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Subsidy Removal In our Best Interest!

Category: Oil Sector


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Subsidy Removal  In our Best Interest!

January 05, 2012
 

Here is a straight-to-the-point response to some internet enquiries on the fuel subsidy by Sanusi Lamido Sanusi (Governor of the Central Bank of Nigeria).
 

Here, SLS shares his convictions and presents a holistic insight into the reality about the Nigerian economy, governance, corruption, the growing gap between the rich and the poor, the challenges to sustainability, the need for the recalibration of the current debate and concerns about the decision taken to remove the subsidy on PMS.
 

The Case for Subsidy Removal
QUOTE - As a Nigerian and an economist, I often take positions on economic matters and this position is one I have had for years long before coming in to the Central Bank. I have also taken time to explain this position on several occasions and criticised government for not doing this before now.
 

In 2010 at a public hearing in the House of Reps on the 25pct saga I alerted the nation of what I considered a potential big scam around subsidies and urged for its removal. No one paid attention. The economics is very clear to me. That it is unpopular is also understandable.
 

The British public is unhappy with Tory budget cuts. The Greeks went on riot over austerity. Italian parliamentarians came to blows before Berlusconi was thrown out of office. The US congress is yet to approve Obama’s tax increases.
 

Economic decisions-by definition-ALWAYS must involve a cost or an opportunity cost since for them to qualify as economic they must involve a choice in resource allocation among competing uses.
 

An enlightened debate is one that weighs the pros and cons of removing subsidy and continuing with it.      Removing it has costs in terms of Nigerians paying more for PMS-which by the way is not the fuel for generators, power plants, production facilities, heavy duty goods transportation trucks and even luxury buses. It is fuel used by the middle class and car owners to drive around town and from city to city not to employ workers and produce goods and services.
 

Diesel which is critical to manufacturing and employment creation is not subsidized as the subsidy was removed years ago by President Obasanjo. Nigerians said nothing then because it was blue collar workers that got retrenched by factories. Those speaking now on the internet and facebook and twitter and newspapers are not workers but middle class elite who use PMS in their smart cars so let's stop all the ideological pretence. This is not about elite and masses but an intra-elite discourse.     

I will summarise the issues and I write as a Nigerian economist and public intellectual not as a public servant:

1. I am a strong advocate for subsidies if they are for production and not consumption and if they benefit the poor and not middle men and rent seekers. The US government subsidizes cotton and wheat farmers and Nigeria spends its reserves importing wheat from America and keeping American farmers employed. The OECD countries pay subsidies to cattle farmers. Today Promasidor imports powdered milk from New Zealand and packages in Nigeria using our foreign exchange while we have cattle. WAMCO imports milk from the UK and adds water and tins it and calls it "production" of Peak milk. We use our Forex to import petroleum products and keep refineries and jobs open in Europe. Meanwhile precisely because of market distortions there can be no private sector investment in refineries since no one can make profit selling at the regulated price unless we are going to provide private refineries with crude for next to nothing. Certainly no one can purchase crude at market price, refine it and sell at N65 without huge losses so this explains why there are no private refineries.   

2 What I mentioned above is at the heart of the problem with government economic policy which needs to be changed. The economy since SAP is one that supports imported consumption and not local production, perpetuating dependency, non inclusive growth and insecurity. Why is it that the economy is growing at 7pct annually but the people are getting poorer? The answer is simply because growth gains are not evenly distributed. Personal income is skewed towards people in the oil industry, Telecoms, high finance, stock market, real estate and yes civil servants and politicians who feed on corruption. We produce crude oil but import petroleum products (today the UK’s highest exports to Nigeria are petroleum based products).
 

