Fuel Subsidy: A Government’s Dishonest Justifications and Why it must stay.
I recently reread the inaugural address of J.F. Kennedy which was delivered on the 20th of January 1961. Of the one thousand three hundred plus words written on the paper, nineteen still resonate in my mind with a clarity only words of profound wisdom possess: “If a free society cannot help the many who are poor, it cannot save the few who are rich”. The unilateral and abrupt removal of fuel subsidy on New Year’s Day of 2012, without having first put in place effective palliative measures to cushion the inflationary impact of the removal policy on the mass of poor and already impoverished Nigerians, makes it appropriate to remind Nigerian policy makers of those nineteen words and the dangers inherent in continuing to build a paradise for the rich and powerful on the withered backs of the poor and disenfranchised.
While most of the rest of the world was getting ready to bid farewell to a momentous 2011 and welcome the arrival of a new year with all the hopes and expectations the coming of a new dawn entails, on the 25th of December, Nigerians were given another devastatingly bloody reminder of the crumbling edifice of their state and the criminal incompetence of their rulers. Before Nigerians could finish mourning that attack that tragically took the lives of about 40 of their compatriots, Government weighed in to announce the implementation of a policy that Nigerians were deceptively led to believe will be implemented in April 2012 after a period of exhaustive consultations. We were promised a “breath of fresh air”, what we instead received was a tornado determined to destroy all but the wealthiest who have built strong walls, with mostly stolen bricks, to protect themselves!
The aim of this article is not to engage in a reflexively negative, ill informed and polemical commentary on this topical issue but rather to attempt to engage with the dishonest justifications and false narratives embedded in the Government’s attempt to rationalise the subsidy removal policy. This article concedes that isolated from context, events and micro-economic reality, the removal of any form of subsidy by government is certainly not economic illiteracy. However, the arbitrary manner in which the Jonathan administration implemented the policy and the dishonest assertions implicit in the Government’s justifications, coupled with the devastating financial impact the policy will have on the lives of ordinary Nigerians has made it necessary for this article to strongly argue against the removal of subsidy. This article will also argue that the case for removal of subsidy has been framed within a very narrow economic envelope and has been disingenuously presented by this “breath of fresh air” administration. In a period of Moral crisis, there can be no neutrality; there is only the side of the oppressed and the side of the oppressor!
To begin the argument against the removal of fuel subsidy, we must first understand what is meant by subsidy. A subsidy is a financial aid paid by Government to business or an economic sector for the purposes of either protecting that sector from bankruptcy and collapse or for the purposes of ensuring that the difference between the true price and the marketed price of a service or commodity is absorbed by the state so as to reduce the cost of that service or commodity to the public. Following from that, fuel subsidy is essentially: if the price of fuel is N5 and as a result of prevailing economic circumstances Government mandates that it be sold at N2, the state then commits itself to absorbing the difference by paying the marketers the remaining N3. Policies of Subsidy are not exclusive to Government neither is there only one type of subsidy but for reasons of relevance, the above explanation and analogy will suffice.
The Jonathan administration, oblivious to the financial hardship it will impose on ordinary Nigerians and in the teeth of civil society opposition, has given many reasons for removing the fuel subsidy. Out of that cacophony of reasons; four broad themes emerge from the statements of Jonathan and his co-conspirators in Aso Rock:
- 1. Fiscal Consolidation
- 2. Subsidy disproportionately favours rich over poor
- 3. Reducing Smuggling and eliminating arbitrage
- 4. Raising revenue for infrastructural projects and Socio-Economic Programmes
Fiscal Consolidation and Counter Argument:
In the “Lagos Fuel Subsidy Debate” that was hosted by “Channels TV” in December 2011, both the Central Bank of Nigerian (CBN) Governor, Sanusi Lamido Sanusi, and the Minister of Finance, Ngozi Okonjo Iweala, articulated very eloquently that the “financial burden to the budget” of having to pay out in fuel subsidy N1.43 trillion ($8 - $9 billion) for the year 2011 was punching a gaping hole in the balance sheet of state, contributing to the budget deficit, thereby increasing the state’s debt profile and depleting it’s foreign reserve.
