Subsidy: Tinubu walks a tight rope

By OBINNA EZUGWU 

The announcement, on Wednesday, by Mrs. Zainab Ahmed, Nigeria’s Minister of Finance and National Planning, that the country’s National Economic Council (NEC) had approved the suspension of federal government’s planned removal of subsidy on Petroleum Motor Spirit (PMS), popularly called fuel, in June, sent policy analysts into a frenzy, and must have been music to the ears of Bola Tinubu, Nigeria’s president-elect, who would have, barring any court intervention, become president at time. 

But on Friday, the minister backtracked, disclosing in a statement, that the plan to get rid of subsidy remained in place, and that the subsidy regime would still be discarded in June 2023.

There was no provision for subsidy beyond May in the 2023 budget approved by President Muhammadu Buhari, which says that either way, the subsidy problem would still be a monster waiting for Tinubu, and which he would have to confront as soon as he takes office; a monster that could potentially cripple his administration even before takeoff, but one which is also part of his own making.

Sources hinted that the reluctance of government to remove the subsidy was a double plot and strategy against the opposition parties to ensure that they never won the polls, and, if the did, would have been dead on arrival, as the subsidy removal crisis would have drowned it.

“Why was the subsidy not removed as promised by the government last year? The simple answer is the election and the fear of losing. However, it inexplicably set June 1, as the new deadline knowing full well that the next president would take over on May 29. Who does such a thing? This government had eight years to deal with the issue and could not until this last minute; it is insane”, he said.

In January  2012, Tinubu, then leader of the defunct Action Congress of Nigeria (ACN), alongside other key opposition figures, led a crippling protest – known as Occupy Nigeria protest – against the government of Goodluck Jonathan, then president of the country, when he attempted to remove fuel subsidy, forcing him to do a volte-face.

Today, as president-elect, Tinubu is having to confront the monster he helped to keep alive over a decade ago, and which has now grown in strength and stamina, and for the former Lagos governor, it’s a very tight rope.

During his campaign, Tinubu had promised to get rid of subsidy, but he won’t be the first president to promise to do so. Nearly every Nigerian leader since Ibrahim Babangida, former military head of state in the 1980s, promised to remove fuel subsidy, yet none was able to do so, including the the likes of Buhari, Olusegun Obasanjo, Umaru Musa Yar’Adua and Goodluck Jonathan.

Indeed, aware of the potential impact that high price of fuel could have on inflation, in a country where nearly half of the population live below the poverty line, none of the past presidents was able to raise the pump price beyond 50 cents at a time. The current state of the economy, however, leaves Tinubu with little choice, but removing subsidy, especially in view of the further dwindled local refining capacity, and inflation rate above 20 percent, could have very catastrophic effect.

At the time President Jonathan opted to bite the bullet in 2012, and announced the removal of fuel subsidy, Nigeria was producing about 2.4 million barrels of crude oil daily, and imported 70% of its fuel consumption, which by then came to about 250,000bpd. With the price of crude hovering around $110 per barrel in the international market, and the volume of petroleum products imported at about 250,000bpd, and the naira relatively strong, exchanging for about  N197 to the dollar, removal of subsidy brought the pump price of petrol to N141 per litre, from the original N65 per litre.

The economy was in a better position to cope, and perhaps the the monster could have been tamed successfully at the time. But in the event, the protests forced Jonathan’s government into a compromise. The price was adjusted to N97 per litre after more than a week of protests, and further reduced to N87.

Subsidy was now fully back and breathing, and Jonathan never recovered from the attempt to get rid of it. He lost power to the emergent All Progressives Congress (APC) in 2015, with Buhari becoming president. The protests had accomplished its key objective.

Although Buhari had conveniently dismissed subsidy as a scam while in opposition, he would come face to face with the monster as president. That same year, his government increased fuel price from N87 to N126, with the assumption that subsidy had been removed.

But alas, it was not to be. The Nigerian National Petroleum Company (NNPC) Limited would disclose subsequently that the government was still paying under recovery, which was a more polished term for subsidy. Indeed, the monster only grew horns, such that the volume of fuel imported and consumed in the country daily began to skyrocket, and is today estimated to be 80 million litres, with the NNPC claiming in February that it now pays N400bn as subsidy monthly, a little less than half of the country’s monthly revenue.

