Although this may be an auspicious moment to courageously confront the unsustainable subsidy payment regime and the fiscal and political problems it provokes, the government has caused more confusion than clarity on the matter by sending conflicting signals and advancing contradictory policy frames in its latest subsidy withdrawal pronouncement.
The issue is not as convoluted as the government makes it out to be, and I suspect that Mr. Kachikwu’s annoying sophistry, which comes wrapped in esoteric petroleum industry jargon, is a product of the issue’s political sensitivity rather than its inherent complication. The government, in a nutshell, is trying to do two things rhetorically; it is trying to eat its proverbial cake and have it too.
First, the government is trying to announce the end of subsidy without calling it subsidy removal, which is understood by Nigerians as, and has in fact often meant, an increase in the price of petrol. Second, they are trying, I suspect, to exorcise the political ghost of the APC/Buhari camp’s strident criticism of subsidy removal during the administration of former president Goodluck Jonathan. These priorities make for a delicate and sometimes comical rhetorical and political dance that is creating confusion and uncertainty in the polity regarding the government’s policy on petroleum subsidy and its implications for the supply, availability, and pricing of petrol.
Personally, I like President Buhari's earlier position better than the one to which he has apparently been converted by his minister of state for petroleum, Ibe Kachikwu. Buhari had echoed my own skepticism about the existence of genuine subsidy on petroleum products, a position I articulated in 2011 in a newspaper Op-ed during the debate over the withdrawal of fuel subsidy.
Subsidy as we know it is overblown and largely fraudulent. It seems to me then that if true subsidy does not exist or only exists minimally in the form of the differential between the pump price of petrol and the total cost of importing and transporting the said petrol to stations, then the thing to do is simply to pay this difference and nothing more as a way to maintain the set price of N87 per liter. If this can be done to keep the cost of subsidy to government minimal then subsidy is worth maintaining because of the aggregate economic impact of affordable petrol.
The problem has been and remains that strictly paying this manageable differential is easier said than done as there seems to be great volatility in the costs associated with the import of fuel as well as an irreconcilable discrepancy between the differential claimed by the government and the one claimed by the oil importers and marketers. It is a case of dueling numbers, and it is an expensive, government budget buster since the government always acquiesces to the numbers presented by the oil importers to ensure that the supply of fuel is not interrupted.
With the price of crude at almost a ten year low, this differential has become negligible — N6.50 per liter, according to the NNPC, which is a far cry from subsidy amounts/rates the importers claim and collect. Buhari's earlier position in an interview during the campaigns was that the government should accurately calculate the difference between the pump price and the total cost of bringing fuel from foreign suppliers to petrol stations plus a small, fair margin or commission for importers and marketers, pay that difference, and nothing more. If the NNPC does the importation the additional margin/commission is eliminated, further reducing the differential.
That was a sound analysis, and I remember telling a friend that this was the most lucid ameliorative analysis of the problem I had heard from any politician or government official.
But Buhari advanced this approach only as a stopgap, temporary solution. For the long term, Buhari acknowledged that the solution was to get our refineries working again or incentivize the establishment of private refineries as a way of weaning us off dependence on imported fuel.
I loved Buhari's position. Unfortunately, Buhari has realized that that position is unrealistic at this time, given the apparent inability of the new NNPC management to get the refineries working at full capacity. He has also realized that, given the unfortunate but, for now, inescapable dependence on fuel importation and the power of blackmail that it gives the importers (they can refuse to import and cause politically unpopular and economically crippling scarcity), he has to decapitate the fuel importation cartel sooner than planned, hence the decision to deregulate the market, essentially allowing market forces (the cost of crude, freight charges, landing, and transportation costs) to dictate the pump price.
The big unknown is how the importation cartel will react and whether the NNPC's cost calculation accurately reflects what the importers and marketers believe to be their actual costs. These actors may claim legitimately or otherwise that new price of N85 (or even the old one of N87) does not adequately cover their costs or the profit margin that makes the business worth their while.
Deregulation/subsidy withdrawal is a courageous move and was forced upon Buhari by the skyrocketing and increasingly unsustainable subsidy payments, payments that are based on inflated claims that hardly reflect the true costs associated with the importation and transportation of fuel. Given the financial strain Nigeria is under, the low price of crude, and the inability of government to accurately ascertain true subsidy amounts, this is an auspicious moment to deregulate the sector. Politically, it is the best time too, because, thanks to cheap crude, it will result in no unpopular fuel price increase.
Nonetheless this major policy shift raises several questions that Mr. Kachikwu has not addressed:
1. If this is true deregulation, or surrendering the price of fuel to market forces or market dynamics, why is the government reducing the price of fuel to, or more appropriately, fixing it at, N85. How does a policy of deregulation coexist with a policy of price fixing?
2. What if the fuel importers (and marketers) resent and protest this contradictory policy of deregulation and price fixing and refuse to go along with it? Deregulation is something the importers and marketers should welcome, but price fixing is something they will resent for the obvious reason that the fixed price lacks the flexibility to respond to fluctuations in the price of crude and in the costs associated with fuel importation.
3. Crude is cheap now, but it will not be that way forever, with credible projects predicting an increase to about $70 in 2019 or 2020. For now, as long as crude remains cheap, the N85 official price may stick without resistance or serious repercussions, but when crude prices go up, which is inevitable, the pump price will have to go up to reflect that. What will the government do then? If the price is adjusted upward as it should to make importation worthwhile for the importers, how will such an increase in the pump price of petrol be explained by the government or received by Nigerians?
4. What is the government's endgame regarding domestic refining of petroleum products, which is the permanent, most cost-efficient solution to this problem — a solution that keeps fuel prices affordable and extricates control over fuel supply and prices from the grip of nefarious and shady importers?
These are all questions and issues that Mr. Kachikwu's glibly jargony rhetoric is silent on. Talk is cheap and reality can bite. I hope that the government has thought about these issues and has contingency plans to address them if/when they threaten the new deregulation regime and/or become a political fallout of the new approach to fuel pricing.
The author can be reached at firstname.lastname@example.org