Post-Subsidy Economy: Exploring Bold Initiatives for Economic Recovery in Nigeria by Ike Neliaku

The Post-Subsidy Economy: Exploring Bold Initiatives for Economic Recovery in Nigeria

Lecture delivered by Dr. Ike Neliaku, fnipr, President and Chairman of Council, Nigerian Institute of Public Relations at the 3^rd Frontier Discourse Annual Pubic Lecture Series and Awards, Enugu, November 18, 2023

Protocols.

I am very pleased, indeed honoured to be considered to give the 3rd Pacesetter Frontier Magazine Annual Public Lecture Series. I note appreciation the profound thought that apply to your choice of subject for the Annual lectures, which is influenced by the prevailing issues in the country. Your consideration makes the choice of this year’s topic on post-subsidy economy, very topical. The same applies to the topics for the 1^st and 2^nd editions of the lectures – Mental Power at the Mercy of Political Will: Nigerian Politics and Its Conscious Play to Ignorance; and The Purpose of Power: Ambition for Common Good and Our Culture of Silence and Endurance, respectively.

Announcing the 3^rd Frontier lecture series Ag. Editor-in-Chief of the Magazine Ms. Dabere Egbo explained that the choice of topic was dictated by the need to ensure that Nigerians do not become utterly despondent as a result of the economic hardships brought about by the removal of subsidy on PMS. According to her, the removal of petrol subsidy has indeed triggered some significant challenges such as inflation, a presidential declaration of a state of emergency on food security and a rise in the cost of living. Some other economic decisions like the free floating of naira have also followed. The aftermath of this decision to remove subsidy has led many to face economic strangulation, and we must now devise bold initiatives and strategies, an economic survival kit, so that Nigeria… can survive and thrive in these challenging times. She also hoped the lecture will “provide practical solutions and bold economic initiatives and strategies to empower people to navigate this challenging phase successfully”.

Distinguished ladies and gentlemen, you could see that about four lines of 42 words, this young lady has sent me on a voyage of discovery to provide a viable antidote to that great declaration of Mr President that “Subsidy is Gone”!!! As daunting a task as this assignment may become, I have decided to speak from a lay person perspective who like all Nigerians has a stake in the economy of the federation, especially the post-subsidy era, with all its ramifications and challenges.

For convenience, I have divided my presentation into three broad sections:

• Brief Overview of Contemporary Nigerian Economy
• Major Challenges to the Nigerian Economy
• The Politics and Economics of Fuel Subsidy in Nigeria
• Thoughts on Post-Subsidy Economy

Brief Overview of the Contemporary Nigerian Economy

Since independence from Britain in 1960, Nigeria has operated a mixed economy – a combination of government and private enterprises and like many developing economies is generally considered an emerging market with considerable growth prospects across various sectors. With a population of over 200 million people and considerable youth bulge, Nigeria boasts of a large labour force capable of servicing different economic sectors. However, with that also comes the challenge of robust and sustained economic growth to keep them gainfully employed.

In 2014, Nigeria changed its economic analysis to account for emergent major contributors to its GDP, such as telecommunications, banking, and the film industry; which made it the largest economy in Africa; a position it has maintained to date with a GDP of about $477.4 (U.S). (www.statista.com). Key sectors of the Nigerian economy include – Oil and Gas, Agriculture, Manufacturing, Banking and Finance, Technology, Communication, (including Information and Communication Technologies), Services, Entertainment, Hotel and Tourism, among others. A brief insight into three of these most influential sectors will help us better understand their contribution to the Nigerian economy.

• Manufacturing: Since 2013, Nigeria boasts of the largest manufacturing sector in Africa and produces a large proportion of goods and services for the West African region. Although growing at a slower pace than other sectors, it still accounts for about 9% of Nigeria’s GDP and employs approximately 12% of the labour force. To underscore the importance of manufacturing to the Nigerian economy, the Federal Government has adopted a number of laws and policies to boost the sector, among which are, the creation of industrial parks, tax credits to local manufacturing firms and the prohibition on importation of certain goods to foster their production locally.

Despite these efforts, the manufacturing sector continues to stagnate with the country unable to produce enough for both local consumption and export. The consequences of having a weak manufacturing base for a country with such a large population include limited number of jobs created to accommodate workforce entrants, an import bill that can hardly be met (nor sustained) by current export earnings, resulting in, among others, severe foreign exchange shortages. A major challenge in the manufacturing sector in Nigeria is poor electricity supply leading to over reliance on power generating sets which considerably increases production costs.

• Agriculture: Prior to the discovery of oil, Nigeria’s first republic economy was primarily driven by the agricultural sector; particularly Cocoa, Groundnut, Cotton, Rubber, Palm Produce, among others. Even today, the sector still plays a key role in Nigeria’s economic development as it employs more than 70% of the country’s labour force and accounts for about 23% of the GDP. Aside from Cassava and Yam which Nigeria is the world’s biggest producer of, she still exports many of her agricultural produce but with considerably lesser contribution to the economy than it did in the early years of the Republic.

The largely subsistence agricultural sector has not kept up with the country’s rapid population growth. Nigeria was once a large net exporter of food; but currently imports some of its food products. However, more recently, the Nigerian government has prioritized agriculture by introducing measures aimed at encouraging industrial farming which has led to increased private sector investment in the sector, resulting in improved crop yields and new employment opportunities.

 

• Oil and Gas: Nigeria is blessed with abundance of natural resources, including vast deposits of solid minerals, which unfortunately, are in the relatively early stages of being exploited. This makes Oil and Gas overwhelmingly the dominant commodity in the natural resources sector and a cornerstone of the Nigerian economy. For long, Nigeria was the largest producer and exporter of oil in Africa. However, in the first half of this year (2023), she dropped to a marginal third position behind Libya and Angola. Most recent OPEC figures as at July 2023 put Nigeria’s oil production at 1.081 million barrels a day, behind Libya (1.173 pbd) and Angola (1.149 pbd).  Curiously, while the oil sector contributes the overwhelming percentage of Nigeria’s foreign exchange (up to 90% by some accounts) and about 80 percent of government revenues, it only accounts for roughly 10 percent of the GDP, making it a small part of Nigeria’s overall economy. Yet, without oil revenues, the Nigerian government cannot function.