On May 29th, barring any unforeseen circumstances, Tinubu, one of architects of the Occupy Nigeria protest, will take oath of office as the country’s new president. He would inherit an economy in dire straits, and will immediately be confronted with the subsidy behemoth; a case of the chicken finally coming home to roost.

“If you remove PMS subsidy, the economy suffers,” noted Kalu Aja, a banking and asset management professional. “If you retain PMS subsidy, the economy suffers. The “how” is the solution.”

A fortnight ago, the World Bank disclosed in a report that Nigeria spent 96 percent of its total revenue to service debt in 2022. And with debt profile continuing to swell up – currently at N46.25trn, even as it could potentially exceed N77trn if the National Assembly reconsiders Buhari’s request for N22.7 trillion ‘Ways and Means’ loan to restructured into debt – the figure could indeed exceed 100 percent.

Economists are unanimous in their agreement that subsidy has to go as quickly as possible in order to save the economy from total collapse. But in the same token, they contend that a wholesale removal of subsidy could potentially crash the economy, meaning that for the incoming administration, it’s a case of standing between the devil and the deep blue sea.

“It’s obvious that subsidy has to go, said Dr. Muda Yusuf, the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE). “We’re already on the threshold of insolvency. You just saw a report by the World Bank saying that over 90 percent of our revenue was used to service debt. If you keep putting conditions that are not realistic for the removal of subsidy, the entire economy will go down.”

But Mr. Yusuf concedes that a sweeping subsidy removal could plunge the economy into even deeper crisis.

“It has to be a holistic approach, based on the price of crude in the global market,” he said. “A holistic removal would be unrealistic, the shock on the citizens would be unbearable. So, it has to be a holistic approach with a lot of engagements. There should also be a well-structured palliative regime, by this I don’t mean handouts. I would advocate for gradual withdrawal of subsidy.”

The Nigerian Labour Congress (NLC), and the Trade Union Congress (TUC), have maintained that subsidy should not be removed until the country has functioning refineries. Getting local refineries, which were built in the 1980s,  have so far proved to be a tall order for the Buhari administration, despite the huge resources committed to the project. The Dangote Refinery, which many hoped would have come on stream by now is still being delayed, with no certain date of it coming on stream yet.

Like labour unions, many analysts agree that there ought to be functional refineries before subsidy is withdrawn, but that would be a big task for the Tinubu administration, which would from day one, inherit a government that is spending nearly all its revenue to service debt, and must immediately deal with the subsidy question.

Again, unlike in 2012 when Nigeria exported over 2m barrels of crude daily, guaranteeing healthy inflow of foreign exchange into the economy, heightened oil theft has crashed daily oil production to around 1.2m barrels per day, meaning that the country now earns less forex from crude. And at the same time, the unexplained spike in the volume of imported refined products from 250, 000 bpd in 2012 to 80m litre pd in 2023, means that the country spends far more foreign exchange on fuel importation than was the case previously.

Yet, while the naira exchanged at N197 to the dollar in 2012, today’s market rate is N470 to the dollar, with parallel market rate at N700. This means that today, unlike in 2012 when the withdrawal of subsidy brought pump price to a manageable N141 per litre, the pump price could range from N400 per litre to over N700, depending on whether or not importers are able to source foreign exchange from the CBN.

“In 2015, the official market rate was N199 to the dollar, and the parallel market rate was N360 to the dollar. If those exchange rate were still applicable today, we’d have been buying PMS at the rate we’re buying today, with the removal of subsidy,” noted Paul Alaje, senior economist at SPM Professionals.

“What we are paying for, therefore,  is poor economic policy. The real problem we have is the quality of the naira. People are working to become poorer because of the devaluation of the naira.

“It is a big challenge. If you remove fuel subsidy today and we don’t have local refineries, you can imagine the impact it would have on food prices, for example. Again, you would have a situation where, if the CBN decides to devalue the naira, the price of PMS will spike further.”