Nigeria: Fuel subsidy removal and the national crisis

Author: Fatima Kyari Mohammed

Originally Published at Peace and Conflict Monitor on 03/02/2012

 

Introduction

On the 1st of January 2012, the Government of the Federal Republic of Nigeria, through the Petroleum Products Pricing Regulatory Agency (PPPRA), announced the withdrawal of a petroleum subsidy on Premium Motor Spirit (PMS), more than doubling the price of fuel from N65 ($0.42) per litre to N141 ($0.92). This left many travellers for the Christmas break stranded as the price of transport and commodities (not surprisingly) doubled overnight and triggered a series of massive protests on a scale rarely seen in the history of the nation; this was indeed a special New Year’s gift to Nigerians from their President, Goodluck Jonathan.

Background to the protests

Earlier in the year, the Government had expressed its intent to deregulate the downstream petroleum sector claiming that it was heavily subsidized and was costing the Government almost $8bn a year – “more than the combined 2012 budgets for health, education, housing and social protection”.[1] The government argued that this was necessary as part of its reform plan to rescue the struggling economy from mounting public debt and declining foreign reserves. Apart from the cost, which is greatly inflated by corruption, the subsidy on imported fuel has also caused the neglect of its local refineries, which are currently functioning at far below their potential capacity.

Nigeria, which is Africa’s largest crude oil exporter and also the 6th largest in the world, spent about N1.15 trillion ($752M) to import an estimated 8.1 million metric tons (MT) of petroleum products in 2010 alone.[2] According to the National Petroleum Agency, the estimated daily amount of petroleum products required in Nigeria today is 30 million litres of petrol (PMS), 10 million litres of kerosene (DPK), 18 million litres of diesel (AGO), and 780 metric tons (1.4 million litres) of cooking gas (LPG), and the estimated amount of crude oil required daily for domestic refining to adequately satisfy the demand for petroleum products in Nigeria, should be about 530,000 barrels per day (bbl/d). This is some 85,000 bbl/d more than the combined refining capacities of all the state-owned refineries located in Warri, Port Harcourt, and Kaduna. The four refineries have a combined capacity of 445,000 bbl/d but have never reached full production due to sabotage and operational failures.[3]

The Government declared the decision to deregulate the downstream sector as part of its economic reform programme. Several government officials have defended the decision, stating that it would allow the country to not only service domestic and foreign debt, but also to divert government resources to development and growth, as well as to fight corruption.

According to Labaran Maku, Nigeria’s Minister of Information: “There is no way a country will survive with N5 trillion in debt and that uses N500 billion to service debt. The entire capital budget is completely borrowed and if it continues, the economy will collapse and companies will be forced to cut the work force.”

The Central Bank Governor, Sanusi Lamido Sanusi also defends this decision, calling it a painful policy decision for the Federal Government but necessary to secure the future of the country. He warned that there would be grave economic consequences for the country if Nigerians did not support the policy. “It does not mean the government is not sensitive to the pain it will cause, but the consequence of not taking the decision now, will be a Greek type of economic situation in a few years time”. In addition, he claims that the entire sector is functioning on a fraudulent system.[4] He states:

Fraud like theft thrives not only because of the existence of greed and benefit but of opportunity. Place yourself in the shoes of the average Nigerian “businessman” or “entrepreneur”- polite euphemisms for rent seeking parasites. You establish an emcee for importing 20,000MT of PMS and the PPPRA says this is at a landed cost of N145 for example per litre. So you know that for every litre in that vessel you will get at least N85 as subsidy. Now you have a number of “possibilities”: 1) You can offload 5,000 MT and bribe customs and other officials to sign papers confirming you offloaded 20,000 MT. 2) You can just forge documents and have them stamped without bringing in anything and collect the subsidy-PPPRA pays based on DOCUMENTS. 3) You can bring in the fuel, load on tankers, sell some at N65N, some at 80, some at 100, some across the land borders. You can do all this and no one can catch it or prove it because somebody was paid to sign off on documents. And with a high enough margin, there is too much temptation to be resisted and firepower for bribing officials. When I spoke to the House of Reps I told them why I was suspecting fraud. It starts from PPPRA “allocations” based on “capacity”. You will find a company like Mobil with capacity for say 60,000 MT and a relatively unknown name with a capacity of say 90,000 MT. So yes, I am willing to take all the criticism and labels and be unpopular but this has to stop and government can find other ways of alleviating. These are all valid issues that are to be taken IN ADDITION to and not in place of subsidy removal.[5]

Removing the subsidy on fuel was always going to be hard since cheap fuel is the one benefit that Nigerians get from the government. No matter what justification the government gives, the reality is that this was carried out in an insensitive and clumsy manner at a time when the country and its citizens are facing nationwide security threats, unrest, and political instability, particularly in certain areas of the northern part of the country, not to mention the volatile Niger Delta that produces the country’s crude oil.

