Fuel, Electricity: Mixed reactions trail IMF advice on subsidies’ removal

*Subsidies on fuel, electricity not sustainable, benefits very lean, say Experts

*NLC cautions against subsidies’ removal, urges FG to be wary of IMF prescriptions

Philip Clement, Abuja and Joy Obakeye, Lagos

Mixed reactions have continued to trail the statement attributed to the International Monetary Fund (IMF) urging the Federal Government to completely remove fuel and electricity subsidies by the beginning of 2022.

Recall that the International Monetary Fund (IMF) at the weekend advised the Federal Government to fully remove fuel and electricity subsidies and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act (PIA).

For instance, stakeholders in the oil and gas as well as economists have reacted differently to the development. While some expressed support for the Bretton Woods institution, others like the Nigeria Labour Congress (NLC) believe that Nigeria has never had any subsidy mechanism.

The President, Nigerian Association for Energy Economics (NAEE), Prof Yinka Omorogbe, argued that the benefits of fuel subsidy were far less than the positives.

While calling for a review of the subsidy regime, Omorogbe said: “There is a need for a subsidy policy to be reviewed to see whether the benefits that come from that policy are more than the cost, or they are equivalent. Let us look around. The roads are bad; hospitals are bad; schools are bad, and infrastructure is not available.

“The most disturbing part of it is that looking at the budget for health, education and budget for defence, they are not up to what was spent on petroleum subsidy only in 2018. Is it not time for the government to look at all these?”

On the likely fallout of subsidy removal, he said: “Yes, there would be social unrest whenever a policy reversal takes place, but such unrest would be only for a while. Government must mount aggressive public education for the populace to see that petroleum subsidy benefits no one.”

On the need for an energy sector that is supportive of economic development, Omorogbe explained that while sustained low oil prices may not be good for rent-seeking and rent sharing, it certainly makes access to energy affordable to a large extent, at least in the short run.

“There is an indirect correlation between oil consumption and economic growth in countries with pragmatic petroleum policies that are geared towards the maximising of national interests rather than personal interest,” he stated.

However, in sharp contrast, President of the NLC, Ayuba Wabba warned against removing subsidies on fuel and electricity and increasing the pump price of petrol.

He reminded President Muhammadu Buhari of his earlier position saying: “Let me tell our government that they should be wary of the International Monetary Fund (IMF) prescriptions. We observed that IMF is urging our government to remove subsidies. In the first place, is there a subsidy?

“That is the question we as a country have not been able to answer. Let me align myself with what President Muhammadu Buhari said sometimes ago that subsidy is corruption and who is subsidizing who? Labour stands by that position and we have remained consistent

He noted that the country could only end subsidy when she increases her local capacity for refining crude oil, adding that labour would soon present a document to the government on the subsidy issue.

The NLC chief pointed out that refineries in the country can work and have their capacities increased to meet the current daily consumption.

“There is nothing wrong with our refineries. It is simply a conspiracy that is preventing them from refining what we need and even exporting to neighbouring African countries.

We have examples of refineries that have been upgraded around the world. Why is our case different? We are going through what we are going through because it pays the corrupt individuals in the system for Nigeria to keep importing finished products.

Aligning with the NLC’s position, former President, Chartered Institute of Bankers of Nigeria, and the Dean, College of Postgraduate Studies, Caleb University, Prof. Segun Ajibola, said until Nigeria operates functioning refineries, the impact of the removal of subsidy would be hard-hitting.

According to him, IMF as an international financial institution does not support government subsidy in whatever form, but the impact of subsidy removal would affect practically every goods and service in the country.

“For countries attempting to accept IMF loans, removal of subsidy is one of the conditionalities. IMF is therefore not saying anything new. They have severally clamoured for the removal of fuel subsidies by the Nigerian government.

“But the problem with subsidy removal in Nigeria is that it is capable of growing the poverty index as so much is attached to cost of fuel in the country because all other prices take a cue from fuel subsidy,” Ajibola said.