 

Given that the Nigerian economy is driven by oil exports leaves her at the mercy of unpredictable global oil prices. Further, the scandalous inability of successive governments to fix the country’s three major refineries means that Nigeria’s crude is first exported, refined and then re-imported back into the country. This is a major contributor to Nigeria’s perennial Foreign Exchange crisis which has left the Naira lagging against all the major currencies of the world.

 

However, in the past few years, the federal government has adopted a variety of policies and legislations aimed at reforming the oil and gas sector with the goal of enhancing its global competitiveness and profitability. These include the liberalization of the downstream sector of the petroleum industry, the institution of a framework for the exploration and production of unconventional hydrocarbons, as well as the conversion of the NNPC – the state-owned oil corporation into a private limited liability company (now NNPL). The reforms were largely embodied in the Petroleum Industry Act of 2021. But critics argue the sector requires further deregulation, especially with respect to the management of the refineries.

As with the economies of all countries, the Nigerian economy revolves around importation and exportation, with petroleum, accounting for about 90 percent of her export profits. While Nigeria also exports numerous products, particularly from the agricultural sector, her economy is substantially import dependent with China as her largest import partner. There is literally nothing Nigerians don’t import, including toothpicks, even when it has become old fashioned.

From the foregoing, it is obvious that a major bane of the Nigerian economy is its high import dependency as we considerably consume more than we produce, which inevitably consigns our balance of trade in the deficit column and puts enormous pressure on the Naira.

However, more recently, the Nigerian government has implemented a variety of measures aimed at diversifying the country’s economy to reduce its dependence on oil revenue.

With a booming services industry, fast-paced ICT sector, and a vibrant young population, immense opportunities for diversifying the Nigerian economy abound. These include an emergent blue economy capable of unlocking job opportunities in fisheries, aquaculture, tourism, shipping and renewable energy, with the added bonus of mitigating the devastating effects of climate change while helping to restore marine ecosystems. There are also massive growth opportunities in the entertainment sector, particularly Nollywood – the second largest movie industry in the world after India’s Bollywood – along with a vibrant music industry which has already taken the world by storm. Further, as mentioned earlier, the burgeoning solid minerals sector, when fully harnessed, will be boon to the Nigerian economy.

Some Major Challenges to the Nigerian Economy

Despite its undoubted potentials, the Nigerian economy faces several very major challenges, most of which are not only interlinked, but also largely structural in nature. Permit me to briefly mention only a few of these:

1. Inflation and Poor Economic Growth:

Data from the World Bank show that between 2000- 2014, the Nigeria’s economy experienced broad-based and sustained growth of over 7% annually on average. This was due to a combination of favourable global conditions, and local macroeconomic structural reform policies. From 2015-2022, however, growth rates decreased and GDP per capita flattened, driven by monetary and exchange rate policy distortions, increasing fiscal deficits due to lower oil production and a costly fuel subsidy program, increased trade protectionism, and external shocks such as the COVID-19 pandemic. GDP during the roughly 7 year period averaged 1.1 percent. Real income remained under pressure as national minimum wage was unchanged even in the face of spiraling inflation which rose to 25.8 percent as of August 2023, the highest since September 2005. Government’s removal of subsidy on fuel coupled with the low exchange rate of the Naira led to 216 percent increase in the pump price of fuel, worsening the affordability of goods and services. The 17 year high inflation, along with sluggish growth has left the economy in very bad shape.

 

1. Poverty and Unemployment:

According to 2023 figures from the National Bureau of Statistics, unemployment and underemployment rates increased to an all-time high with a total of 133 million Nigerians classed as multi-dimensionally poor. World Poverty Clock classed 71 million of those as extremely poor making Nigeria the poverty capital of the world (since 2016) as four in every 10 Nigerians live below the poverty line of $1.9 (US) per day.

Further, economic growth has not been inclusive as the economy faced key challenges of lower productivity, and the weak expansion of sectors with high employment elasticity. In the 2019 United Nations Development Index, Nigeria ranked 161 out of 189 countries.  Weak job creation and entrepreneurial prospects stifle the absorption of the 3.5 million Nigerians entering the labour force every year. The poverty rate is projected to reach 37% in 2023.

Worse still, around 80 percent of workers are employed in sectors with low levels of productivity like agriculture and non-tradable services. This means that the kind of jobs needed to generate income growth and lift many Nigerians out of poverty are not available in large numbers. In most areas of Nigeria, state capacity is low, service delivery is limited, while insecurity and violence are widespread.

 

iii. Infrastructure Deficit:

Nigeria suffers from massive infrastructural challenges. Highways built decades ago to connect various parts of the country and foster trade and commerce are in terrible state of disrepair. Arguably, Nigeria’s worst infrastructural challenge is poor electricity supply which is supposed to drive industrialization and manufacturing, as well as other businesses. This is despite having some of the world’s largest deposits of coal, oil and gas, and more importantly, free sunshine which would have made renewable energy a piece of cake for the nation. Wide infrastructure gaps hinder domestic economic integration that would allow the country to leverage its large market size.  Infrastructure deficit and inadequate power supply, in particular limit the competitiveness of the manufacturing sector.

 

1. Corruption:

It is probably no longer news that Nigeria is among the world’s most corrupt nations as her rankings in Transparency International Global Corruption Index consistently shows, despite modest improvement in recent years. Former British Prime Minister in the now infamous off microphone incident described Nigerians as ‘fantastically corrupt’. Culture has attained the unconscionable level of a culture in Nigeria, resulting in the resultant scourge that despite enormous economic opportunities that abound in Nigeria, many foreign companies and investors who are very ethically conscious, are often hesitant to engage. This without doubt, is a contributing factor in Nigeria’s not stellar score in the 2020 ease of doing business index where it ranked 130 out of 189 countries with a score of 56.9 percent. Despite government’s said efforts to improve Nigeria’s business climate to attract foreign investment, corruption, along with poor infrastructure, especially epileptic power supply remain major deterrents.

 

1. Insecurity:

Nigeria continues to face serious security challenges, which have   got worse in about the past decade. These include the Boko Haram insurgency in the North East, the farmer-herder conflicts that have spread to most geographic zones of the country, banditry, kidnaping for ransom, as well as separatist agitations –    all of which contribute to a pervading climate of fear that not only adversely impact the local economy but also send wrong signals to potential foreign investors. Worse still, it portrays Nigeria either as a failing or fragile state- none of which is good for the    economy.