While it is indeed economically sound to aim to operate a balanced budget especially in the volatile global economic environment of today. The question is not whether or not we should aim to run a responsible fiscal regime, which in any case is a rhetorical question. The real question is what should be taken off the balance sheet of state? Should it be the policy that since its inception has unquestionably benefitted the masses and ensured a marginally affordable and stable price of fuel and by extension affordable cost of transportation, food and other basic necessities of life? Or should it be those other two massive subsidies that benefits the very few that constitute the political class, their acolytes, surrogates and bed fellows in business; namely salaries and entitlements of political office holders and corruption. In the “Lagos Fuel Subsidy Debate”, it was amusing to hear the Governor of the CBN confess that he couldn’t remember the last time he bought fuel in his car! The inconvenient truth is that the cost of “Governance” and public sector corruption is the biggest “financial burden” on the budget and the biggest contributor to the budget deficit and debt profile.
This is the same budget that allocates N992.57 million ($6,210,549.08) for the feeding of the President and his deputy, that’s about $518,000 per month for feeding for two men and their families when about 70% of Nigerians live on about $2 dollars a day! When workers are still fighting tooth and nail to get the promised but not yet delivered N18,000 ($113) per month minimum wage, this is the same fuel subsidy pressurised budget that has allocated N295,322,579 ($1.845 million) to “residential furniture” in the presidency!
To further crystallise and focus the issue on the extraordinary choke hold the salaries and entitlements of the political ‘mis’ruling class have on the budget, consider these numbers: in UK, the state expends just over $408.5 million to cover the salaries, pensions and entitlements of 1436 members of parliament: 786 in the House of Lords and 650 in the House of Commons. In Nigeria however, according to the newly revised salary structure, the state is committed to expend just over $529.6 million to cover the salaries and entitlements, excluding pensions, of its own 496 “honourable” members: 360 in House of Representatives and 109 in Senate! To further drive home this shocking comparison, the UK economy is about 6.5 times Nigeria’s economy and it has about 10 times the minimum wage per month that ordinary Nigerians take home as minimum wage, yet with about 3 times more parliamentarians and even with the inclusion of pensions, it still manages to spend about $121 million less than Nigeria, thus do the wicked take vengeance upon the weak! It is the same Nigerian budget with its “unsustainable” deficit that has to absorb that extraordinary figure which is just one of many examples of the massive drainage pipes that sucks out capital at a phenomenal rate to subsidise the standard of living of the politically appointed and (s)elected! Reduce those first, then if the need is still truly there, fuel subsidy can begin to be reduced and removed once the standard of living of ordinary Nigerians rise to a level comparable to what the size of our economy and the sacrifice of Nigerians justify.
The governor also highlighted the plight of Greece by way of warning to the fate of those who fail to heed the dangers of running constant deficits leading to an unsustainably high debt.
The governor said that should Nigeria not seriously begin consolidate her finances and act decisively to bring down expenditure, by 2015, Nigeria will face a fiscal crisis bigger than that of Greece’s. To further buttress the point, the Minister of Finance stated that the increasing consumption of fuel by Nigerians, which currently stands at 35 million litres per day, will only increase the pressure on the budget vis-a-vis expenditure on fuel subsidy. This is a pathetically shameful attempt at fear mongering. To say the least, and the Governor should know better, this is a highly disingenuous and frankly dishonest analogy. Greece with which the analogy was made is projected to have a debt exposure of about 200% of GDP by 2015. Greece is where it is today for having run up a colossal debt profile of about 130% of GDP today! Nigeria has a current debt profile of 17% (about $39bn) of GDP. Even if one were to project forward to 2015 and assume that the fuel subsidy had not been removed, isolated from everything else and supposing that the fuel subsidy was the only major expenditure that is tipping the budget into deficit as the Governor seemed to be insincerely implying at the debate, at the current rate of spending, $8-9bn on a per year basis, till 2015, Nigeria’s debt profile will rise to only about 26% of GDP. This, by any stretch of the imagination, by any level of arithmetical gymnastics, is nowhere near the dooms day scenario of 130% much less 200% of GDP that is alluded to in the Greek analogy! By way of comparison, Germany, the economic powerhouse of Europe has a debt profile that is about 85% of GDP and nowhere can I see the mobs getting ready to storm the Bundestag neither can I hear “to the barricades” in Berlin! The above section was not an argument in favour of running up deficits and sovereign debts; it is just an attempt to point out the fallacy and dishonesty inherent in the CBN Governor’s attempt at justifying the removal policy.