Stating that the IMF argument is often supported by the envisaged impact of the application of the funds garnered from fuel subsidy removal to socially desirable projects that would benefit the populace and cushion the pains of the removal, Ajibola insisted that the Nigerian government has a bad record in managing and delivering on such promises.

He said: “We have not been seeing this happen in Nigeria, at least at a commensurate scale. The Petroleum Trust Fund (PTF) of old tried to apply the removed subsidy in this manner until it ran into operational hitches.

The question, therefore, is that, if the subsidy is removed, how will the negative impact of the removal on the poor majority of Nigeria be cushioned?

“As a country, we have never succeeded in coming up with a workable template to date. This is the dilemma in Nigeria with the IMF prescription. The majority of Nigerians will bear the brunt. Another question is how is the subsidy determined, as the cost of fuel in the global market is not a good reference.

“Lastly, why can’t we make our refineries work? We need to remove this unholy alliance between local fuel price, dollar price per barrel of oil in the international oil market and foreign exchange rate.”

Reacting, the General Secretary of Nigeria Labour Congress (NLC), Comrade Ismail Bello said: ‘Nigeria didn’t vote for the IMF and World Bank, we voted for the APC government and some promises made Nigerians vote for them.”

He said that one of them is not to frequently increase petrol prices and not to frequently increase electricity tariff, adding, “I don’t think that is one of the promises to Nigerians”.

According to him, the contract between the government and the Nigerian people does not include IMF prescription. We don’t want to join in the frame, we will be engaging in a battle for the government to do what is right in the interest of the Nigerian people.

“At this rate that everybody has agreed that poverty is pushing Nigeria to the brink, we didn’t think this is the right time to do an adjustment to a crisis that will further deepen the poverty of our people.

“Our position has been clear, it is not new, so there is no new position. We don’t believe that there is a subsidy, frequent adjustment of crisis will hurt the economy, the people, it will hurt job creation and that is not the right way to go. The government must have it clear that it has to listen to the Nigerian people and not the IMF and World Bank”, he added.

Also commenting on the development, Economist/CEO, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said that there is a need to creatively manage the transition from the current pricing regime to a fully deregulated arrangement.

He said: “It is a tricky issue which could pose a serious challenge to government if not tactically managed. The reality is that the sentiments among the citizenry are not favourable to the deregulation of petroleum product pricing or petroleum subsidy removal. Even some elites are curiously not persuaded on the justification for the subsidy removal.”

Speaking with the Daily Times, he explained that if the policy transition is not properly managed, the risk of a social and political backlash could be quite high.

“No doubt there is a sound economic and business case in favour of fuel subsidy removal. But the social and political contexts are equally critical.

“Certainly, the subsidy is not sustainable, which is why there is need to accelerate engagement with the relevant stakeholders to come up with a policy transition strategy that is sustainable, realistic and pragmatic.

“The conversation should not be economic, but also social and political.

“The subsidy argument is slightly different in the case of electricity. Already some progress has been made to a market-driven electricity framework. We already have the willing buyer willing seller policy. There is also a market segmentation model that has been adopted by the DisCos.

“Different pricing applies to different segments. This is also a move towards the Stock market-driven electricity market. It is true that to sustain private investment in the electricity sector, the subsidy should be discontinued. But the transition needs to be strategically managed because of the political and social contexts,” Yusuf added.

Also, an economist, Emeka Chidi agrees with the IMF on subsidy removal, but added that it should be gradual since the regime has been subjected to fraudulent practices.

“We need to follow best practices obtainable in other countries. Paying for subsidies is no longer sustainable, so we should allow market forces to determine the prices of petrol just as we did with diesel,” he added.

It would be recalled that the IMF had advised the Nigerian government to fully remove fuel and electricity subsidies and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act (PIA).

The IMF, in its 2021 Article IV Mission statement released at the weekend also projected that despite high oil prices, Nigeria’s fiscal deficit would widen in 2021 to 6.3 per cent of Gross Domestic Product (GDP).

The fiscal deficit is projected at 3.93 per cent and 3.39 per cent of GDP in Nigeria’s 2021 and 2022 budgets respectively.

The IMF, in the report, said: “The complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor.

