Fuel subsidy: Failure of a 42-year-old price fixing policy (4)



01 June 2015, Lagos – As the new president, Mohammadu Buhari settles into office today, it is clearly evident that one of the most urgent (may not necessarily be most important) task before him would the optimal decision on the lingering fuel crises (supply or pricing crises) which ironically welcomed him to office while bidding good (or bad) by to the former president Goodluck Jonathan last weekend.

With a flurry of arguments in the public media over the challenges of fuel crises concentrating on one dominant issue, subsidy, our series on this issue in today’s edition is taking a close look at the histonomics or (historical economics) side of the discuss on subsidy.

For clarity of thought, we have always noted that definition or usage of the word subsidy presupposes that the price paid by the final consumer of the product is less than the actual cost of delivering the product to the consumer, and in this instance the government pays the difference. So the argument is now focusing on the efficacy of this subsidy logic: should there be any subsidy at all, if any and is it sustainable given our experiences so far back in history?

From the available data, it is rather amazing that Nigerian economy and the society have lived under this argument for 42 years since price adjustments in the fuel products began in 1973. What is most baffling is that no new arguments have emerged beyond the regular dynamics of the Nigerian economy.

Legend of fuel price increase-decrease in Nigeria.

Legend of fuel price increase-decrease in Nigeria.

A cursory look at the history shows that fuel price has always been regulated by government, that means the market (that is forces of demand and supply) had never dictated the price of petroleum product in Nigeria. This means the prices are fixed, adjusted and managed by the government over the years while changing it with attendant socio-economic dislocations.

A total of 25 such tinkerings with the price has been made in the 42-year history and none of them has solved the problem for which the tinkering was made. Out of the 25 experiments seven were for downward adjustments of the prices while 18 were upwards.

One other salient feature of the downward adjustments was that each of the six was followed by an upward adjustment at a rate far higher than the downwards, giving the impression of dishonesty in the benevolence. For instance, General Sani Abacha effected the first downwards adjustment (amazingly, he did it twice within five years) from N5 in Nov 22, 1993 to N3.25k (about 35 per cent reduction) only to jerk it up a year later from N3.25k to N15 (over 370 per cent increase). This has been the pattern over the years.

Also, out of the 18 upward adjustments only two came without major impact on socio-economic life of Nigerians, but the other 16 were accompanied by inflationary pressures, 13 came with public unrest and several people dying in some of the incidents. Most economics have argued that the inflationary impact of upward adjustments in petroleum products prices is not as important a factor as the advantages or accretion to gross domestic product (GDP) which the extra government revenue should yield to the economy arising from judicious use in infrastructure and other public investments.

Historically, the issue of judicious use of extra revenue from increased petroleum products prices has always been negative from 1973 when General Yakubu Gowon increased the price from 6kobo to 8.45kobo. His government had then said they needed the extra revenue to fund the Fourth National Development Plan. Surprisingly two developments on the heels of this adjustment put a big question mark on the veracity of the reason given for the price hike. First the price hike came with positive developments in the international price of crude oil which yielded revenue to the government far more than was required for the Plan. Secondly while investments were actually made in import substitution industrialization, the economy began to witness over dependence on finished product imports.

From then till 2012 when then president Goodluck Jonathan’s price hike introduced SURE-P as a cushioning to the Nigerian publics suffering from the effects of fuel price hike, no meaningful economic returns on investments from the extra revenue have been recorded. Many observers have noted that it has always been ‘more money for the boys’.

It has always been long-drawn battles getting the governments both at federal, states and local levels to increase their workers’ salaries in line with the inflationary and or higher cost of living impact on them since the governments are the primary beneficiaries of the price hikes. Only in seven out of the 19 instances of the price hikes have the various governments implemented upward adjustments in salaries of workers.

Even at that, most economics would insist that such salary increases are just cosmetic in addressing the real economic impact of tinkering with petroleum products prices as the salary increases also ignite its own round of inflation, thus wiping out the benefits in the real terms and even on less than medium term.

With the price of fuel much cheaper in Nigeria than in neighbouring countries, the subsidy had led to widespread smuggling on almost all instances of the price adjustments, and usually worse when the prices are adjusted downwards over the years. Nigerians are heavy users of fuel, not just for cars but to power generators that many households and businesses use to cope with the country’s erratic electricity supply. With the fast rise in population and economic activities over the 42-year history of the price adjustments, it has been noted by the various governments that the cost of subsidy on government’s revenue was equally rising fast, if not faster, thus reducing government’s ability to provide other services to the population.

Former finance minister, Dr. Ngozi Okonjo-Iweala, as well as former central bank governor Lamido Sanusi have long argued that removing the subsidy would free up money to invest in other sectors and relieve poverty.

The gap between the rich and the poor has been widening since the government’s subsidy policy started 42 years ago, even though it was designed to mitigate income inequality. The gap is now so huge to the extent that it was recently confirmed that less than 6 per cent of bank depositors own 88 per cent of all bank deposits in Nigeria. The remaining 94 per cent of depositors, mainly the working people and poor, own about 12 per cent of bank deposits in Nigeria.

In fact, it is believed that the subsidy has actually moved more public resources away from the general public to a few who are involved in petroleum products importation.

In 1978, the government of General Olusegun Obasanjo while justifying fuel price increase from 9 kobo to 15.3 kobo claimed there was still subsidy after the increase and today at N87 the government still say there is about 60 per cent subsidy. When will there be no subsidy? There is no end in sight.

What has been changing since the late 70s till date has been the value of the Naira. The value of the Naira has massively depreciated since the mid 80s till date. As at 2012, when the last increment in petrol prices took place the value of the naira was about N118 to the dollar; it is now at about N199 at the official market rate and much more at the black market. And the rates would likely get worse with the structure of the economy. With each devaluation the subsidy gap widens, forcing the government to either consider further increase in pump prices or reduce its other public goods.
Head or tail, the general public has always been at the losing end in the subsidy history.
*Emeka Anaeto – Vanguard

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