So the argument is clear, while it is indeed appropriate to want to trim down expenditure and reduce deficit, the wrong subsidy has been removed. Those on the honourable side of the divide say, take away the subsidy that undeservingly cushions your extravagant and wasteful lifestyles before you touch that which gives meagre succour to the miserable lives of the many Nigerians!
Subsidy disproportionately favours rich over poor and Counter Argument:
Nope, it is not an oxymoronic phrase! The above contorted argument was advanced by none other than the chief IMF ideologue in Government: Minister of Finance and Co-ordinating Minister for the Economy Mrs Ngozi Okonjo Iweala. In the “Lagos fuel subsidy debate”, the Minister essentially argued that even though subsidy is beneficial to the poor, it disproportionately benefits the rich. She used the analogy of 4 groups of people whose primary mode of transport are bicycle, motorcycle (20 litres), medium car (60 litres) and jeep (80 litres) which roughly corresponds to the economic classes that exist in Nigeria today: the extremely poor, the poor, the not so poor and the Political class and their collaborators in the private sector! Her argument follows that the man who uses the bicycle uses no petrol; consequently impact of subsidy is negligible on his life. The man who uses motorcycle, at the subsidised rate of N65 per litre, will spend N1,300 to fill up his tank per week (assuming for arguments sake petrol is used up on a per weekly basis). The medium car man and the jeep man will spend N3,900 and N5,200 respectively (again assuming same). So therefore, according to the limited logic of Madame Minister the effect of subsidy is to cushion the impact of larger use of petrol by those who are wealthier and therefore have bigger cars.
This rather facile and simplistic argument hides the true financial impact of fuel subsidy on those whose lives are not totally subsidised by the “over pressurised” budget i.e. the 99% of Nigerians. Firstly take the analogy given by the Minister of the four men to show that more is spent subsidising the use of petrol by the wealthier so therefore removal is justified, using the N140 true cost of petrol as the basis for calculation, it would seem that the State has spent 25% more for the Jeep owner to fill up his tank (N6000) than for the motorcycle owner (N1500). The argument however dishonestly ignores to point out that the poor spend proportionately more of their income on petrol and transportation, so the likelihood is if you are a motorcycle owner at the pump, when you dip your hand into your pocket to pay for petrol, you will be left with far less change to cover your other basic necessities than if you were a jeep owner with considerably deeper pockets. The other fact the minister shamefully failed to mention is the inflationary effect a rise in the price of petrol will have on the already over squeezed cost of living for ordinary Nigerians.
As history has proven and as is now proving to be the case, when the price of petrol goes up, not only does the cost of transportation increase, but also, so does the cost of consumable commodities, food. Because as the transporter pays more to fuel up his truck, so naturally he will charge the market woman more to deliver her supplies who then chargers her customers more for buying her supplies. The customer is then forced to spend an ever greater amount of his meagre salary to pay for basic services of all type, be it getting from point A-B, for feeding, for paying more for his kids to go to school and paying more for school material, or for paying more for rent, as landlord too begins to feel the buffeting winds of inflationary law! And so, slowly but surely, as the sun rises in the east and descends in the west only to rise again, inevitably, the inflationary ripple effect of the increase in petroleum will spread throughout the economy hitting harder those who have less to spend on the rising cost of living and perhaps slowing down macro-economic growth in the non-oil sector! It will be interesting to see what effect this fuel subsidy removal will have on government’s projected 9.7% inflation rate for 2012, this article suspects that the target will not be met and I am not at all convinced that the rise in the price of petrol will have a negligible impact on the macro-economic rate of inflation.
It is unsurprising that the ‘mis’ruling class will contrive and re-contrive the imposition of such an aggressively regressive policy which will only bring about a rising price of commodities hedged against a stagnant salary scale and a declining standard of living. With a life cushioned against the impact of economic reality, it is no surprise the Governor of the CBN can arrogantly declare that “hardship is not an economic argument” in the Lagos debate.
