Why we must remove the subsidy on petrol prices, By Uddin Ifeanyi
Reading Time: 3 mins read
The removal of the subsidy on the pump-station price of petrol will have a strong (adverse immediately and positive eventually) effect on the economy. By raising prices across sectors, it could even bring on a political crisis over cost of living conditions that are already irksome. It will hurt lower income segments of the population more. Following the adverse economic outcomes of the fiasco that was the attempt to swap banknotes earlier this year, it could be argued that this is one reform initiative that could wait. But this is only an immediate consequence. More remote outcomes follow from the repair to the Federal Government’s wallet from not having to spend the enormous sums monthly that the subsidy currently consumes.
The decisive test for government spending is neither its size, the expected outcomes, nor its claimed beneficiaries. It is, instead, how efficient it is. On this measure, the petrol subsidy programme had long since failed. Higher income groups (with their many gas-guzzling cars) gained the most from a programme that is still advertised as in the interest of the poor. Criminal cartels benefited even more
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exaggerating the quantity of fuel consumed by the economy in order to cream the subsidy system. However, to argue for the removal of the petrol subsidy arrangement is different from being able to aver that the Federal Government will make better use of the resulting savings.
If the incompetence of successive Federal Governments is no excuse for not removing the subsidy, is the requirement that we provide functional local refineries before we may remove the subsidy an argument for delay? Attractive though this argument might be at first blush, it merely complicates the conversation. Nonetheless, it raises a problem in the management of reform initiatives that public conversations rarely allude to: sequencing. Very few economic reform initiatives are single episode events. They involve stages. The myriad stages have complicated “start-to-finish” relationships with each other. Require collaboration across government departments. And have dynamic, and often difficult-to-anticipate consequences from their interactions with the real world.
In spite of these, the sequencing problem is but a matter of the process of determining the combination of all these variables that delivers the greatest value at the least cost. In the end, it often boils down to deciding which comes first
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the chicken or the egg. Thankfully, the petrol subsidy removal problem is not deeply theoretical. At its most basic, calling for functional refineries ahead of market-based reforms to pricing in the economy’s downstream oil and gas sector, is akin to having argued, ahead of the award in January 2001 of three GSM spectrum licences, that we needed first to have had a functioning GSM infrastructure (towers, base stations, SIM card and phone vendors, etc.).
However we choose to sequence it, it is going to be difficult for the next federal government to dodge the bullet that is the budget for petrol subsidy. It will need all the money it can lay its hands on to kick-start the engine of domestic economic growth. The path to this goal leads through enhancing economic productivity
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keeping human capital supported through better school curriculum and delivery systems, robust healthcare systems, upscaling public infrastructure, and improving the functioning of the criminal justice systems. The Buhari administration, unfortunately, understood all of these goals in terms of public provision. Which is why the main lesson from the last eight years is that the next government must lay out welcome conditions for private investment (both domestic and foreign) in the economy.
On this argument, the main reform task, if we must remove the subsidy on petrol prices, is to remove barriers to entry and exit in the downstream oil and gas market. It is a contradiction in terms, for example, that the state oil monopoly is both a player in the downstream sector and a regulator. Strengthen the regulatory function
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quality control, consumer protection, etc.
― by all means, but it is time to retire the idea of our nanny state, and to free initiatives across the economy.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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