Not many Nigerians are aware that the country’s economy has been subsided in several ways for many years. This includes fuel, education, electricity, and forex among others. A report from the cosmopolitan global audit firm, Price Walter Cooper House recently published in 2023 gave a detailed analysis of the fuel subsidy regime and its trajectory over the last 4 decades.
For the records, fuel subsidies began in the 1970s. However, it became institutionalized in 1977, following the promulgation of the Price Control Act which made it illegal for some products (including petrol) to be sold above the regulated price. While the concept of subsidy itself is noble, its administration in Nigeria has been plagued with serious allegations of sleaze, corrupt practices and mismanagement by its handlers over the years and their accomplices.
The subsidy on Petroleum Motor Spirit (PMS) has hitherto proven to be the biggest challenge to the managers of the Nigerian economy. On an annual basis, a substantial portion of the national inflow is committed to funding the subsidy scheme. Of course, there are good reasons for the astronomical growth in subsidy amount – the price of crude oil in the international market, volume of PMS consumed albeit debatable, and Naira devaluation are some of the drivers. Given the significance of the amount committed to funding the subsidy regime, there is a need to have a closer look at this scheme.
It is worth noting that, the porous borders between Nigeria and neighbouring countries have created an enterprise for smugglers who purchase large volumes of petrol at a subsidised rate in Nigeria and sell at market prices in neighbouring countries. In June 2022, the Managing Director of NNPC Limited indicated that daily consumption of PMS had increased to over 103 million litres per day and that at least 58 million litres were being smuggled.
The Nigeria Customs Service also affirmed that PMS was being smuggled out of the country in large quantities after it had been subsidized by the Federal Government, adding that the petroleum product is being diverted to as far as Mali.
In Nigeria, the fuel subsidy has significantly impacted funds available for critical infrastructure and other essential sectors such as education, health, and Defence. According to the Debt Management Office, the country’s public debt stock is increasing as the government borrowed N1trn to finance fuel subsidies in 2022.
It’s clear that Subsidy encouraged arbitrage and other forms of corruption and ordinary Nigerians cannot continue to bear the brunt and excruciating pains of the removal of subsidy. But what options are there for decision-makers to take a holistic look at the entire subsidy mechanism? What is the way forward?
Given the many challenges that have made the subsidy regime look more of a conundrum, the Federal Government may want to consider any or all of the below possible options as equally proposed by the global audit firm, PWC;
1. Fully deregulate the downstream sector and completely remove the petrol subsidy
2. Privatize the existing country’s four (4) moribund refineries for optimal functionality
3. Provide an enabling environment for more private investors to build modular refineries
4. Incentivize the locals who are into local refineries and oil bunkering to make them more productive
5. Remove petrol subsidy and provide credible, evidence-based palliatives
6. Redesign the subsidy regime and direct it towards only the poorest.
The Removal of petrol subsidies has led to an increase in the pump price and the direct impact has been a higher cost of transportation which has led to an increase in prices of goods and services.
Now that the subsidy regime is over, there is no looking back.
However, there are several ways by which the government can cushion the effect of subsidy removal –
1. Increase in minimum wage – this will ensure that there is support by workers and limit the resistance by the Labour Union
2. Increase in the monthly income threshold for PAYE exemption purposes – currently N30,000 per month is exempted from PAYE which can be increased to at least N50,000 per month. This will give extra cash to the employed poor every month to cushion the impact of subsidy removal on them.
Also, small business owners will benefit by way of higher tax exemption on their equivalent profits for direct assessment.
3. Fix the exchange rate:
4. There should be an End to food protectionism
5. End the punitive taxation on auto imports
There’s no doubt of the fact that fuel subsidy removal will come with some excruciating pains. It is a necessary measure that MUST be taken to save the future of the country. The past subsidy regime was characterized by a lot of shenanigans and sleaze. The current leadership in the country must take a holistic look at the subsidy process and mechanism and ensure true transparency in its application. A situation where the bulk of subsidy payment goes into the private pockets of a handful of individuals and neighbouring countries rather than its intended beneficiaries does not augur well for the country and its citizenry. Hopefully, Nigeria will move from this, and the populace can truly heave a sigh of relief. And the poor can breathe.
