Fuel Subsidy Redux

A new report strikes the same familiar tune, and I honestly do not know why they write these things.

Below The Headlines is on Easter break this week. So please enjoy this piece on your favourite topic; fuel subsidies.

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It has been a minute since I have been on these pages, I hope you have not missed me too much. Well, I am back now - and I want to start with an ‘‘overfamiliar’’ subject. Fuel subsidy in Nigeria has been completely overshadowed by concerns about the exchange rate and inflation in the last couple of months, and that’s not bad. But the fact remains that we have not dealt with it, and only sort of wished it away. Firstly, we do not know whether ‘‘subsidy is gone’’ or only partly gone. Secondly, all talk of cash transfers to the poorest as relief for the fuel price shock has completely cooled, and the government has shifted its gaze to food. Thirdly, the country's labour unions are still insisting on compensatory salary increases for the hike in fuel prices and its effects on the cost of living. I do not know how many warning strikes they have left in them, but the issue will certainly boil over at some point.

It is in light of all these that I dug into a new paper by the Overseas Development Institute.¹ My overall feeling after reading it is one of tiredness about the same talking points we keep repeating about Nigeria in general - but I have been moody lately, so this is not a fault of the authors. Anyway, I read the report so you do not have to, and I want to summarise some of the key themes before I return to my gripe.

The report starts by framing the economic strain fuel subsidies have placed on Nigeria's finances, consuming $9.7 billion in 2022 alone. This financial burden is juxtaposed with the immediate economic shock experienced by the populace following the subsidy's removal, which led to a more than 200% increase in petrol pump prices. The report suggests that while the economic rationale for subsidy removal is clear—to free up vital fiscal resources for development—the execution must be meticulously planned to prevent severe welfare losses to the most vulnerable.

Political Economy

A significant portion of the document delves into the political economy of fuel subsidy reform, highlighting how entrenched interests, opacity in oil and gas revenues, and the social reliance on subsidies complicate reform efforts. The success of subsidy reform in Nigeria hinges on navigating these political and economic minefields, requiring a strategic approach to dismantle the status quo while ensuring social stability.

Social and Environmental Imperatives

The need for carefully designed redistribution policies is emphasized as critical to mitigating the reform's adverse effects on lower-income and rural households. The report argues for a strategic reallocation of fiscal savings towards public infrastructure, healthcare, and education, aligning with sustainable development goals. Additionally, it points to the environmental benefits of phasing out fuel subsidies, including the potential reduction in CO2 emissions and the promotion of renewable energy industries.

Building Trust and Confidence

Another central theme in the report is the importance of building public trust and confidence in the government's reform process. The sudden increase in fuel prices, coupled with the historical mistrust between the Nigerian populace and its government, underscores the need for transparent communication and genuine engagement with all stakeholders. The report suggests that successful reform requires not only the technical reallocation of funds but also a socio-political contract that convinces the populace of the reform's long-term benefits.

Recommendations

Transparent Communication: The report calls for an open dialogue about the necessity of subsidy reform, its expected impacts, and planned mitigation strategies to build public trust.

Social Protection Measures: Implementing immediate social protection measures to cushion the economic shock on vulnerable populations is crucial. This could include direct cash transfers and investment in social services.

Sustainable Reinvestment: Long-term success hinges on reinvesting the savings from subsidy removal into sustainable development projects that address both economic and environmental goals.

International Collaboration: Leveraging international support for technical and financial assistance in managing the transition towards sustainable energy and economic models.

Towards a new social contract

I have no deep objections to the approach taken in this report. But lately, when it comes to Nigeria, I have become overcome with philosophical concerns about how to do reforms. The fuel subsidy regime has a logic that has sustained it for so long - perhaps we can even call it a social contract. The government collects rent on crude oil production and exports - to which it does not invest much in its technological improvements and linkages to the rest of the economy. Corruption inevitably ensues from this rentier arrangement. The government then takes part of what it collects on oil and redistributes it to the population in the form of fuel subsidies. The public on the other hand makes do with cheap fuel in the place of other public goods and services that the government does not provide. This social contract has run into trouble because what the government collects from oil is no longer enough to spend, steal, and redistribute.

Even though talk of energy transition is everywhere and getting serious international political and investment support, the oil economy is not dead and can still be a boon for Nigeria. My proposal is for a new social contract. The simple purpose of that contract should be that reform of the oil economy must be towards achieving domestic energy abundance. Nigeria needs cheap energy to revitalize industrialisation, food production, transportation, and other services. I do not mean cheapness through subsidies. We need market reforms that provide the right incentives for investments, and a regulatory regime that enforces competition.

Designing the specific policies will not be easy. Political leadership has to understand the importance and dimensions of energy abundance and prioritize accordingly. But cheap energy for economic transformation is how we will reach a $1 trillion economy and not financial engineering.

1. The title is "Towards Sustainable Fuel Subsidy Reform in Nigeria" and it has many authors