 

1. Nepotism:

For a very long time, Nigeria has operated as a country where merit is considered a hindrance, geographical local a      disadvantage, capacity to perform an anathema, and wide                knowledge a      strategic set back. This is more prevalent in political           considerations and appointments, where where we come from and our religion are considered rather more important than our competence and content of character. Off course, there are exceptions where bright and qualified people are given opportunities to contribute to nation building.

 

To be or not to Be?: The Politics and Economics of Subsidy Removal in Nigeria.

Subsidy is standard economic practice all over the world, with countries applying it in different ways across various sectors of the economy. In fact, virtually all the cases that end up at the World Trade Organization have to do with some form of protectionist, subsidy-related disagreements between countries or economic blocks such as the European Union (EU).

Being a mixed economy with strong government involvement, various sectors of the Nigerian economy have been subsidized for decades. These include education, electricity and health, among others. In fact, fuel subsidies in Nigeria began in the 1970s and became institutionalized in 1977 following the enactment of the Price Control Act which made it illegal for some products, including petrol, to be sold above a government fixed price.  In 2003, the President Olusegun Obasanjo administration removed subsidy on diesel while the Muhammadu Buhari regime did the same for kerosene in 2016. However, a 2012 plan by the Goodluck Jonathan administration to remove subsidy on Petroleum Motor Spirit (PMS) was met with mass nationwide protests tagged Occupy Nigeria, which forced the government to back down. Since then, the issue of subsidy removal on PMS (petrol) has become a subject of intense public debate in Nigeria with both political and economic dimensions.

 

Let us first take a quick look at the politics. For example, President Buhari in 2022 technically signaled the end of subsidy on fuel when no allocation was made for it in the 2023 budget, only to change his mind due to concerns of political backlash against his party- the All Progressives Congress (APC), in the then upcoming February 2023 general elections. Interestingly, we now knowthat Occupy Nigeria was more of a political movement than a salvation intervention! No less a person than a chieftain of the APC and former Governor of Ekiti State Dr. Kayode Fayemi recently admitted that the opposition parties’ resistance to President Goodluck Jonathan’s policy to end petrol subsidy in 2012 was down to sheer politics as they knew, even then, that the policy was very detrimental to the Nigerian economy. Thus, is a deep pointer to how far the political elite can go in dis-articulating national development for personal considerations.

 

It was at his swearing in on May 29, 2023 that President Bola Tinubu announced that, “Subsidy is Gone”, signaling the official declaration of an end to subsidy on PMS; a decision which was met with consternation by a lot of Nigerians, and has since, led to over 250 percent increase in the pump price of the product, with concomitant implication on the socio-political economy of Nigeria.

 

As mentioned earlier, while subsidy is common economic policy globally, subsidy on fossil fuel is understandably large and prevalent in oil producing countries, especially in Africa and the Middle East. The International Energy Agency estimated the value of fossil fuel consumption subsidies globally at $325 billion in 2015, up to more than $400 billion in 2018, which is significantly larger than the value of all aid ($163 billion in 2015). Records also show that, for the 96 countries where there is data for both energy subsidies and aid, 59 per cent have subsidies that are larger than all the bilateral aid that they receive.

 

With respect to the fuel subsidy regime in Nigeria, aside from its astronomical cost which has become a drain to other critical sectors of the economy, the programme is also dogged by allegations of massive corruption and mismanagement.

 

Ladies and Gentlemen, for discussion of the Economics of fuel subsidy in Nigeria, permit me to rely substantially on the May 2023 report by leading management accounting firm PwC because of its penetrating insight on the scheme. Titled – Fuel Subsidy in Nigeria: Issues, Challenges and the Way Forward, PwC identified the following 5 major issues with fuel subsidy in the form it was until President Tinubu ended it on May 29, 2023:

• Unsustainable financial cost of subsidy: According to the World Bank, in the past 18 years, Nigeria has spent over USD 30 billion on fuel subsidies which has significantly impacted funds available for critical infrastructure and other essential sectors such as education, health, and defence. Figures from the Debt Management Office, indicate that Nigeria’s public debt stock increased as the government had to borrow N1trn to finance fuel subsidy in the year 2022. In the past 9 years, total fuel subsidy vs federal government allocation to critical sectors are as follows: Fuel subsidy – N11.5 trillion; Defence – N7.0 trillion; Education – N6.2 trillion; Health Sector – 2 trillion.
• Economic Distortion: Studies show that households in the bottom 40% of the income distribution account for less than 3% of all fuel purchases. Furthermore, it is reported that three-quarters of all fuel sold in Nigeria is consumed by private firms, public transportation services, government agencies, and other businesses. Most vehicles used for carrying large numbers of people (such as molue) and goods are diesel powered which is already deregulated. Also, household Kerosene which is mostly used by the poor is no longer subsidised, meaning that the poor are already to a large extent paying market prices for their fuel. This effectively means that the government is subsidising mostly those who can afford fuel (PMS) at market rates and not the poorest of the poor who need subsidy.
• Smuggling: 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 NNP 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. This means that smugglers and other West African countries benefit more from fuel subsidy than Nigerians. A report published by Chapel Hill Denham, estimates that 15.64 million litres of petrol are smuggled out of Nigeria daily as the retail price of Nigerian petroleum products on average is 3.7 times cheaper than those of its neighbours, and this has given smugglers undue opportunities for arbitrage. The Nigeria Customs Service also affirmed that PMS was being smuggled out of the country in large quantities after it has been subsidised by the Federal Government, adding that the petroleum product is being diverted to as far as Mali.
• Endemic Corruption: The subsidy point for fuel is importation (or supply) rather than at the pump for eligible users only, which encourages arbitrage and other forms of corruption.
• Investment: Nearly 70 years after the discovery of crude oil in commercial quantity in Nigeria, Nigeria’s oil and gas downstream sector (i.e. refining of petroleum crude oil and processing and purifying of raw natural gas) is yet to develop to the desired levels, despite the recent enactment of the Petroleum Industry Act (PIA). The downstream sector of the oil and gas industry had the least foreign direct investment compared to the midstream and upstream sectors. This is primarily due to the subsidy regime and the legal framework of the downstream sector which discourages investments, even if inexplicitly. A full deregulation of the sector would attract more private investments (local and foreign) which would also require the removal of fuel subsidies.
• Climate Change Commitments: At the COP26 (U.N. Climate Change Conference) which was held in Glasgow, Scotland in 2021, the President of Nigeria, Muhammadu Buhari signed the Climate Pact thus committing Nigeria to achieving net zero emissions by 2060. A week after the conference, President Buhari signed the Climate Change Bill into law demonstrating the country’s commitment to truly achieve net zero carbon emissions. It is a contradiction for a country to subsidise consumption of fossil fuel while at the same time seeking to reduce the country’s carbon footprint. Rather than subsidising fossil fuel, the country should encourage green and renewable energy.

