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FUEL SUBSIDY: RIPE FOR MANAGEMENT NOT REMOVAL!

By NBF News
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The practice of subsidising the cost of petroleum product delivery in Nigeria is a core element of economic management and policy formulation that all Nigerian governments of the last four decades have sustained. When the issue is discussed in these times however those who support the idea of its removal put forward the argument that the need for government to increase the funds available for development makes this an imperative.

This is an unfortunate and disingenuous rationale for the transformation of an element of government policy that has been beneficial to the welfare of the masses no matter how irregularly it has been implemented. It is probably correct that in terms of direct financial gain some of the main beneficiaries of the policy have been those who least need support from government in order to maximise their profits, i.e. the importers of petroleum products.

However the indirect benefits that accrue to the consumers of these products are passed on to the wider populace in the form of price stability and alleviation of the cost of other products that must be distributed throughout the country. The abrupt removal of this relief at the central core of the economic profile of the Nigerian market will disrupt this fragile balance. It is certain to increase rather than alleviate the hardship that many ordinary citizens are already experiencing in their efforts to sustain their basic standard of living. For example it is wrong to assume that if moneys saved from the abrupt discontinuation of fuel subsidy is used to boost monthly allocations to state governments this will automatically be translated into improved circumstances for the ordinary people. Some state Governors have gone so far as to suggest that the adoption of a minimum wage should be tied to the decision to halt the subsidy. This suggests that the governors are simply seeking to maximise their already inordinate dependence on Federal government hand-outs as the basis for lining their own coffers rather than improving the ability of their states to generate internal revenue.

The subsidy on fuel products is a direct result of the inability of Nigeria's premier revenue-earning sector, the oil and gas industry, to develop into a truly productive entity. Since most of the value-added to the primary product is to be gained after the export of the basic raw material the true profits emanating from Nigerian petroleum are offshore. Refining and retailing of the end product of Nigerian oil and gas has been virtually expunged from the machinery of domestic economic growth. Because of this it has become virtually compulsory that government must provide incentives for the importation of the refined product while making the export of raw material both attractive and hitch-free for its foreign clients.

The deployment of the government subsidy is an integral aspect of this strategy. As a result of this imperative government must ensure that the inflow of fuel can be guaranteed on a steady basis to offset the outflow of crude oil and gas as a part of its management of a monopolistic economic profile. In other words government sells oil in order to buy fuel and thus must subsidize its marketing partners the fuel profiteers. The call for the removal of the subsidy appears to be aimed at reversing this negative trend but the devastating impact that its removal whether abrupt or gradual will have on the overall pricing of basic commodities such as foodstuff, clothing, utensils for household use, and agricultural and other implements needed for domestic production makes it a decision that should not be taken lightly.

It must be recognised that the Nigerian industry has little or no influence over the true cost of importing fuel since it is priced by the vagaries of the international market rather than by the domestic processes of the production of crude oil. Nigeria can hardly afford not to subsidize the cost of importing fuel unless it can become a major exporter of the commodity itself

Given the indices outlined above it should be clear to anyone who regards Nigeria's operation of a market-based economy as an unchangeable imperative that the preservation of relative stability in the structural foundation of the nation must depend to a large extent on the management and prevention of inflationary tendencies. In a country where the largest proportion of the formal wage-earning populace is either in the public sector or dependent on it, and where the government is the main arbiter of the nation's most lucrative resource the fall-out from any disruption in the management of that resource will be irredeemable and devastating. The mismanagement of the process of subsidising fuel costs has been extremely debilitating to the Nigerian economy at various points in the past but the outright abandonment of the principles that have generated this process will be even more-so. The abrupt removal of the subsidy will strangle the market economy unless certain key processes are put in place.

Without the provision of commensurate factors of growth and profitability the removal of the subsidy will destroy the capability for survival of many small entrepreneurs. Government should therefore be considering ways in which it can encourage the development of effective refining and marketing capabilities before contemplating the elimination of the subsidy. The strategies to be put in place should ensure that Nigeria becomes a net exporter of refined petroleum products and a self-sufficient domestic consumer of locally produced fuel products as a priority before the removal of the subsidy should even be contemplated. Unfortunately the official supporters of subsidy removal have ignored these simple strictures because their key objective is the retention of the expenditure rather than the generation of savings or the proper investment of profits.

The whole idea behind the movement in favour of the removal of the subsidy on fuel in Nigeria should be based on the growth of a viable fuel production industry.

The petroleum industry as it exists in the country today is of virtually no use to the common man without the subsidy. It is not the maintenance but the mismanagement of the subsidy that has undermined the structural relevance of the policy to the overall benefit of the average citizen. Instead of generating and strengthening marketing practices that can actually help to reduce the cost of goods and services within the nation the provision of the subsidy more often than not encourages its beneficiaries to maximise their profits.

They do so through a process of balancing their importation requirements with government's ability to cushion any shortfall in their landing costs.

In effect the importers, through their collaboration with the regulators who monitor and advise on the payment of subsidies, are very often business partners with government in the long run because they base their pricing regime on a standard that ensures that government provides them with a guaranteed profit rather than depending on the true market forces to make this possible for them. In this situation the preservation of the subsidy is clearly a process that will eventually run itself into the ground in the future if the oil industry can be made more productive and accountable.

However the fact that the subsidy does not have a clear and credible future does not mean that its usefulness so far can be discarded without having a highly debilitating effect on the existing conditions of the average citizen. For this reason, if for no other the Government must be cautious and considerate when it confronts this issue and realise that its task should be to manage rather than to eliminate the subsidy.