarter of 2015 due to a scarcity of forex.

Also, the rise in crude oil price and prevailing high cost of importation has brought back subsidy regime at the price of #86.50 since April, 2016. Due to decline in government income related to crude oil price and limited crude oil output caused by the spate of renewed vandalism and sabotage of oil infrastructure in the Niger Delta, there is neither funding nor appropriation to cover this in the 2016 budget.

The government through this new price regime will ensure the price of products are monitored and modulated to ensure that citizen, get a fair value for products they purchase. The failure of investors to invest in private refineries was attributed to the inefficient and ineffective subsidy regime which did not allow free market forces to determine price of product, unavailability of foreign exchange and inability to open letter of credit has forced marketers to stop product importation and as imposed over 90%of the national requirement.

With the new price regime, marketers will source their foreign exchange independently of CBN and ensure adequate product supply in all locations of the country whilst catering for full cost recovery and averaging of price across the nation.

The new price regime will enable government focus on these critical sectors and free up our scarce foreign exchange via (CBN) central bank         of Nigeria to be used in other sectors. The national leader of the All Progressives Congress (APC), Asiwaju Ahmed Bola Tinubu echoed this sentiment, when he said that the action would president Buhari to reallocate funds once embarked to the fuel subsidy and commit services and undertakings was a difficult decision.

Tinubu acknowledge that politically, it would have been easy for the president to sit back and let the subsidy remain in place. He alleged that the subsidy regime had been distorted to where it no longer functioned for the benefit of the masses but for the undue enrichment of a small club of businessmen. Some legitimate in their work some not “instead of remaining a positive aspect of the social contracts, the subsidy was transformed into an opaque haven of intrigue and malfeasance. It was turned into a shadowy process from which the unscrupulous extracted large sums of money without providing the services and products duly paid for fake businessmen became true billionaires over night as if by supernatural forces” he added illegality of action.

However, a constitutional lawyer and Senior Advocate of Nigeria SAN, Mr. Femi Falana said the removal of subsidy was illegal, immoral, insensitive and a disobedient of court order. He noted that during the campaign last year, the Buhari pledged that if elected has the president by the Nigerian people has administration would not remove fuel subsidy. ”since he won the election last year, president Buhari has consistently resisted pressures from the Neo-liberal characters in the government to remove fuel subsidy and increase the price of petrol”, he said.

He lamented that without any public delicate or consultation with relevant stake holders whatsoever the federal governments took the Nigerian people by surprise when it decided to increase the pump price of petrol from #86.50k to #145 per litre.

Falana recalled that not long ago, the federal government had supported the imposition of higher tariffs and paid on epileptic supply of electricity by consumers.. He said in sentencing the Nigerian people to excruciating economic agony the Ministry of Power defined a court order which had restrained the government from giving effect to the proposed electricity tariff.

  Falana argued that the decision to increase the price of petrol is also illegal and contemptuous, acting the case of Bamidele Aturu versus Attorney-General of the federation unreported suit No.FHC/ABS/CS/591/2009, where the federal High court declared illegal and unconstitutional, the policy decision of the federal government to deregulate the downstream sector of the petroleum industry contrary to the price control act and petroleum act.

“In total defiance of the said order of the federal high court, the federal government has deregulated the downstream sector of the petroleum industry” he added.

Falana also argued that since the Petroleum Products pricing Regulatory Agency PPPR which is statutorily empowered to recommend the price of petroleum products has not been reconstituted, the unilateral decision of the executive secretary of the body to fix the pump price at #145 per litre is ultra vices illegal in every material particular.

“In view of the illegality, insensitivity and immorality of the price increase the federal government should cancel it, revert to the status quo and consult widely with all relevant stakeholders in the society”, Falana added.

 

 

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