At the last opportunity I had, I made a brief reflection on the current debate going on in the polity about fuel price increase, deregulation of the downstream petroleum sector and other allied issues. My reflection generated a debate on my facebook wall and I promised to do a comprehensive write-up on my take on the issues. That's what I'm attempting to do now.
A few days ago, the government through the Minister of State for Petroleum, Dr. Ibe Kachikwu announced what he referred to as the withdrawal of petrol subsidies due to deregulation of the downstream sector and consequently a new pricing template for Petroleum Motor Spirit popularly known as petrol. This saw the price rising from #86.50 to #145. We all know this. This new policy of government is a direct response to the biting fuel scarcity that has grounded the whole system for almost five months now.
I will first react to the need to ending fuel scarcity for which government is taking the current policy direction and see whether the government policy in properly placed. When I'm done with that, I will mow take on headlong, the issue of deregulation which is government's way of responding to the current fuel crisis.
In the first place, many Nigerians do not know the cause of the fuel scarcity that has been ravaging the country for months. Without a clear understanding of what brought the scarcity, we will not be able to properly judge the current government policy at solving the problem.
Since June 2014, oil which is the only foreign exchange earner for Nigeria began to crash from around $115 per barrel to about $30 per barrel in recent months. This means that the amount of dollars that Nigeria was earning dropped drastically. This is what it means when they say our foreign reserve has gone down. Yet, all the oil importation that Nigeria undertakes are in dollars? How do we then finance import when we do not have enough dollars? This unavailability of dollars and consequent inability to open letters of credit forced oil marketers to stop importing refined fuel thus forcing NNPC to bear over 90% supply burden of this product. Normally, NNPC only bears 48% of the burden while oil marketers bear the remaining 52%. Thus, since NNPC lacks the resources and capacity to supply 90% of domestic fuel consumption, the product was in short supply. That was the cause of the fuel scarcity we've experienced for months.
As a result of scarcity, simple economics teaches us that prices will go up- that's even if you get the product in the first place. Thus, Nigerians apart from buying at three times the normal cost had to wait for hours to get the product. This brought untold hardship upon all of us and we wondered, 'when will this end?' Surely, no responsible government will sit down and watch its citizens subjected to such pain without wanting to bring an abrupt end to it. Seeing then that the problem is scarcity of dollars, only availability of dollars could solve the problem in the immediate. So how will government make dollar available? One way is to trust God to touch the international oil market so that oil prices will rise and then we could earn enough dollars to finance oil import. But you know that God's response to prayer is not always instantaneous. So we will have to watch the scarcity go on while we wait on the Lord. Surely, Nigerians cannot wait.
Another way is to release the $28 billion dollars left in our foreign reserve to fund import and in the next 60 days, the money will finish and longer queues will return upon an empty reserve. This again is not an option. The other option which seems to be the only other option in the immediate is to remove the restriction that disallows oil marketers from accessing dollars in other sources other than the CBN. Let marketers go and source dollars from secondary sources in order to resume import to meet the demand of Nigerians and thereby end the scarcity. This is exactly what government has done. There appears to be no other option open to us if the system will not be totally grounded.
But you know that the rate of dollars at the secondary sources are higher than that of CBN. It is this percentage difference in dollar rates that government has tried to accommodate in the new new pricing template. You can't expect someone who sold at #86.50 when he exchanged a dollar for #199 at the CBN to want to sell at the same amount now that he's exchanging a dollar for #300 in a secondary source. He will rather not import at all or import and hoard the products until there is scarcity enough to force prices up. This is the simple reason for the price increase to #145. As a result of this new policy, within 24 hours, all the queues at filling stations across the country disappeared. The products are now available. New companies are already entering the market to import fuel due to the same liberalization policy. With time, supply will become more than demand and prices will have to fall. Nigerians obviously prefer the fuel situation in the last six days to what we've experienced for almost five months. It is better to buy at between #110-#145 within five minutes than to queue for five precious hours only to purchase at between #200-#250 per liter. Thus, the current policy of government as far as it relates to ending fuel scarcity by all means is rightly placed and is yielding good results. We must commend it.
It is worthy of note that Nigeria is not the only oil exporting country going through the current crisis precipitated by the crash in oil prices. Other nations like ours are having to make one form of adjustment or the other- some more drastic compared to the Nigerian experience. Venezuela has increased fuel prices by 6000 per cent. It has also devalued its currency, the Bolivar. The government then increased the minimum wage by 30 per cent. This sounds amazing until you hear the new minimum wage is now just about $13! That is N4,550.00 at N350/$1. Venezuelans despite the increase apparently still get to buy fuel at the world’s cheapest price but the reality should not be lost on anyone, arguably the world’s most socialist country today has been forced to make adjustments, increasing fuel prices for the first time since 1996!
