President Goodluck Jonathan has picked a battle that every Nigerian president, military and civilian in the past 20 years has fought and lost in one way or another.
With the cost of maintaining government now running at three quarters of the national budget, there is little room for investment in the infrastructure and services the country needs to continue growing. One obvious saving could be made if the state stopped subsidizing fuel – as cabinet ministers have hinted they will do in 2012.
In the FT’s annual special report on Nigeria published Wednesday Lamido Sanusi, the central bank governor, says the overall cost of the subsidy is equivalent to just over $16bn, or $200,000 more than the state has earned from oil revenues this year.
Of this, $7-8bn is the amount shelled out on the subsidy itself. Another $8bn is delivered to oil marketers in letters of credit. Even then, this spending doesn’t guarantee cheap fuel. The subsidy distorts the market, discourages maintenance of the refineries and promotes smuggling. In many parts of Africa’s leading oil producer fuel is diverted to the black market before it is even delivered cheaply to the pump.
Because Nigeria’s refineries are barely functional, the country is forced to sell its unprocessed stock on the global market and import the refined fuel it needs for domestic consumption. The government guarantees any losses incurred by fuel marketers and middlemen on the imports. Not all of them are entirely scrupulous.
According to one former official at the Nigerian National Petroleum Corporation who spoke to us, at least half the cost of the subsidy is diverted in over-invoicing, demurrage fees (costs incurred by ships being delayed, in reality or otherwise, in reaching port), and “round tripping” – when cargos are registered and taken out to sea, only to be re-registered for twice the subsidy.
“If you remove the subsidy you would at least take away all the demand that is fuelled by smuggling and rent seeking,” Sanusi says. This measure, and legislation to extract higher revenues from the oil industry, would create something like $16bn of additional funds for the state, he says.
The problem is that Nigerians have come to see cheap fuel as an entitlement – one of the few benefits that accrue to the public from Nigeria’s position as Africa’s leading oil producer. They want to see improvements in other areas before the subsidy is lifted.
A higher fuel price would also inevitably fuel inflation, raising the cost of living across the board and inflicting hardship on the wider population at a time when high-level corruption scandals make a mockery of the government’s calls for belt-tightening measures.
“Once you take away the subsidy you automatically double or triple the generator costs of small businesses which depend on smaller generators that use petroleum, not diesel. These are the generators that drive the informal economy,” explains Toyin Akinosho, an oil analyst.
Even General Sani Abacha, the most ruthless of Nigeria’s former military dictators, withdrew his own attempt at lowering the subsidy as a result of public outcry. A recent opinion poll found that 87 per cent of Nigerians still oppose the move. The real difficulty for Jonathan lies in what carrots he can offer to placate consumers as he wields the stick of subsidy removal. This provides the first but by no means last test of whether Jonathan has the stomach for reform, and the ability to carry the public with him.
Nov242011