For many Nigerians, the fuel subsidy removal is merely a symptom of deeper-rooted problems that exist within the system. With a stagnant economy, high levels of corruption, little or no investment in health, education or other social amenities, and weak infrastructure, the reaction of the population did not come as a surprise. In addition, the clumsy manner in which the policy change was handled was almost an automatic formula for chaos, with critics arguing that the President did not follow due process and did not have the prior approval of the Legislature. In the 2012-2014 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) in September last year, President Jonathan had hinted that the fuel subsidy would be scrapped in 2012. He had also hinted that this would take place sometime in the middle of the year, but the New Year announcement was quite an unexpected shock.

The lower house of the national assembly reacted to the announcement by cutting short its recess to consider the issue. The legislators aired their views on the state of the nation and the step taken by the executive in unilaterally removing the subsidy. Some senators also expressed concern and spoke against the removal when it was clear that there was no provision for a fuel subsidy in the 2012 Appropriation Bill presented to the National Assembly. These attempts, however, did not have much impact, and the Nigerian Labour Congress (NLC) and the Trade Union Congress (TUC) announced a national strike on the 9th of January, bringing the nation to an economic standstill. This was not the first major national strike, but this time it was on a different level. It not only involved the organized NLC/TUC coalition and usual civil society organizations, but also a number of other groups such as the ‘Occupy Nigeria’ movement. In a discussion with one of the group leaders in Abuja, they expressed their position:

We are not the NLC, we are just young, frustrated, unemployed youth that are saying ‘enough is enough’, and we are not going to take things sitting down anymore. And even if the NLC calls off the strike, we will continue to fight this on the streets or off, the Government should know that Nigerians will no longer take it sitting down, we have been fooled for far too long.

Although the strike was formally called by labour in collaboration with other civil society organisations, thousands of Nigerians from every social class found an outlet to express their anger against the system during the protest; scores of citizens from all social classes also took to the streets to express their grievances. Although many did not expect the protesters to succeed, it was amazing to see that thousands of people, mostly the young, were still prepared to take to the streets. For many, the damage inflicted on ordinary Nigerians outweighed concerns about retaliation. The escalation of fuel costs have affected everyone, but especially the poor, and instead of including measures to cushion the effect particularly for them, the country’s citizens only received assurances from the government, most of which was brushed aside as mere talk, for this was not the first time Nigerians had received such assurances and had lost faith in the system due to decades of bad governance.

Following several days of protest – which in many instances turned violent – the government finally relented and announced a partial removal of subsidies, which reduced the domestic fuel price from N141 naira to N97. The strikes were called off following this agreement and Nigerians, although still gravely disappointed, went back to work. In addition, the President ordered cuts of up to 25% for the salaries of top government officials, and special programs for mass transit to help poor workers over the hurdle of higher transport costs.

Moving forward

The Government has strong arguments to support its policy changes, and to a certain extent they can be justified; but the Government must now deliver on its promise to its people in order for it to regain its credibility. This is not the first time oil subsidies have been removed in the country, and it is not the first time the Government has committed to investing the funds into social amenities such as health, education, and much needed infrastructure in various sectors such as transport and power. But Nigerians are now completely disillusioned with the empty promises, and are closely watching the Government’s next steps.

A starting point for the Government will be to focus on repairing its rundown refineries and bringing an end to the senseless system of importing 85% of the oil needed for its own domestic consumption. It needs to learn lessons from other, more developed oil producing countries. The issue of the exorbitant salaries of legislators must also be addressed. Nigerian legislators are among the highest paid in the world. The disconnect between the minimum income of N18,000 ($118) and the average salary of a Senator of N15.18m ($99,167) per month is, to say the least, completely unjustified and unjust. With a GDP per capita of $2500[6], Nigeria is classified as one of the poorest countries in the world. Yet its legislators’ salaries are more than that of their counterparts in the US, UK, France, and Sweden.

The Nigerian Government must invest in its people and focus on addressing they country’s huge economic problems, providing jobs and basic social amenities such as good education, healthcare, and much needed infrastructure. The government should also tax high-income individuals in order to raise revenues for urgent pro-poor investments and a fairer society.[7] A recent economic development index report stated that Nigeria has the second highest rate of inflation among 12 major oil-producing nations. It also ranked 142 out of 169 on the country list of prosperity, making it one of the globe’s least prosperous countries. In a 2010 UNDP Human Development report that assessed countries based on standards of education, wealth and life expectancy, it was grouped amongst the lowest 41 countries.

