Subsidy removal: government concern about efficiency gains vs citizenry worries about increasing hardship

by Shafiu Ibrahim Abdullah

Economics, the dismal science, is full of situations of trade off (the choice between contrasting alternatives) where you are told you can have one but you cannot have the other or rather the two at the same time. Examples of these trades off abound in economics: inflation and unemployment, the price of bond and interest rate, higher price and lower demands and so on and so forth, but the most prominent trade off is the one between efficiency and inequality. Conventional economists’ believed that you cannot start with a situation of efficiency and equality and try to maintain the two at the same time; this is to say you can decide to have efficiency and forget about equality for that duration of time or vice versa. Efficiency here means increase productivity, output, profits and economic growth, while equality means reduction in the gap between the rich and poor, increase in total welfare and reduction in poverty. The current controversy about subsidy withdrawal is an example of these trades off, where government wants to remove oil subsidy for efficiency reasons while the citizens are kicking against it for equity and welfare reasons.

Let’s begin by looking at the government efficiency concern first. There is wider belief that the billions of Naira government is spending annually to subsidize the price of oil is just a wastage of money that is not going to the target group. There are evidence that the major beneficiaries of oil subsidy are oil importers, distributors, and filling stations across the country. Those who share this view believe that the subsidy is only helping to keep the cartel of oil importers and smugglers in the market. Smugglers from Nigeria and their associate from across the border in Niger, Cameroon and Togo have for years frustrated any effort Nigeria authorities make to supply cheap and abundant oil to it people by moving the cheaper stock to the neighboring countries where the price is higher.

The other point put forward for the removal of subsidy is that, for Nigeria to have private refineries of her own the price of oil must be increased just like it is being advocated for the power sector. This it is argued is the only way that a private refining business can break even and therefore become sustainable. The staunch advocates of this line of thought believed that increasing the price of fuel in Nigeria is a phenomenon that is inevitable whether thus opposing it like it or not; because in order to attain efficient level of production of the stuff locally domestic price must converge towards international price. One other argument look at the issue from the direction of government fiscal position; looking at the present precarious position of the government revenue and expenditure, it is argued that it is not wise to continue to pump over two trillion Naira annually to subsidizing oil consumption which can at best be away with. It has been argued that these trillions of Naira should have been spent to develop the most needed infrastructures in power, transport, health, and education sectors. It is argued that our Northern neighbor Niger that discovered oil of recent, are planning to increase the price of oil in order to make their soon to be open refinery (built by Chinese in the country) sustainable; and their price increase will push the rate of smuggling of the stuff from Nigeria thereby helping to aid the scarcity of oil in the country.

All the above points notwithstanding, the one time lump-sum increase in the price of oil as advocated by those in the government contrary to more rational incremental increase that should be carried out over a period of time is unwise and will help to make things difficult for this administration. To increase the price of oil by over 100% at once will make life more difficult for the average citizens and will not help this government efforts to create more jobs and control internal security. Instead of higher percentage increase; something like 10 to 15% increment should have been looked at, to be implemented at intervals of one year, until the time the price will be reasonable enough to allow for independent local refining facilities to take up, and at the same time not high enough to hurt welfare of the citizenry. We should not forget the fact that in a country like Nigeria oil subsidy removal alone will not help to bring efficiency in the oil sector, of more importance than subsidy removal is the fighting of corruption that has been bedeviling the sector for time immemorial, as well as removal of bureaucracy and red tape. The oil sector in Nigeria needs overall overhauling for efficiency to be entrenched, and normalcy to return to the sector. A situation whereby appointments to the oil sector are not done on merit but instead done using the yardsticks of nepotism and Godfatherism will continue to help the existing cartels that remain the main stumbling bloc to reforms in the sector.

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