Mallam Sanusi, in your air conditioned office, behind your desk, looking at the dazzling array of numbers on your computer screen, it can indeed be difficult to feel the heavy blows those fluctuating numbers flittering across your laptop screen are delivering to ordinary Nigerians. If you can only allow yourself to pull back the curtains of your office window, lift your eyes away from the immediate surroundings of the magnificent complex called CBN towers and throw your gaze towards the horizon, you will be able to see the true heroes of Nigeria, toiling under the punishing heat of the Abuja sun. The taxi driver, the plantain seller, the office workers drifting in and out of office, contributing their quota to generating profits they will never see. Why don’t you imagine yourself in their shoes and see if your facetious comment stands up to scrutiny. Better yet, why don’t you place yourself in front of a young man who has had to call the underside of a bridge his home, exposed to the elements, he is too poor to find himself a more dignified abode? Why don’t you place yourself in front of a young woman, who, faced with the shattering reality of a life of impoverishment, has had to sell her dignity just to make ends meet? Why don’t you place yourself in front of a young child who is condemned to growing up a stark illiterate because the parents are too poor to step away from the edge of permanent financial ruin? Why don’t you tell them to their face that “hardship is not an economic argument”? Mallam Sanusi, hardship may not be a valid economic argument from the vantage point of the ivory tower of CBN building, but to the vast majority of Nigerians, who cannot count on the Federal Government to subsidise their entire lifestyle, hardship is the only description of their economic state!
On the other hand, to counter that flippant statement, I thought the business of contriving and calibrating public policy is to alleviate precisely that which you dismiss as not being an economic argument. With rulers like that, who needs saboteurs? As can be discerned from the Governor’s statement, the supreme reality of our time is the growing gap between the treacherous ‘mis’rulers whose sole concern is to corner all the wealth for themselves and to legislate laws to give the mask of legitimacy to this odious acquisition and the treacherously ‘mis’ruled who have been left with nothing but misery and statistics!
Reducing smuggling and eliminating arbitrage and Counter Argument:
One of the main disadvantages to Subsidy is the smuggling and arbitrage opportunities it provides. That is to say if you have two markets selling the same product at different prices, people will always take advantage by buying the product at the cheaper market and then selling same at a higher price in the other market and pocketing the difference as profit. Arbitrage doesn’t necessarily have to be illegal as this is what obtains in financial markets through purchase and sale of bonds, derivatives and other such financial instruments.
What obtains in Nigeria with the fuel subsidy is that fuel is imported by licensed marketers on the mandate that they will sell the petrol at N65 per litre, they then collect the subsidised difference from Government and then divert through smuggling either in part or whole the fuel to neighbouring countries where petrol is sold for about N140! The question must be asked instead of tearing away the one substantial pillar ordinary Nigerians lean on, why not, in the words of Femi Falana, “go to Abuja and enforce our laws”? The laws are there to deal with significant economic crimes which this is. The players are known, as the list of those benefitting from the subsidy was published by the senate in December 2011, including a construction company, ’Pinnacle Construction’, which was given about $1.9bn to import oil!
It is profoundly dishonest to punish Nigerians for the monumental crimes of a powerful few. Strengthen and enforce the laws and smuggling and arbitrage operations will drastically reduce. Nigerians are tired of always being told to bear untold hardships for the economic good of the country while those who schemed to wreck the country are left untouched.
Raising revenue for Infrastructure and Socio-Economic Projects and Counter Argument:
The administration of Goodluck Jonathan has stated that N1.43 trillion ($8.5bn) was spent on Subsidy in 2011 and from 2006 – 2011, N3.7 trillion ($23bn) was spent on subsidy. The argument advanced by the administration then follows that by terminating subsidy, the $8.5bn will then be saved for the purposes of investing in infrastructural and socio-economic projects such as light rail, power, urban mass transit, vocational training, improving maternal care, reducing infant mortality and other such similar programmes.