“In addition, the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed. Well-targeted social assistance will be needed to cushion any negative impacts on the poor particularly in light of still elevated inflation.

“Nigeria’s past experiences with fuel subsidy removal, which have all been short-lived and reversed, underscore the importance of building a consensus and improving public trust regarding the protection of the poor and efficient and transparent use of the saved resources.”

The IMF observed that there were significant downside risks to the near-term fiscal outlook from the ongoing COVID-19 pandemic, weak security situation and spending pressures associated with the electoral cycle.

According to the IMF, over the medium term, without bold revenue mobilisation efforts, fiscal deficits are projected to stay elevated above the pre-pandemic levels with public debt increasing to 43 per cent in 2026.

It stated: “With the emergence of fuel subsidies and slow progress on revenue mobilisation, the fiscal outlook faces significant risks. Continued reliance on administrative measures to address persistent foreign exchange shortages is negatively impacting confidence.”

The IMF observed that the Nigerian economy “is recovering” from a historic downturn benefiting from government policy support, rising oil prices and international financial assistance.

It noted that the Nigerian authorities’ pro-active approach had contained the COVID-19 infection rates and fatalities, adding that with the emergence of fuel subsidies and slow progress on revenue mobilisation, the fiscal outlook faces significant risks.

The IMF said: “The economy is recovering from a historic downturn. Helped by government policy support, rebounding oil prices and international financial aid, Nigeria exited the recession in 2020 Q4, earlier than expected.

Output rose by 5.4 per cent (y-o-y) in the second quarter, mainly reflecting base effects from transport and trade sectors and continued strong growth in the IT sector.

“However, manufacturing and oil sectors remain weak, reflecting continued foreign exchange shortages, and security and technical challenges. Headline inflation rose sharply during the pandemic reaching a peak of 18.2 per cent y-o-y in March 2021 but has since declined helped by the new harvest season and opening of the land borders.

“Reported unemployment rates are yet to come down although COVID-19 monthly surveys show the employment level to be back at its pre-pandemic level.

Noting that the outlook is for a subdued recovery, the IMF observed that while Nigeria’s real GDP is projected to grow by 2.6 per cent this year and continue in the range of 2.6-2.7 per cent per annum over the medium term, “this is just above the population growth rate implying stagnant per capita income in the medium term.”

Despite the ease in food prices, it said inflation is projected to remain in double-digits, in the absence of monetary policy reforms.

It also alluded to significant downside risks to the near-term outlook arising from the uncertain course of the pandemic and the domestic security situation, in the medium term.

It added that there were upside risks from faster-than-expected reaching of the Dangote refinery’s production capacity along with the effective implementation of the 2021 Petroleum Industry Act in terms of higher manufacturing production and investment in the oil sector.

The IMF called for major reforms in the fiscal, exchange rate, trade and governance to alter what it described as “the long-running lacklustre growth path.”

The IMF listed near-term priorities for Nigeria to include the implementation of e-customs reforms, including efficient procedures and controls, developing a Value Added Tax (VAT) compliance improvement programme, improving compliance across large, medium, and micro/small taxpayers and rationalising tax incentives and customs duty waivers. the recent passage of the PIA and stressed its timely implementation.

It stated that preliminary assessments by the IMF and the World Bank suggest that the approved fiscal terms would provide greater incentives to invest in the oil and gas industry but would reduce the fiscal take from new and converted fields.

On exchange rate policy, the IMF called for reduced administrative measures and room for a market-clearing unified exchange rate.

It also endorsed steps taken toward the unification of the exchange rate and stressed the need for further actions.

“The discontinuation of the official exchange rate is a step in the right direction, but continued dependence on administrative measures to address FX shortages sustains uncertainties and increases the risks of a sudden and large adjustment in the exchange rate.

“To preserve competitiveness, any exchange rate adjustment should be accompanied by clear communications regarding exchange rate policy going forward, macroeconomic policies to contain inflation and structural policies to facilitate new investment.

“A further move toward a market-clearing exchange rate will also help build foreign exchange buffers through higher capital inflows,” the Fund stated.