Opinion: The economics of this subsidy removal of a thing

In January 2012, hundreds, maybe even thousands of people thronged designated spots in the major cities of Nigeria to protest President Goodluck Jonathan’s abolition of fuel subsidies.

At the time, it seemed like the right thing to do. With our status as Africa’s top producer of crude oil, it was – and remains – unfathomable that the country imports refined petrol products and worse still, that there are sustained periods of fuel scarcity on the streets of what is essentially a mono-product economy. The people were suffering and needed to let their voices be heard.

But at the heart of it all was a widening hole. If the conveners of the protests and the largely naïve protesters had been keen to discern below the surface even a little, they would have discovered that an estimated $8 billion was spent in funding fuel subsidies alone in 2011, the previous year. And that was at a time when Brent crude price averaged around $100 per barrel. In all, over N11 trillion has been spent in cumulative subsidies between 2006 and 2015, an amount enough to build over ten refineries and is actually almost twice the value of the entire 2016 budget.

It is May 2016 and an unfavourable clime. Oil prices have risen to about $48 per barrel; measly by 2011’s standards but significantly higher than January 2016 when the price was about ten dollars lower. To cut a long story short, it has become more expensive to fund subsidy given higher costs of importation, especially as the Nigerian population is on the increase and the naira keeps tumbling against the dollar due to exchange rate volatility. Also, it is important to add that pipeline attacks by vandals, including the infamous Niger Delta Avengers, have simultaneously reduced the volume of crude oil output from the region as well as further hiked up import costs. Shell, for instance, had to declare a force majeure in February this year after an attack on a key pipeline which supplies a terminal with an export output of about 250,000 barrels a day.

At this point, a bitter but necessary pill is needed in the form of President Buhari’s interventionist economics. Only yesterday, the Petroleum Products Pricing Regulatory Agency (PPPRA) announced a new price regime for Premium Motor Spirit (PMS), increasing it from N86 per litre to N145 per litre. In that short while, I have seen a number of articles suggesting that the president keep the subsidies and resurrect the moribund refineries so that in the long run, import costs are whittled down. But In the immortal words of the legendary economist, John Maynard Keynes, “in the long run, we are all dead.”

To delay this decision and also pour more money down the drain would be a classic case of being ‘penny wise, pound foolish’. So the wise move would be to deregulate the downstream oil sector. As Economist Razia Khan says, “If you look at the reasons for fuel subsidy and its economic effects, the subsidy is very regressive because it is a cost on the whole economy. It takes resources away especially from the poor and rewards those who consume more fuel”

Apart from macroeconomic benefits such as saving the government much needed forex to repurpose for spending on developmental infrastructure in line with its newly introduced zero-based budgeting, the common man stands to profit a lot from the new price regime.

To benefit doubly from the subsidy, some marketers connive with law enforcement agents to divert trucks with the product across the borders or create artificial scarcity by hoarding the product. Now, that will be eliminated and aggregate supply will meet aggregate demand. Given the reduction in smuggling, hoarding and diversion of the product, there will be a corresponding stability in the market price of the product. It’s science.

The price stability will inevitably lead to a potential increase, perhaps even exponentially, in employment levels across the country. An additional 200,000 jobs is the target, given new investments in refineries, with double that saved as existing investments can now stay open.

Most importantly, subsidy withdrawal will end the existence of a number of distortions in the Nigerian economy including bunkering, raising private armies, jetty ownership and piracy.

It is the way forward.

Op-ed written by Yusuf Ayinla

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