The Government must also focus on the security challenges facing the country under the guise of ethno-political and pseudo-religious movements. USIP, in a recent article related to the subsidy removal, states that “Severe domestic economic shocks in conflict-affected countries, like Nigeria, could have dire and potentially destabilizing socio-economic consequences”.

If there is one positive thing that has come out of this experience for Nigerians, it is that it has united people beyond class, ethnic, regional, and religious divides. It has brought Muslims and Christians from the North and South together at a time when the country is going through unrest due to regional and religious divides. Many are beginning to understand that these artificial divides are politically motivated and based on sentiments that can only further divide the country. In addition, for the first time ever, young men and women, the employed and unemployed from across the board were chanting to the same tune: ‘Enough is enough’! What started as a demand for the fuel price to go back to N65 a litre expanded to include action against corruption in the oil industry and an audit of the Nigerian governance process as a whole. Uniting against real issues that affect all citizens and holding leaders accountable is the only way to achieve socio-economic stability and lasting peace. There is no doubt that momentum has developed and a new movement of Nigerians is emerging. Are these the long awaited winds of change for the giant of Africa? Only time will tell.

References:

Muhammad Jameel Yusha’u, 16 January 2012, Viewpoint: Nigeria’s President Goodluck Jonathan backs down, – Northumbria University,http://www.bbc.co.uk/news/world-africa-16579001

Leonard Shilgba, 28 January 2012, Nigeria: Lies About Fuel Subsidy Removal – The Moment, http://allafrica.com/stories/201201301344.html

Xan Rice, January 16 2012, Nigerian president yields on fuel subsidy, Financial Times http://www.ft.com/intl/cms/s/0/9592e0cc-4020-11e1-9bce-00144feab49a.html#axzz1nnw03Yqz

Sanusi Lamido Sanusi, 8 January, 2012, Why I Started War Against Subsidies, The Street Journal,http://thestreetjournal.org/2012/01/%E2%80%9Cwhy-i-started-war-against-subsidies%E2%80%9D-sanusi-lamido-sanusi/

Raymond Gilpin, 16 January 2012, Subsidies and Suffering in Nigeria: Exploring Conflict-Sensitive Economic Policy in Fragile States, United States Institute for Peace http://inec.usip.org/blog/2012/jan/16/subsidies-and-suffering-nigeria-exploring-conflict-sensitive-economic-policy-fragil

Jeffrey D. Sachs, January 10, 2012, Nigeria Hurtles Into a Tense Crossroad, New York Times http://www.nytimes.com/2012/01/11/opinion/nigeria-hurtles-into-a-tense-crossroad.html

Roland Obasa, 23 February 2012, Fuel Subsidy removal: The Arguments and path to progress, Nigeria Oil and Gas monthly http://www.nigerianoilgas.com/?p=769

Footnote:

[1] Xan Rice, January 16 2012, Nigerian president yields on fuel subsidy, Financial Timeshttp://www.ft.com/intl/cms/s/0/9592e0cc-4020-11e1-9bce-00144feab49a.html#axzz1nnw03Yqz

[2]Roland Obasa, 23 February 2012, Fuel Subsidy removal: The Arguments and path to progress, Nigeria Oil and Gas monthly http://www.nigerianoilgas.com/?p=769

[2] Roland Obasa, 23 February 2012, Fuel Subsidy removal: The Arguments and path to progress, Nigeria Oil and Gas monthly http://www.nigerianoilgas.com/?p=769

[4] Roland Obasa, 23 February 2012, Fuel Subsidy removal: The Arguments and path to progress, Nigeria Oil and Gas monthly http://www.nigerianoilgas.com/?p=769[5] Sanusi Lamido Sanusi, 8 January, 2012, Why I Started War Against Subsidies, The Street Journal, http://thestreetjournal.org/2012/01/%E2%80%9Cwhy-i-started-war-against-subsidies%E2%80%9D-sanusi-lamido-sanusi/

[6]World Bank http://devdata.worldbank.org/AAG/nga_aag.pdf

[7]Jeffrey D. Sachs, January 10, 2012, Nigeria Hurtles Into a Tense Crossroad, New York Times http://www.nytimes.com/2012/01/11/opinion/nigeria-hurtles-into-a-tense-crossroad.html

Bio: Fatima Kyari Mohammed is a Master’s candidate in the Responsible Management and Sustainable Economic Development programme at the University for Peace.