It is pertinent to note that in reeling out all those magnificent aims, no figure was attached to each of these programmes to show seriousness of purpose and the existence of detailed plans ready to be implemented. No detailed policy plans have been drawn up and released to show exactly how the money saved from subsidy will be spent. This shows that there is no credible plan and to use a military metaphor: the Federal Government is on manoeuvres and it is just throwing out smoke grenades to screen the true substance of this deployment; the absence of a shield to absorb what will be a crushing blow delivered to an already pauperised populace. Nigerians need no reminding that we have heard this all before. Subsidy had been reduced 12 previous times, all with the excuse that the money saved will be invested and spent to benefit ordinary Nigerians. What obtained was the money was instead diverted through embezzlement and other such odious means to subsidise public sector corruption and the bloated salaries of the many tin pot emperors in and around government.
If government insists that money needs to be saved to tackle Nigeria’s immense infrastructural and socio-economic problems, then the purging of the diversion of public resources by known and unpunished actors is surely the place to start. Consider these numbers: the aggregate subsidy on petrol over a 5yr period according to Government figures is $31.5bn. By the law of averages, this comes up to $6.3bn per year. Corruption however, according to a recent report by the think tank, Global Financial Integrity, has taken out $130bn within a period of 8 years from Nigeria, this averages out at a staggering $16.25bn per year. This is the cost that must be removed from the balance sheet of state.
The biggest deficit in Nigeria is not of the budgetary kind but of the credibility kind. Nigerians have been lied to for too long. We were promised that the money saved from paying off $12bn of our debt in one fell swoop in 2006 will be invested in infrastructure. Nigerians bit the bullet and made the necessary sacrifice, yet from 2006 till today our debt profile has yet again risen from $0 to about $39bn. Show us what was built with the $39bn, then you will begin to close the huge deficit of trust that exists between the governors and the governed. It is clear the wrong subsidy has been targeted and yet again it is ordinary Nigerians that are called upon to make great sacrifices only to see the fruits of their sacrifice wasted by a visionless ruling class!
The argument against fuel subsidy removal this article presented falls into two broad themes:
· The wrong subsidy has been targeted: Enough savings can be found if government seriously targets corruption and reduces the subsidy in the form of salaries and entitlements extended to a bloated and unproductive political class. An enormous amount of revenue can be raised by clawing back the monies that was paid out to the contractors who were paid in full for the repairing of our refineries and the building of new ones, contracts that were never executed even though the money was disbursed.
· Strengthen and Enforce existing Laws: The inefficiencies associated with the implementation of subsidy arise mostly from Government incompetence and collusion in criminal activities. Arbitrage and smuggling can easily be tackled if government puts in place a tough regulatory and enforcement regime. Those that have been given contracts year on year to build and maintain our broken refineries must be prosecuted to the full force of the law.
Closing Argument: “You have nothing to lose but your chains; you have a world to gain”
Those immortal words were penned by Karl Marx in the Communist Manifesto which was issued in 1848 and it perfectly encapsulates the attitude we Nigerians must adopt if we are to smash the formidable power structure of the insidious cabal that bestrides the comatose corpse of the Nigerian colossus. The veil has been torn from our eyes too many times for us not to have seen the faces of the shadows operating against our general interest. This struggle must be framed in a manner that is wider than just restoration of fuel subsidy. After all even if the subsidy were to return tomorrow, the underlying contradictions of the Nigerian state will not disappear. The scope of the argument must be framed around first a return of subsidy and then reform of how subsidy is implemented to ensure that a few business men with long spoons to government cannot corner the acquisition of import of fuel.
It is times like these that reveal to man the true power of the masses. This is an opportunity to stand firm and stand united against a common enemy. When the arrogant few are determined to stampede their way towards a direction we do not want to go, we must not be cowed, instead, we must impose our will on them. When hubris propels the powerful towards arrogance, the defiance of the masses must remind him of his limitations! We must stream into the streets in our multitudes and show them our rage. At no time in history has liberty been given on a plate of gold, it has always been snatched from the broken hands of tyrants. The fate of Ben Ali, Mubarak and Ghaddafi is testament to that reality. A dividing line is being drawn on the ground; the positions have been identified. As the game plays out, those who have played their part, for good or ill, will be known. When the historian raises his pen from the pages of time, before the ink dries out on the paper, let us ensure that the narrative that passes into history reflects the change we desire!