 

The PwC report then went on to interrogate some of the key economic assumptions driving the subsidy debate in an attempt to separate, as it put it, facts from myths. Below are their findings:

• Relationship between petrol price increases, inflation and cost of living

The first assumption the report critiqued is that the cost of petrol is a major driver of the cost of living because of its pervasive use by all including small businesses and many households given the country’s epileptic electricity supply. Therefore, any increase in fuel price could directly and immediately impact the prices of goods and services across the country. When petrol prices increase, small businesses tend to raise their prices to cover the increased cost of operation which can lead to higher prices for consumers. This can make it more difficult for people to afford basic necessities, lead to a decrease in the standard of living and contribute to poverty and inequality. But as the report noted, the relationship between petrol price increases and, inflation and cost of living is complex and multifaceted as previous attempts to remove PMS subsidy had mostly been accompanied by hoarding and general scarcity which invariably worsened the impact of the price increase beyond just the subsidy removal. The report therefore concluded that while petrol price deregulation can contribute to higher costs of living and inflation, its impact can be mitigated with effective policies and well-thought out implementation strategy.

• Local Refining of Fuel Products will Eliminate Petrol Subsidy

The general belief is that local refining of crude oil could potentially eliminate the need for petrol subsidies altogether or make the market price affordable. Currently, Nigeria imports its refined petroleum products due to limited or no domestic refining. According to Blackgold, Nigeria’s total import for petroleum products is about $28 billion per annum. This makes the country’s fuel price not only dependent on global oil prices and exchange rates, but also importation and handling charges. Local refining is therefore expected to reduce Nigeria’s dependence on imports and potentially stabilise petrol prices. However, other than the costs of haulage, insurance and associated cost of importation, though substantial, does not constitute the most significant component of cost across the value chain. This implies that the pump price without subsidy would still be higher than the regulated price unless the international price of crude oil falls below a certain level. The report acknowledged that while local refining will provide a price cushion, it is not a single magical answer to the subsidy problem.

 

• Are Palliatives Effective?

According to the PwC report, fuel subsidy in Nigeria has been fraught with issues of corruption and inefficiency and palliatives have been suggested by some as a possible way to alleviate the suffering of those that will be most affected by subsidy removal. While palliatives may help to mitigate the immediate impact of rising prices such as cash transfers, provision of buses to the Labour Union or other forms of assistance. However, the effectiveness of palliatives depends on several factors. While palliatives can provide some relief to vulnerable households; it is difficult to identify and sufficiently cover the vulnerable population that will be most impacted, especially given the lack of reliable demographic data. In reality, palliatives can be expensive yet ineffective in addition to their being prone to corruption. A multifaceted approach that involves evidence-based identification of the most vulnerable population, and a robust palliative administration with in-built controls would provide a more sustainable and long-term solution.

 

• Can CNG be a viable alternative?

Compressed Natural Gas (CNG) has been proposed as a promising alternative to petrol in Nigeria due to the country’s significant natural gas reserves. This has several potential advantages, including lower cost, reduced emissions, and improved fuel efficiency. One of the most significant benefits of CNG is that it is considerably cheaper than petrol, which could result in substantial savings for vehicle owners. Additionally, the cost of CNG is more stable than the volatile price fluctuations experienced by petrol. Also, the use of CNG could reduce vehicle maintenance cost due to its cleaner burning properties, which produce fewer engine deposits that clog up the engine over time. However, the adoption of CNG in Nigeria also presents some challenges. These challenges include the initial investment required to retrofit existing vehicles with CNG engines, the need to establish a robust distribution infrastructure for CNG, and the need for government policies and incentives to promote the use of CNG. While CNG presents a number of benefits compared to PMS, there are challenges to its adoption making it an unlikely alternative to petrol in the short to medium term.

 

• Does it cost Nigeria money to subsidise petrol given that the country produces crude oil?

Despite being a major producer of crude oil, it still costs Nigeria money to subsidise petrol. There is cost associated with crude oil production, as well as the opportunity cost of crude oil for local consumption. In addition, the process of refining crude is expensive, requiring significant investment in infrastructure, technology and expertise which would necessarily be imported. Therefore, evidence in support of the argument that Nigeria being an oil producing country should be able to sell PMS at the regulated price without incurring significant subsidy is, at best, tenuous.

The PwC report, went further to list some short term benefits of removal of oil subsidy to the economy at large. These include:

• Reduction of government borrowing and associated huge deficit given the huge sums government spends annually to keep fuel prices artificially low;
• Frees up resources for investment in other critical sectors such as education, healthcare, security and infrastructure, among others, which will not only improve standard of living for citizens but also foster economic growth;
• Removes incentive for fuel smuggling to countries in the sub-region and associated security risk, including illegal refining, pipeline vandalism and other criminal activities.

Medium to long term benefits petrol subsidy removal, according to the PwC report include:

• Stronger Naira and decline in import-driven inflation as the massive importation of fuel increases the demand for foreign exchange and majorly contributes to inflation in Nigeria
• Investment flow to the downstream sector, especially private sector investment, leading to the development of local refineries, creation of jobs and ensuring Nigeria’s energy security.
• The new investment in the downstream sector will stimulate economic activities and enhance government revenue in the form of taxes from the companies, their employees, vendors and other players across the value chain.
• Removal of subsidy will incentivise private sector investment in the downstream sector, leading to increased local refining capacity and improved product availability.
• Improved sovereign credit rating. Nigeria’s sovereign credit rating has been adversely affected by its low revenue, high debt levels, rising deficit, and vulnerability to oil price shocks. Removal of the subsidy will increase government’s revenue, reduce borrowing and the associated deficit, leading to an improvement in the country’s sovereign credit rating and lower cost of borrowing.
• Leverage on the AfCFTA to legally export refined products rather than crude oil to other African countries. The African Continental Free Trade Area (AfCFTA) agreement provides a platform for Nigeria to competitively export refined petroleum products to other African countries. With the removal of fuel subsidy, Nigeria can leverage the AfCFTA agreement to increase its exports of refined products, generating foreign exchange and enhancing economic growth.

