The Heavy Burden of Continued Fuel Subsidy on Nigerians

Introduction

The removal of fuel subsidy by the government of Nigeria might not be a bad thing after all. Although the argument for removal and the argument against removal of fuel subsidy might remind one of what Americans refer to as catch-22 or a paradoxical situation in which an individual cannot avoid a problem because of some contradictory constraints or rules, it may not be as absurd as it has been portrayed. The contradictory constraint in this case is the level and the depth of corruption in Nigeria. I used the catch-22 analogy because as things stand now, it potentially seems that Nigerians are damned if fuel subsidy is removed and are also damned if fuel subsidy stays. However, this may not be the case. It may not be the case after all. If some of the anticipated benefits as elicited by the Minister of Finance of the Federal Republic and the Governor of the Central Bank of Nigeria are not hampered by corruption, I believe that Nigerians will reap a plethora of benefits from subsidy removal. Let’s see why.

I am still wondering why many Nigerians are unable to understand the simple logic of fuel subsidy. I met a few Onitsha Market traders that fully understand the logic far better than many Nigerians. Before I could say anything to these business men about fuel subsidy, they quickly and incisively made their opinions known to me. In the end I found out that they understand the politics and logic of fuel subsidy better than most Nigerians, including some of the so-called educated labor leaders. Honestly, I was amazed by what I heard from these men.

Perhaps, the removal wasn’t explained well to Nigerians. Perhaps, it wasn’t handled well. Perhaps, it they would have implanted it in phases. Perhaps, they should have fully communicated their cushioning plans first before the subsidy removal announcement. There are many things that they should have and could have done. It is akin to Monday morning quarterbacking (an American football analogy) or what football team supporters think that their team’s quarter back should have done to win a game that was played the previous Sunday evening. I am not yet ready to equate it with what Nigerians refer to as “medicine after death” because fuel subsidy removal still on the table and is being implemented, albeit incrementally.

I believe that Nigerians are smart people. It doesn’t take scientist to understand that the subsidy is a wasteful spending that benefits only a handful of Nigerians – the oil cabals, oil markets, and some corrupt government officials. The subsidy doesn’t currently serve any Nigerian well. Like I stated above, it is like a catch 22. Corruption will always rear its ugly head in Nigeria – at least for now until we have a messiah that will clean up the polity. To reap real benefits from fuel subsidy or subsidy removal, corruption in the oil industry sector and in fact, in our body politic must be eliminated in its entirety first.

Before I delve into the pros and cons of oil subsidy and why fuel subsidy is a burden on Nigerians, I believe that it is pertinent to understand how fuel subsidy started. Fuel subsidy was necessitated by the fact that our obsolesced and partially-functioning refineries are unable to meet the energy demands of Nigerians. As anyone should expect, the cost of processed fuel should be higher than the cost of raw fuel. To cushion the effects of expensive imported fuel on Nigerians, the federal government had to subsidize imported fuel. Our refineries were and are not properly maintained because of corruption and as a result, they are not operating at full or planned capacity. Fuel has to be imported to supplement local production. Funds that are allocated to refineries maintenance each year are always embezzled by corrupt officials. That Nigeria has one of the worst maintenance cultures in the world is an open secret. Our poor maintenance culture is not limited to the oil sector. It is glaring everywhere as evidenced by the preponderance of dilapidated infrastructure, public schools, hospitals, roads, and bridges to name a few.

Like I stated above, since imported processed fuels sell at higher price than what it would have sold if they were to be processed in Nigeria, the federal govern decided in to cushion the effects of that the exorbitantly priced fuel will have on Nigerians. I believe that this program started during the time of Gen Babangida or Gen. Abacha. President Obasanjo and Yar’Adua continued to implement the policy. President Jonathan supported it initially before he decided to do a U–turn for good. Now, let’s take a look at how much that is spent each year on fuel and who actually benefits from fuel subsidy.

