Beyond the Nigerian fuel subsidy crisis

20 April 2012

Nigeria is one of Africa’s most significant oil producers, but with corruption and economic mismanagement, the perennial problem of fuel shortage and the increasing rising cost of petrol at the pump is adding pressure on the economy and sparking social instability.

Reporting for Africa Renewal, Yemisi Akinbobola examines the paradox of Nigeria’s fuel scarcity despite its booming oil production:

One would think that being a citizen of a country with the second-largest oil reserves in Africa came with some perks. Not so in Nigeria where scores of people are up in arms after being stripped of a petrol subsidy in effect since 1973.

The price of gas at the pumps more than doubled, sparking massive protests around the nation in early January.

Prior to the subsidy’s removal, the pump price of fuel was 65 naira ($0.40) per litre, against a landing cost of N139. The government therefore contributed a N73 subsidy, for an annual total of N1,200 billion (US$7.6 billion), or 2.6 per cent of the country’s GDP.

Divided among nearly 160 million people, the gross domestic product (GDP) averages just $1,695 per person annually.

Reform needed

With 37.2 billion barrels of proven oil reserves, Nigeria is the continent’s largest oil producer. Yet Nigeria is the only member of the Organization of Petroleum Exporting Countries that needs to import refined fuel, and often suffers scarcities.

Most economists, both in Nigeria and abroad, believe that removal of the subsidy is a necessary step towards long-needed reform, since the country can no longer sustain the cost.

Political analyst Garba Sani points to the colossal sums spent on the subsidy, N3,700 billion ($23 billion) in 2006–2011 alone.

As an oil-producing country, he adds, Nigeria should not be importing — and subsidizing — refined oil.

A report by Renaissance Capital, a leading investment bank that focuses on emerging markets, argues that removal of the fuel subsidy, combined with other reforms in the power sector, could increase global investors’ interest in the Nigerian market.

Potentially, it suggests, Nigeria could become one of the world’s top “frontier markets.”

‘Just the spark’

In 2011, Transparency International ranked Nigeria as among the 40 most corrupt nations in the world. The oil industry in particular is notoriously corrupt, notes Renaissance Capital.

Years of anger and discontent with government performance fuel much of the resentment among ordinary Nigerians, according to Denja Yaqub, the assistant general secretary of the Nigeria Labour Congress.

“All sectors have problems in Nigeria, so the subsidy removal was just the spark that Nigerians needed,” says Mr. Yaqub.

Nigeria now has democratic structures, adds Mr. Yaqub, but corruption and mismanagement within the legislative bodies mean they do not adequately perform their democratic duties.

“They are constitutionally set up to check each other, but they are all behaving the same way: corrupt, undemocratic, irresponsible and absolutely reckless.”

This corruption, unaccountability and lack of transparency have now been coupled with the government’s apparent inability to tackle increasing religious intolerance, including the attacks of the Islamist sect Boko Haram.

All this contributed to the resistance the authorities met when they announced the removal of the fuel subsidy.

Importance of strategy

While President Jonathan may have had the best of intentions for Nigeria’s economic future – observers argue; his government lacked an effective implementation and communication strategy.

Subsidy removal may have been the right move, but it was done in the wrong way, and at the wrong time: the country was still recovering from multiple bombings by Boko Haram on Christmas Day.

Mr. Garba Sani argues that it would have been better to remove the subsidy in phases, while at the same time refurbishing the country’s four dilapidated oil refineries.

Since 2000 the government has spent $1.78 billion on maintaining the four refineries, with very little to show for it. They operate at less than a quarter of capacity, and are 30 years behind modern standards.

Some maintain that the money used on the fuel subsidy could have been better put to building new refineries and thus ending the need to import refined petroleum.

In addition, tackling corruption and mismanagement within the Nigerian National Petroleum Corporation would have helped make removal of the subsidy a more acceptable proposition to the populace.

“If they can simultaneously fight [corruption] as well as increase refinery capacity and withdraw the subsidy gradually,” says Mr. Sani, adding that; “the country would have then set up a solid foundation for a permanent removal of the subsidy, a permanent capability of domestic production and a more stable economy.”

According to Thomas Sterner, an expert in environmental economics, getting rid of corruption within the industry may not be easy because of the powerful interests involved.

Urban elites directly benefit from the petrol subsidy, he argues, as do smugglers and oil companies such as Oando, which took in $1.4 billion from the subsidized fuel imports last year.

The next time the government contemplates removing the subsidy, it must be “more careful,” argues Mr. Sterner. “You need to have a strategy, and say, ‘We are moving the money immediately. We will use it on health or education or something else’.”

That, he says, would make it harder for the beneficiaries of the status quo to say that removing the subsidy hurts the poor.

President Jonathan, it seems, has heeded the experts’ advice. In a sign that the government is moving towards a longer-term strategy to win public acceptance for the subsidy removal, recently inaugurated the Subsidy Reinvestment and Empowerment (SURE) programme in mid-February.

The programme is intended to monitor the funds saved from the subsidy removal and manage their investment in public works projects that may generate 370,000 new jobs, especially jobs for women and youth.

Africa Renewal


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