Flowing from its detailed analysis of Nigeria’s contentious fuel subsidy programme, PwC proposed the following three options to government in dealing with the issue:

Option 1: Fully deregulate the downstream sector and completely remove fuel subsidy.

Option 2: Remove Petrol Subsidy and Provide Credible, evidence-based Palliatives:

Option 3: Redesign the subsidy regime and direct it only to the poorest. Let us briefly look at the key elements, along with the socioeconomic and political implications of each of these options.

Option 1: Fully deregulate the downstream sector and completely remove fuel subsidy

According to the PwC, the complete removal of fuel subsidy has been fraught with a lot of challenges ranging from opposition of Labour Unions and pressure groups, lack of political will, notions that cheap fuel is a right (Nigerian being an oil rich country), and the concerns that complete deregulation will generally make life unbearable for the masses. On the other hand, proponents of subsidy removal assert that deregulation will bring about competition which will result in increased efficiency, lower prices and production costs, and increased supplies. While this may benefit the economy financially, the fallout might result in social unrest and protracted industrial actions which will hurt the economy. It is important that the government demonstrates care for its citizens while not neglecting the impact of fiscal and economic policies on the national economy. This option, while being ideal and desirable, will be difficult to implement without significant resistance and economic trade of.

It is apparent that the government has decided on this option of full removal of fuel subsidy and is currently trying to manage the fallout of that decision in its ongoing faceoff with organized labour and other interest groups. I will return to this later in the presentation.

Option 2: Remove Petrol Subsidy and Provide Credible, evidence-based Palliatives

Since the only fuel product under consideration in this instance is petrol (both diesel and kerosene are already deregulated), the option proposes  the full removal of subsidy on petrol while focusing government palliative on the vulnerable population that will be most impacted by the subsidy removal. Likely effect include increase in the pump price of fuel with direct impact by way of higher cost of transportation while the indirect impact may be seen in terms of increases in rent and prices of goods and services. This will have the most impact on the poorest people, especially the employed urban poor population who earn low wages but have to pay for transportation daily to get to work. According to the report, it is not the poorest people in villages that will be most impacted as they normally have very limited touch point with petrol consumption (they move around by trekking or using bicycles to their farms, shops and market with only a very few owning motorcycles or vehicles). Instead, it is the urban poor who should be the main target of government palliatives under this option.

The report then goes on to recommend the following ‘’evidence-based palliatives’’-

• Increase in minimum wage to ensure workers’ support and limit resistance by the Labour Unions;
• Increase the monthly income threshold for PAYE (tax) exemption purposes from the N30,000 per month to at least N50,000 per month which will give extra cash to the employed poor on a monthly basis 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.
• Government guarantee of forex to importers of diesel at the official exchange rate using the fx savings from the current fictitious petrol consumption that will be eliminated when subsidy is removed. This will bring the pump price of diesel down significantly and in turn moderate the inflationary impact of petrol price increase.

As the report explains, while the minimum wage increase and high tax exemption threshold will affect the revenue of states, the higher revenue to be shared from subsidy savings will more than compensate. The additional benefit of this proposal is that it can be implemented within a short period of time at a manageable cost while protecting the most vulnerable population in a sustainable manner without being prone to corruption.

Option 3: Redesign the subsidy regime and direct it only to the poorest

Having established that a general subsidy regime for PMS is largely misdirected and unsustainable because the upper and middle classes typically consume more fuel than the poor, the report now invoked a World Bank Study that was critical of the Nigerian fuel subsidy regime. “Nigeria is the only country in the world with a universal price subsidy that applies exclusively to PMS. Universal price subsidies for liquid fuels are almost always regressive, as the rich consume far more fuel than the poor. PMS subsidies are especially regressive because PMS is used primarily in light and medium-duty motor vehicles, which are rarely owned by the poor. Since raising PMS prices tends to have minimal adverse effects on poor households, governments worldwide have typically prioritised eliminating PMS subsidies over those that apply to other fuels. However, Nigeria has done the opposite – eliminating all subsidies for liquid fuels other than PMS.”

According to the recently released multidimensional poverty report of the National Bureau of Statistics (NBS), Nigeria’s poverty index was estimated to be at 0.257, with about 133 million people being multidimensionally poor. This category of individuals are not in a position to purchase vehicles or own generators that will run for several hours in the absence of power supply from the grid. The major touch point that they have with fuel consumption is indirectly through public transportation – and the majority of the vehicles that engage in public transportation run on AGO (diesel) which has already been deregulated. Hence, it is important that fuel subsidies are targeted at the poorest people to cushion the impact of the associated rise in transportation cost of subsidy removal, the report concluded.

Among the key mechanisms it proposed to subsidize fuel exclusively for the deserving poor include-

• Identification and Registration of owners of shared passenger transportation vehicles powered by petrol, leveraging on existing data such as National Identification Number (NIN), Phone/SIM registration that will be linked to the vehicles they own using vehicle registration data.

Based on a 2018 report by the National Bureau of Statistics (NBS), there are 11.8m vehicles registered in Nigeria out of which 39% (or 4.6 million) are privately owned while 56% (or 6.7 million) are commercial vehicles, 1.1% (or 135,216) are government owned while 0.4% (or 5,834) are registered for diplomats. According to the National Motorcycle and Tricycle Riders Association of Nigeria, there are about 8 million registered commercial motorcycles in Nigeria. There is also a sizable number of motorboats, but many of these are unregistered due to non-enforcement of Nigerian Inland Waterways Authority’s (NIWA) registration requirement.

