President Goodluck Jonathan likes to stress his humble roots in Nigeria by recalling how he went to school barefoot. Now, as protests sweep the nation, his common-man narrative has been turned against him. “Don’t trust the man without shoes,” one placard read during big demonstrations in Lagos this week.
Mr Jonathan’s perceived “betrayal” of the general population was to abolish fuel subsidies on January 1, causing petrol prices to more than double from 65 naira (40 US cents) a litre.
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Sub-Saharan Africa’s second biggest economy has been paralysed since Monday and is losing $600m daily, according to Lamido Sanusi, Nigeria’s central bank governor. Shops, businesses, schools and banks remained closed on Friday.
By gambling that public anger would dissipate after a few days, Mr Jonathan placed and lost the biggest bet of his presidency. He has now opened talks with labour leaders that will resume on Saturday. If no solution is found, the main oil union says that, from Sunday, it will start shutting down crude production, which provides four-fifths or more of government revenues.
A backlash to the subsidy withdrawal was inevitable, since Nigerians see cheap fuel as the one benefit the government provides. By removing it without first putting in place policies to cushion the blow for the poor, Mr Jonathan miscalculated, say analysts.
“The government simply relied on the fact that they have the mandate to represent the people to push this through,” said Bismarck Rewane, managing director of Financial Derivatives, a Lagos-based consultancy. “The strategy has been a joke.”
Mr Jonathan is not the first Nigerian president to attempt to remove the subsidy. For more than 30 years, successive leaders have tussled with labour unions each time they tried to increase the regulated price of petrol.
But the president insists the subsidy has become unaffordable. Most economists agree, while noting that corruption has greatly swelled the cost of providing cheap fuel. Over the past four years, the government has spent more than 3.6tn naira ($22bn) on the subsidy. Last year alone, the cost doubled to over $8bn – more than the combined budgets for health, education and agriculture.
Indeed, the chronic mismanagement of oil sales and fuel imports in recent years has seriously damaged the country’s fiscal health. Public debt has climbed to more than 6tn naira – levels last seen before the country’s crippling external debt was written off in the mid-2000s.
Foreign reserves have tumbled from $62bn in 2008 to $33bn today. The excess crude account, where windfall savings above the budgeted price of oil are saved, now holds little over $3bn – down from $20bn.
In theory, no fuel subsidy should be necessary, since Nigeria produces more than 2m barrels of oil per day, the most in Africa, and should be able to refine it locally. In practice, the subsidy has discouraged investment in refining.
About 445,000 b/d are allocated for the country’s four refineries. This roughly equals their collective installed capacity and should meet more than two-thirds of Nigeria’s needs. But the local refineries are dilapidated, and only operate at 25 per cent capacity. Most of their allocation is sold abroad through multinationals and “briefcase companies” linked to the ruling elite.
To meet domestic needs, petrol must be imported, with transport costs and fees to middlemen greatly inflating the price. So, too, do interest and insurance charges, since the state-owned Nigerian National Petroleum Corporation has stopped paying the traders, with payment times now exceeding 400 days and more than $4bn owing, according to banking sources.
To keep the petrol flowing, the NNPC entered into crude-for-product swaps with several traders, whereby oil is exported, and an equivalent value of petrol and other refined products delivered to Nigeria, according to bankers. The deals generate no cash for NNPC to pay older debts.
The biggest cost of the subsidy may be graft, which has worsened in the oil sector since Mr Jonathan became president in 2010, say insiders. Methods of corruption include bribes, overcharging, presenting domestic fuel as imported, and smuggling to neighbouring countries where fuel prices are higher.
Once the petrol lands in Nigeria, well-connected oil marketers are paid the difference between the open market price of petrol and the official regulated price; with the subsidy typically amounting to 80 naira a litre last year.
The removal of the subsidy will not solve the problems in the short term, since fuel will still need to be imported. But deregulation will encourage investment in refineries, which should eventually bring prices down, said Samir Gadio, emerging markets strategist at Standard Bank.
“It’s a very difficult social context, and you can understand the opposition from the public who are losing out financially,” he said. “But if the subsidy stays, Nigeria will be stuck in the same cycle of exporting oil and importing petrol.”
Source: The Financial Times