We have a large cotton belt but import textiles from China (thus keeping their subsidized factories open and jobs in china). We are the world's number one producer of cassava but import cassava starch from Europe. We have a huge tomato belt in Kadawa, Jigawa and Chad Basin but are the world's largest importer of tomato paste - from China and Italy. We can produce rice but we import rice from Thailand and India-most of it from grain reserves that have been in stock for over 5 years. I can go on and on    
 

3. If the above is clear then it is evident that this trajectory can only lead to disaster. We will continue to spend our resources promoting growth and employment in our trading partners’ countries. When the Terms of trade shift against us, we can only have foreign reserves because by the good grace of God we have Oil which will be exhausted soon and with new discoveries may become so cheap it loses value. We don't create any value-added jobs as the only real production is peasant farming. Oil, Telecoms, finance and real estate are not employment intensive. So everyone becomes a civil servant as the economy cannot create jobs. In the 2012 budget, out of a total N1.8tr recurrent expenditure for the executive arm N1.6tr is on personnel costs not overheads. To reduce this you have to cut salaries or pensions or retrench civil servants. This is the classic trajectory of underdevelopment, de-development and de-industrialisation.  
 

4. For the above reasons I am a strong proponent of structural reform and this begins from the fiscal framework. The limited resources of government should be allocated to supporting production-especially if we are running a budget deficit. We cannot keep borrowing to support conspicuous consumption. To support a job creating economy we need to fund power, transportation infrastructure, market infrastructure and access, technical and vocational education etc. We need to build rice processing plants, produce starch and cassava flour and ethanol, process our tomato and milk locally, regenerate our textiles firms (which used to employ 600,000 workers but now employ 30,000!), refine our own crude etc. We cannot even begin to do this if 30pct of govt expenditure is on fuel subsidy, if out of the balance 70pct is recurrent spending, 10pct is debt service, 10pct goes to the Niger Delta and only 10pct is capital expenditure. So it is about a choice-what do we spend money on and how do we allocate resources?  This is the real debate we should be having.
 

5. We often compare ourselves to other oil producing countries like Saudi Arabia. What are the facts? With a population of over 160m we produce 2mbpd i.e. 1 barrel for every 80+ citizens daily. Govt share of revenues is like 50pct of every barrel so it is effectively a barrel for 160 citizens. Saudi Arabia with a 24m population produces over 8mbpd or one barrel for every 3 citizens. In fact in 2010 the nearest OPEC country to Nigeria in production per capita was Algeria with a barrel for 30 and Algeria is more gas than oil.
 

With one barrel for 3 citizens daily, Saudi Arabia is able to provide infrastructure, education, healthcare and social safety nets and have huge savings. It can provide subsidised fuel at a total cost that is a fraction of its savings and even export refined products. It is paying for subsidies out of its fiscal savings and not borrowing to pay.
 

We are like a poor man with a rich neighbour. The neighbour builds a good house, buys several cars, eat expensive food, travel abroad every year and still have huge balances in several current accounts. Then you choose to live that lifestyle and mortgage your house, take an overdraft from the bank to finance it. Next year it is time to repay the bank, you don't have the money so you go to another bank; borrow enough to pay the first bank’s principal plus interest and also fund the continuation of the lifestyle. It continues till you can't borrow anymore and the bank throws you and your family out of your house and you lose everything. A responsible father would have long since faced reality and told his family he doesn't earn as much as his neighbour and expectations need to be moderated if they are to keep their roof. Of course the children won't be happy at not going to Hawaii for summer and having to take public transport rather than own cars like their neighbour's children. Maybe they will even abuse the father behind his back and call him a miser. That is the cost of leadership.
 

Finally: removing subsidy is not a silver bullet that solves our economic problems. Further, there is a huge trust deficit that government has to address. Government needs to investigate subsidy payments and punish any violations of extant guidelines. It needs to cut off unnecessary and wasteful expenditure. It needs to fight corruption and show seriousness in that. It needs to deliver on capital projects, power and infrastructure including irrigation, farm-level storage and agri-processing.
 

These are all valid issues that are to be taken IN ADDITION to and not in place of subsidy removal. UNQUOTE

 



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