• Nationwide survey to be conducted across all capital cities to determine average monthly fuel consumption. The data for the capital cities will be used as proxies for the rest of the country given that the highest fuel consumption is expected to be in the cities.
• Establish a database of eligible individuals and transporters for fuel subsidy leveraging data from banking information, tax authorities, lands registry, SIM registrations and the NIN, which will be stored in a secure platform (i.e. national subsidy database). Private taxis and those that work with hailing apps and vehicles that run on diesel will be excluded from this arrangement.
• Deploy technology to make subsidy available to only those who need them. Upon the identification and registration of eligible persons, special fuel cards (with similar features like prepaid cards or mobile phone airtime) will be used to administer the subsidy. This will be used only at fuel stations in a similar way as fuel or ATM cards. Essentially, the cards will be used to offset the difference between the market based pump price and the subsidised PMS for the eligible transporters. This method will provide an audit trail which will be used for effective control and monitoring to prevent and detect abuse. As an added advantage, the data provided through this registration process may be used subsequently to register the transporters for tax purposes. Government may choose to extend the fuel credit to SMEs who use petrol generators to power their businesses. In addition to the registration through NIN and NCC registration, eligible small businesses will be required to register with the CAC, at least as a business name, and also register with the tax authority in order to access this credit.
• Subsidy Acounting and Funding- The report proposed that the narrow subsidy targeted at the poorest should be funded through levies to be imposed on petrol consumption by ineligible consumers, mostly the middle class and the rich.

In conclusion, the report warned that the prevailing fuel subsidy regime in Nigeria was unsustainable and would inevitably lead to a massive debt crisis capable of bringing down the economy hence the urgent need for the government to re-strategize its approach to the issue. And considering the immense political challenge wholesale, across the board, removal of subsidy has posed to successive governments, the report warned against it as the political disruption it would engender may hurt the economy more than the projected benefit, even if only in the short term. Instead, it endorsed either a full subsidy removal with targeted palliative (Option 2) or a targeted subsidy scheme for the poorest of the poor funded through a subsidy levy (Option 3). Targeted subsidy, it argues, will reduce corruption, increase government savings and investment in infrastructure, and reduce poverty and hardship. Marked by some degree of nuance, the report is particularly concerned with ensuring that the most vulnerable population is protected from any negative impact of subsidy removal and at the same time secure the necessary public support to make it happen.

As I mentioned earlier, I have relied substantially on the PwC report, which on occasions, I reproduced verbatim because of its analytical vigour and clarity in addressing what has become an intractable economic policy challenge for successive Nigerian governments. The report, if not for any other thing, helps us better understand some of the underlying issues in this complex and sometimes acrimonious debate.

However, as we all know, the Nigerian government has since made its decision on fuel subsidy opting for the wholesale, across the board option as announced by President Tinubu at his inauguration on May 29, 2023. Curiously, I am not sure if the government was privy to this report given that Taiwo Oyedele, who currently heads the Presidential Tax Reform Committee is also a Partner in PwC, which produced the report. The President’s announcement of removal of subsidy at his inaugural speech came as a surprise to most Nigerians as the issue was allegedly not in his prepared speech.  The impromptu nature of the announcement also left many wondering how much thought was given to the huge impact of the policy, especially on the most vulnerable demographics.

The growing unease among citizens following the announcement led the Federal government to approve N5bn palliative for each state and the Federal Capital Territory, amounting to N185BN.  The fund was shared in the ratio of 52 to 48 – fifty-two per cent to the states as grants and forty-eight per cent to be paid back in instalment within a period of 20 months through the Central Bank of Nigeria. Apparently not satisfied with the above measures which it saw as too meagre to cushion the impact of the subsidy, and possible corruption that may aadversely impact deployment of the funds, the organized labour under the aegis of the Nigeria Labour Congress (NLC) and the Trade Union Congress (TUC), among others, threatened industrial action forcing the government to the negotiating table. A meeting between the federal government and labour on October 2, yielded a 15-point memorandum of agreement on the basis of which the unions suspended for 30 days their planned indefinite nationwide strike (scheduled to begin on October 3, 2023), to allow for the implementation of their demands. The agreement includes the following-

• The Federal Government grants a wage award of N35,000 (thirty-five thousand Naira) only to all Federal Government workers beginning from the month of September pending when a new national minimum wage is expected to have been signed into law.
• Federal Government suspends collection of Value Added Tax (VAT) on Diesel for six months beginning from October, 2023.
• Federal Government accepts to vote N100 billion for the provision of high capacity CNG buses for mass transit in Nigeria. Provisions are also being made for initial 55,000 CNG conversion kits to kick start an auto gas conversion programme, whilst work is ongoing on state-of-the-art CNG stations nationwide. The rollout aims to commence by November with pilots across 10 campuses nationwide.
• The Federal Government implement various tax incentive measures for private sector and the general public.
• The Federal Government commits to pay N25,000 per month for three months starting from October, 2023 to 15 million households, including vulnerable pensioners.
• The Federal Government will increase its initiatives on subsidized distribution of fertilizers to farmers across the country.
• The Federal Government should urge State Government through the National Economic Council and Governors Forum to implement wage award for their workers. Similar consideration should also be given to local government and private sector workers.
• The Federal Government commits to the provision of funds as announced by the President on the 1st of August broadcast to the Nation for Micro and Small Scale Enterprises. The MSMEs beneficiaries should commit to the principle of decent jobs.
• A joint visitation will be made to the refineries to ascertain their rehabilitation status.
• All parties commit to henceforth abide by the dictates of Social dialogue in all our future engagements.
• This Memorandum shall be filed with the relevant Court of competent jurisdiction within one (1) week as consent judgment by the Federal Government.

As we speak, the status of the implementation of the agreement is unclear and it remains to be seen if both parties can overcome their differences to avoid a debilitating nationwide strike by labour, with its grave implications for a long struggling economy.

With fuel subsidy now gone, we can only be hopeful that outstanding issues between labour and the government will be resolved and the expected savings which some estimates put as high as N7tr annually, will be judiciously used for the benefit of Nigerians.  Because if people truly see the state fulfilling its obligations by investing fuel subsidy savings in directly beneficial public goods and services (healthcare, security, education, infrastructure etc.), they are more likely to embrace the reform. In this regard, citizens’ trust in government is vital. This now brings us to the crux of the paper.