Qatar Petroleum laid off some 3000 people in 2015. RasGas, the gas company, did its own firings. Qatar Museum and other companies including the almighty AlJazeera have had to reduce their staff strength. The sackings continued into 2016.The Abu Dhabi National Oil Company laid off 2000 staff members about two weeks ago. In Kuwait, salaries and other benefits are being reduced while the oil company is sacking those even less fortunate. Kuwait is OPEC’s third largest producer, also holding eight per cent of the global oil reserves. Mind you, some of these countries have better reserves than we do. Many of them really saved when the going was good. A country like Saudi Arabia saved about $900 billion during the same oil boom that saw Nigeria sharing billions of dollars through Dasukigate, Diezanigate and Jonathangate. Countries that have huge savings and other sources of income are making adjustments and you think Kleptocratic-mono-product-economy-Nigeria will not. Forget it! Too bad that we are having to suffer for the stealing of some people. But what can we do now? Eventhough we are currently attempting to recover the loot, we can't wait for that before we move forward. This is the matter fellow Nigerians.
Someone may now ask, so how do all these relate to the issue of subsidy removal and deregulation? Let me explain. Remember that the new government policy under consideration removed certain restrictions in the oil market including the restriction that oil marketers can only source for dollars at the CBN (we analyzed this above). Other restrictions include who can import oil? Only certain companies could before now. This restriction has also been taken away. All these restrictions are regulations- there are other ones- the removal of these regulations is what deregulation is. Thus, in order to solve the current fuel crisis, government is having to deregulate (remove certain regulations from) the oil industry. It has always wanted to deregulate anyway. The current crisis only again pointed to the need for us to do what we needed to have done? Government has now grabbed the opportunity. Fuel subsidy on its part is a component of a regulated market- price regulation. Government has always had to fix how much the products MUST be sold. This is because government is bearing a huge part of the cost of every litre of fuel consumed across the country. That is what subsidy is. But genuine deregulation involves removing the price regulations i.e the product should be sold to final consumers at the real market price as determined by the forces of demand and supply. In this case, there will be no need for any subsidy. This is the link between deregulation and subsidy removal.
Thus, deregulation of the downstream petroleum sector refers to the reduction, or removal of government control, rules and regulations that restrain free operational activities in the sector. Deregulation leaves market forces as the sole determinant of product prices, which entails removal of any form of subsidy.
Now the big issue is should we support this policy? My answer is yes albeit with some reservations. First, we need to admit that a regulated market which runs a subsidy regime is not sustainable for us in Nigeria from the records on ground.
A subsidy is a reverse tax. It is a deliberate attempt by government to support a chosen economic agent –a consumer and a provider and it can be applied in any market that involves the buying and selling of products and or services. It is basically government action that decreases the consumption price of the consumer and or increases the selling price of the producer. The idea of subsidy is a good idea in itself. It is a way of giving back to the populace who has little or no gain from the common wealth of the nation-oil. But even where the regime is not ridden with corruption, energy subsidies are generally expensive; they eat up national budgets. Benefits end up going mostly to the richest citizens, (who run plenty fuel consuming automobiles and generating plants compared with the middle and lower class citizens who have fewer, low-fuel-consuming or no vehicles at al), and crowd out more productive government spending on education, health and infrastructure.
Fuel subsidy costs Nigeria over 1 trillion naira yearly. Last year, Nigeria borrowed a total of about 850 billion Naira to fulfill its subsidy obligation. An analysis of the 2013 budget shows that allocation for fuel subsidy constituted about 20 per cent of the entire budget. It was also 10 times more than the appropriation for agriculture and rural development (N81.41billion), three times that of health (N279.23 billion), and twice of education (N426.53 billion). The vote for capital expenditure N1.54 trillion was just a little above the fuel subsidy. The amount spent on petrol subsidy alone in eight years is 15.57 per cent higher than the N4.69 trillion 2014 national budget, and also 10.61 per cent more than the 2013 budget of N4.93 trillion. The subsidy spent for the year is almost twice or 196.07 per cent of education’s N495.28 billion and more than three times the N262.74 billion for health.
To complicate matters, Nigeria's subsidy regime which is in itself expensive is ridden with corruption? According to the Nigerian Extractive Industries Transparency Initiative, Nigeria paid N198.11bn for subsidies in 2009, the sum went up to N416.45bn in 2010 and then some extraordinarily amazing thing happened in 2011, the subsidy numbers against reason shot up to N1.9tn! You need not be an expert in Mathematics to see that the 2011 number was way out of line. We paid just N219.72bn in 2006 and N236.64bn in 2007. What happened in 2011 to take the subsidy numbers to celestial realms? It was the 2011 elections. Not only did President Jonathan and his ill-fated co-travellers fund his 2011 election from the subsidy payments, they also depleted the Excess Crude Account to $3m in 2011 from almost $20bn in 2009.