Before I continue with my rants, let’s do a simple arithmetic of fuel subsidy. First, let’s take a look at the annual cost of fuel subsidy. Information from the hyperlink below indicates that the annual budget for the year 2011 is 4.226 Trillion Dollars: http://www.nigerianelitesforum.com/ng/nigeria-national-debt-finance/6265-recurrent-expenditure-gulps-59-of-2011-budget.html

Information from the hyperlink below indicates that the amount spent on oil subsidy in 2011 is 1.76 Trillion Dollars: http://saharareporters.com/news-page/n176trn-paid-subsidy-2011-alone-cbn-tells-house-reps-committee

The percentage (%) of the national budget spent on oil subsidy in 2011 is as follows:
1.76
------   X 100 = 42%
4.226

The simple arithmetic above shows that a whopping portion is our national budget goes to fuel subsidy. In 2011 alone, 42% of the national budget was spent on fuel subsidy. This percentage is way above a third of the national budget. That is not reasonable or fair, especially when one ponders about other government programs or projects that will benefits an average Nigerian. All things being equal, other programs such as education, healthcare, roads, and infrastructural development and maintenance (combined), received less than 10%. However, all things are not equal because of the entrenched culture of corruption in Nigeria. Even the meager amounts that are budgeted for the aforementioned programs are still susceptible to embezzlement. The amount spend each year on subsidy might even build more than one refinery.

There is also another perspective to consider before making a decision on whether to support or not to support fuel subsidy removal. Information that has come to light recently indicates that the amount paid for oil subsidy in 2011 is way beyond the amount that should have been paid. Whereas subsidy was paid for 59 billions barrels of imported processed fuel, the actual quantity that was imported or consumed was 35 million barrels. Institutionalized corruption, which has remained the bane of the Nigerian nation, is certainly manifesting itself here. The difference between 59 and 35 is 24 billion barrels. In other words, billions of dollars that were paid for non-existent (or phantom) imported fuel actually ended up in some people’s pockets. The people in question are the oil cabals, oil marketers, and government officials.

Once again, I will calculate the amount of fuel subsidy payment that ended up in the pockets of these criminals.

If 1.76 Trillion Naira was paid for 59 Billion Barrels, the amount that was paid for 24 billion barrels is as follows:
24
---- X 1.76 = .72 Trillion or 720 Billion Naira (4.5 Billion Dollars)
59

From the above arithmetic, it means that 720 billion dollars are shared by corrupt officials and oil marketers for no just cause. The percentage of the national budget that was embezzled by oil marketers, Oil cabals, and government officials is as follows:

.72
----- X 100 = 17%
4.226

From the above calculation, a few corrupt Nigerians receive 17% of the national budget for doing nothing. This percentage does not take into account the fact that the oil marketers have already profited handsomely from the 35 billion barrels that were actually supplied.

The next issue to address is whether fuel subsidy should stay or not. Like I stated above, Nigerians are damned if it is removed and are also damned if it stays. However, since the savings that comes from fuel subsidy can be used to construct three refineries (in Lagos, Beyelsa, and Kogi) within two years as the federal government stated, I will go for fuel subsidy removal. If all the fuels that Nigerians need will be processed locally, the price will fall to about 70 Naira per liter. I believe that market forces will also bring down the price of imported fuels if more refineries are built in Nigeria. If some of the anticipated benefits as elicited by the Minister of Finance of the Federal Republic and the Governor of the Central Bank of Nigeria are not hampered by corruption, I believe that Nigerians will reap a plethora of benefits from subsidy removal.

The federal government should license private investors and encourage them to build private refineries of all shapes, sizes, and capacities as long as these private refineries will comply with yet-to-be-created private oil industry safety codes. Like the Finance Minister posited, savings from oil subsidy will be diversified to take care of other government programs that have hitherto suffered because of underfunding. Examples of such program include schools, hospitals, roads, bridges, tourism projects etc. Like I stated earlier, all these programs, including construction of three new refineries, will not become accomplished realities if institutionalized corruption will not be stamped out. What the government is saying is good on paper and we should give them the benefit of the doubt. The taste of the pudding is in the eating. Let’s hold them to their own words.

Now, if you still believe that fuel subsidy will stay, I have no qualms with that view for the reason that you are entitled to your opinion and your opinion is not necessarily wrong, because like I stated earlier, this is like a “catch-22”. However, one thing that you have to bear in mind is that the real beneficiaries of fuel subsidy are the oil cabals, oil marketers, and a few government officials. It is not you and it will never be you. You are being scammed by these cabals, corrupt officials, and profiteers.

Ejike Okonkwo, PhD
Professor of Computer Information Systems