The Post-subsidy Economy: Exploring Bold Initiatives for Economic Recovery in Nigeria

I have spoken thus far as a political economist. However, as someone who has been involved in the political process at some levels, have participated in nation building at different times and seasons; and more importantly as a citizen with stakes in the Nigerian project, I will like to place before you some thoughts on three things I consider as conditions precedent to rebuilding the Nigerian economy. Three 3 issues are very fundamental that unless they are resolved, the efforts towards building strong economy in this post subsidy era will be a mirage.

1. Combating Corruption

The socioeconomic and political crises Nigeria faces today are as a result of decades of bad governance and as such are not easily fixable. Take for instance the scourge of corruption that has permeated every part of our national fabric. Earlier in this lecture, I stated that corruption has become a culture, in other words, a way of life for most Nigerians. And we are all guilty! We have all indulged, one way or the other in acts of corruption. We have this mistaken mindset of believing that corruption is only related to financial crimes. When the real meaning of the word is widely deployed to include, moral perversion, dishonest proceedings, debased form, wrong influence, bribery. However, for the purpose of this part of the lecture I will emphasise financial and economic crimes.

This why I believe that the first bold initiative we, both citizens and government, must take as a people reset our nation towards economic recovery is to amass the will and make up our minds to frontally fight corruption at all levels. How I wish that the President of Nigeria used the same passion applied in declaring that ‘subsidy is gone’, to declare that corruption is gone. This is because, as I see it, the loss of resources from petroleum subsidy is a child’s play when compared to losses from corruption that pervades all levels of society, especially on financial corruption and economic crimes committed mostly by the elites of Nigeria.

Why, for instance, is it that noble policies, which have worked wonders everywhere else fail in Nigeria, including our topic of discussion – fuel subsidy? For example, corruption has been mentioned as one of the major problems with the subsidy scheme, yet to date, no one has been indicted not to talk of convicted for fuel subsidy scam.

Similarly, since 2010 to date, Nigeria has spent over N11tn rehabilitating her three major refineries with little to show for such humungous amount; which begs the question – why not privatize them? As mentioned earlier, the deregulation of the downstream sector of the petroleum industry will spur new investments in the sector, particularly new refineries, foster local value creation and drive the creation of good paying new jobs, all of which will drastically increase Nigeria’s revenue from the oil sector.  In particular, it will save the country the massive economic loss and global shame of being the only top oil producer utterly incapable of refining her crude locally.

Just like with the refineries, same applies to every major governance challenge the country faces (insecurity, lack of critical infrastructure, high unemployment, among others) which to varying degrees, have all been made worse by endemic corruption; in a system where actions, no matter how deplorable, have little or no consequences. Pointedly, what is the guarantee that the savings from fuel subsidy which should be invested in improving the lives of Nigerians will not be frittered away like all past revenue that came Nigeria’s way, including the Gulf War oil windfall of the early 1990s?

2. National Reorientation

The above underscores the point that the second very important bold step to be taken is to initiate a genuine, robust and comprehensive nation reorientation programme. The point here is that without strong value and ethical reorientation, even the finest economic schemes and policies will still come to peril. To be believed and taken seriously, such national reorientation programme should be driven by the private sector, with support by governments at local, state and federal levels. It has to be organic and citizen driven, so as to be owned by the people. Apart from the era of MAMSER in the early 90s, other efforts at national reorientation have not yielded the expected result, because of lack of trust on governments by the citizens, coupled with government’s inability to sustain such initiative after transitions.

It is for this reason that the Nigerian Institute of Public Relations (NIPR) recently signed a Memorandum of Understanding with Development Specs Academy to initiate the REBIRTH Nigeria programme. REBIRTH is an acronym meaning, Reinventing the Essence Beauty Integrity Resourcefulness Tradition and Heritage of Nigeria. Given the diversity of Nigeria, we find expression to these seven (7) words across the federation, making it easy to sell the concept on common grounds.

REBIRTH Nigeria will operate with four (4) core pillars, comprising:

1. Values Reorientation
2. Citizens Education

• Service Excellence

1. Promotion of Made-in-Nigeria Products and Services

With the dark clouds over Nigeria, only a reformed people can rescue the Nigeria and the time to do so is now. Realities of our timehas revealed that campaigning for a new Nigeria will never be enough unless we have new Nigerians we can not have a new Nigeria. This is because, you need new Nigerians to build new Nigeria. As we pray for new Nigeria, we should pray more for God to give us the new Nigerians who will carry the foundational structures for new Nigeria.

3. Rule of Law

The third condition precedent I want to advance in exploring bold initiatives for economic recovery in Nigeria, is social justice and the rule of law. It used to be said that the courts constitute the hope of the common man. Unfortunately, what comes out of our courts today are rather confusing. We can no longer predict the outcome of judgments from our courts. The level of inconsistencies have become highly unpreditable and confusing.

Yet, social justice and the rule of law are the bedrocks of nation building. The matter of the rule of law matters so much that it sets the foundation for development in any society because that is what gives confidence to investors, locally and internationally.

Therefore, we must reinvent the judiciary to rise above political and economic influences that have characterised the Nigerian judiciary at this time.

Above three seeming caveats notwithstanding, it is with unbridled optimism in the immense potentials of this great nation that I propose the following initiatives with the hope that our political leaders should vigorously pursue them to restore Nigeria’s glory as the shining light on the hill for Africa and the black race.

1. Create an Enabling Environment for the Private Sector to Thrive

The primary role of the state is to help create an enabling environment for entrepreneurship to thrive and the post-subsidy Nigerian economy must embrace this model. This requires opening up more sectors of the economy to private sector investment. One of such sectors in the context of our discussion is the Downstream sector of the petroleum industry; which would have helped fix Nigeria’s troubled refineries. The era of state controlled (command) economies is long gone. The best performing economies in Africa like Rwanda (with relatively limited resources) have made this transition and the results are evident. Such business friendly initiatives include the establishment of industrial hubs, tax breaks and other macroeconomic policies to spur investments both local and foreign, among others. This requires a detailed and well-articulated industrial policy across the various sectors of the economy. President Bola Tinubu administration seems to understand this and appear to be decidedly moving in that direction.  We can only hope it follows through.