Surely, the poor will benefit more if all these monies are genuinely invested in education, health, security, power and infrastructural development. This is why the subsidy must go and NOW!
But I must note that only full deregulation can bring benefit to the poor on the long run and not the current kangaroo type that the government has just implemented. Full deregulation involves the removal of government control on petroleum products prices, the removal of restrictions on the establishment and operations of refineries, jetties and depots, while allowing private sector players to be engaged in the importation and exportation of petroleum products and allowing market forces to prevail. Government is currently claiming to have deregulated while still fixing the price. A strong regulator needed to enforce competition rules is non-existent neither is the competition rules itself and yet government is claiming that prices will soon start coming down. This is pure deception! None of PPPRA or DPR is empowered by their enabling acts to rein in anti-competitive practices. How then won't the oil marketers easily form a cartel and start fixing prices against the dictates of the over-mouthed forces of demand and supply? Why is the price of diesel defying the forces of demand and supply despite the deregulation of that sector for many years? Its simple. A cartel has been formed and their is no strong regulator empowered to rein it in. It then means that without a competition law and policy coupled with a strong market regulator empowered to enforce same, the current policy of government will further impoverish the already maligned middle and lower classes while the ruling elites smile to their banks as they scorn our gullibility. Prices will not come down, they will rather go up. Also, investors will not be attracted to the sector to build refineries as government is currently selling to us where the market is not truly free. These are the issues I believe all stakeholders should engage government on and not just the stereotype of 'no to subsidy removal.' Because we are not discussing the right issues, chances are that government may escape with the current policy without any commitment to the masses concerning the necessary templates that is needed to be put in place if deregulation will indeed bring growth.
I personally opine that the Department of Petroleum Resources should be merged with the PPPRA and any other relevant department of the NNPC to produce a SINGLE and STRONG Regulator for the oil industry than enforce competition rules and policies. This is the way to go.
Government itself should clearly articulate to us how it plans to fix the existing refineries and build new ones rather than the empty boast that we'll start exporting refined products by 2019. We want to know how so we can evaluate government plans and make necessary inputs. I do not for one believe that the country should completely be at the mercy of private investors in the building of all the refineries we need. While we attract private investors, government itself should be committed to building new refineries that could be privatized upon completion. This is because it is government that has the primary responsibility to provide these needed infrastructure. Again, private investors may not be able to immediately mobilize the needed resources to accomplish the task. And since they owe no one any obligation, they may choose to work at their own pace. That's not what the masses want. We need a quick-fix if possible.
We should thus immediately demand from government
1. A full deregulation of the downstream sector as enunciated above
2. An immediate enactment of a competition law and policy for the downstream oil sector
3. The merger of DPR and PPPRA and any relevant department of NNPC to form a single and strong industry Regulator empowered to rein in anti-competitive practices.
4. An articulate plan on the refurbishing of existing refineries and construction of new ones by the Nigerian government which could then be privatized upon completion.
5. The immediate review of the national minimum wage to #56,000 in order to cushion the effect of the inflation on the people.
6. A review of the allocation sharing formula to devolve more resources to the states so that states can also afford the wage increase. Many states today have not even genuinely implemented the #18,000 minimum wage. Only Federal workers seem to be enjoying the full benefit of wage increase in Nigeria.
7. A quick investment of proceeds of subsidy in genuine pro-poor programs- reduction of tuitions and construction of student hostels across tertiary institutions, massive investment in our moribund hospitals and health centers across the nation, provision of soft loans to farmers, market women and young entrepreneurs which would in turn boost the economy, massive infrastructural development- road, rail, and power.
These are the issues that Nigerians should immediately engage government on. Certainly, all the benefits that government and other opinion leaders are claiming will emanate from deregulation are TOTALLY DEPENDENT on the templates articulated above. If these templates are not put in place, I can confidently welcome Nigerians to the beginning of dark days. These also are the issues that the labour leadership should take to the negotiation table with the Federal Government. All stereotypes must be jettisoned if we will bring something tangible out of the current industrial action. I believe also that my humble suggestions herein will be a good template for further robust intellectual discuss in the coming weeks. If we are vigilant enough, we will not be deceived into a bleak future for eternal vigilance remains the price of liberty.
Written by
Peniela Akintujoye.
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