 

2. Fix Nigeria’s appalling Critical Infrastructure Challenge

I have already discussed this earlier, but it bears reiterating that without modern and functional infrastructure, Nigeria’s quest for industrialization will never fully come to fruition. Aside from network of roads across the country that need urgent rehabilitation, rail transportation which was fully functional in the 1960s need to be developed. Developing the rail system is even more urgent because of its capacity to move massive amounts of goods, without the type of disruption and degradation that haulage trucks cause on the roads. Power supply is yet another critical infrastructure that has held the Nigerian economy down, especially in the critically important manufacturing sector, which has a very high productivity level and is capable of accommodating, in large numbers, the kind of labour that is abundant in the country.

 

3. Tapping into the Youth Bulge:

Youths account for roughly 70 percent of the Nigeria’s population of over 200 million people; which is projected to reach 450 million in 2050. While this demographic bodes well for the future of the country, it can also be a major challenge; especially providing them with skills to be productive and gainfully employed. At the top of the productivity ladder in Nigeria is the trades and services sector, which has the potential to improve incomes and raise overall productivity. The challenge with this sector, however, is its inability to accommodate labor in large numbers. Nevertheless, the sector is important, given Nigeria’s young population who are increasingly driving technological revolution across various sectors on the African continent. To leverage the full potential of this sector, the government will need to design and implement national skills programs aimed at upskilling young Nigerians to ensure many more embrace digital skills and capabilities. Nigeria has in the past privileged formal education over vocational education and skills acquisition; even when the white collar jobs are not there.  Greater emphasis should now be placed on vocational education and skills acquisition targeting specific sectors of the economy, especially the emergent ones where the jobs of the future are expected to come from.

 

4. Investing in the Solid Minerals Sector and Green Economy

Nigeria is abundantly blessed with a wide range of solid mineral resources which are only in the very early stages of being officially harnessed and formally regulated. This is undoubtedly a massive boon to the economy. At present, the Solid Minerals Development Fund (SMDF), estimates that Nigeria has about 44 different types of commercially viable minerals worth over $700b.

Abundant solid and critical minerals present opportunities for green development. For example, with the discovery of more than 3,000 lithium pegmatite bodies, Nigeria can be a global leader lithium-ion battery manufacturing. The benefits include green job creation and climate change mitigation. Such opportunities require a blueprint to attract green financing and investment. From 2019 to 2020, average climate finance amounted to only $1.9 billion from both public ($1.5 billion) and private ($435 million) sources. The good news is that individuals and businesses have a stronger reason to see opportunities in clean energy by embracing cleaner options like electric vehicles, biofuels, or solar-powered technologies. The prevailing high cost of petrol will undoubtedly stimulate investments in affordable renewable energy, leading to a greener economy and sustainable transportation systems.

For instance, the buses in major cities globally are powered by compressed natural gas. Rather than flaring gases indiscriminately, Nigeria’s 209.5 trillion cubic feet of proven gas reserves is capable of powering vehicles which reduces operating cost by 30 per cent and carbon footprints by 95 per cent. A huge extra source of income for the Nigerian economy.

 

5. Sustaining Investment in Mechanized Agriculture

In the past decade, Nigeria has taken giant strides in Agriculture which has witnessed large scale private sector investment, especially in the industrial cultivation of crops like rice, tomatoes, wheat, sorghum, among others. As a major employer of labour and key contributor to Nigeria’s GDP, greater investment in agriculture will not only ensure food security, but also boost Nigeria’s export market, especially in the light of the opportunities offered by the African Continental Free Trade Area (AFCTA).

 

6. Creative Economy: Nollywood, the Music Industry and the Rest

Government must come up with ways to support Nigeria’s burgeoning creative sector, in particular Nollywood and the Music sector who have emerge in the past decade as a significant employer of labour and contributor to the country’s GDP. It is exciting what they have accomplished. We can only imagine what they can achieve with targeted government assistance like grants, soft loans and other types of support.

 

7. Leverage on the African Continental Free Trade Area (AFCTA):

AFCTA which was established in 2018 is Africa’s single market initiative designed to provide broader and deeper economic integration across the continent as well as attract investment, boost trade, provide better jobs, reduce poverty and increase shared prosperity in Africa. As a key player in the African economy, Nigeria stands to benefit enormously from opportunities offered by the African Continental Free Trade Area (AFCTA) across various sectors of her economy such as oil and gas, manufacturing, agriculture, the creative industry and more.  The African Continental Free Trade Area (AfCFTA) is expected to offer significant opportunities for Nigerian businesses to join new markets and expand their trade with other African countries.

 

8. Embrace Policies that ensure all-inclusive Economic growth

With a vast majority of the population facing great hardship as a result of the removal of fuel subsidy, government must ensure that the savings are not only judiciously used in the interest of the masses, but that economic policies going forward are underpinned by inclusive growth. This agenda must also include a practical strategy on how to structurally transform the economy, moving labor and economic resources from low productivity sectors (trade and services) to high productivity sectors (manufacturing and agriculture) capable of generating many high quality jobs.

 

9. Embracing the Digital Economy

Statistics have shown that the direction of wealth today is in the Digital economy sector. Today, we are using our smart phones produced by other economies. Some of us even have up to 3 phones. Huge businesses are transacted online, giving opportunities to people with stamina for creativity and innovation.

 

Conclusion:

In concluding this lecture, I will like to state categorically that unless we resolve the Igbo question in Nigeria, our challenge will remain for a long time. This is because I believe that Igbos, just like other tribes in Nigeria, are a huge blessing to Nigeria. While Nigeria has influenced the Igbos, Igbos are yet to be given the opportunity to influence Nigeria. I believe that the wealth of human and even material resources in Igboland, is yet to be tapped, mostly because Igbos have been largely misunderstood. And the beginning of tapping into these resources, would be the beginning of wisdom for Nigeria’s economy and overall development. Take for instance, the wasted productive capacities in Aba, where leather works are transformed into world class shoes and other products, yet governments at state and federal levels have not seen the need to show genuine interest to invest in expanding the frontiers of such raw talents and outstanding display of economic opportunities, for the zone in particular and the nation in general.

 

Dr. Ike Neliaku, fnipr, President and Chairman of Council, Nigerian Institute of Public Relations made this presentation at the 3^rd Frontier Discourse Annual Pubic Lecture Series and Awards, Enugu, November 18, 2023