How not to remove fuel subsidies

17 months is a short time in a country’s history, but it can also be a long time. 17 months after the casual statement by President Bola Ahmed Tinubu during his inauguration, many Nigerians are in utter shock. They are shocked that fuel prices have moved from N185 per litre in May 2023 to between N1,100 and N1,300 across the country. That is a staggering 550 percent increase. Some have described it as their worst nightmare.

Fig. 1. The dynamics of PMS and diesel prices since June 2017

Wale Edun, the Minister for Finance, and the coordinating minister for the economy said last week that the government no longer pays subsidies on fuel and the foreign exchange. Recently also, the Group Managing Director of the Nigeria National Petroleum Company (NNPC), Mele Kyari argued that the prices of fuel in Nigeria and across West Africa trade corridors needed to match to prevent smuggling from Nigeria, supposedly stressing the motivation for the removal of fuel subsidies in the country.

It follows that those in government, whenever they speak, spill two narratives. They argue that the reforms were necessary and there is no alternative. They also argue that Nigerians needed to pay this price for a greater future. However, what is clear, both in government and in public, is that no one could have predicted the dramatic increases in the price of fuel in the last 17 months. The expectation was that the increase in the price of fuel will be a one-off. However, fuel prices have gone up four distinctive times and the expectation is that there will further increases. And the simple reason is not just because the subsidies were not removed in full in June 2023, but because of the volatility of the exchange rate in the period.

Combined, there are three dimensions to the crisis that are often absent in most analysis.

First, there is no clear path or destination in President Tinubu’s reforms. For many months now, the President and his team have been at pains to explain the rising costs of living as a necessary pain for future growth, as part of a downturn of the global economy, and a necessary adjustment for the future growth in the country. However, these statements are made without context and explanation of the future they see.

No one in government has been able to explain how the removal of fuel subsidies and the liberalisation of the foreign exchange will lead to investments, growth, and jobs. The argument here is not that there are no paths, but that the government has not figured that out. Nearly 18 months after the reforms, the government has not provided a concrete path to investments, growth, and jobs. The reason the government has not been able to provide these paths is because it has become obvious that those in government assume that those announcements are the reforms themselves and that “ right pricing” is sufficient to improving market conditions.

Second, the floating of the Naira on June 14th have been done without understanding its implications on fuel prices. The government, after supposedly removing fuel subsidies at the start of June last year did not think through the implications of another policy before going ahead. It shows a gross lack of understanding of reforms that President Tinubu and his team thought that the two policies could not be contradictory in the short term. Without the exchange rate volatility that followed exchange rate reform, the removal of fuel subsidy would have been a one shot increase in price.

Finally, the hasty, casual, and pedestrian way the removal of fuel subsidy was done also meant the necessary conversation, consultation, and preparation for what replaces or what the resources could be used for was not done with State governments. The outcome is a disparate and incoherent expenditures of newfound windfalls in governments, especially State governments.

Fig. 2. State governments have been the largest beneficiary of FAAC since the removal of fuel subsidies

The outcome is now different from the many arguments that were constructed by many in favour of the removal of subsidies, including by ThinkBusiness Africa. The argument was that the removal of fuel subsidies will allow greater level of expenditure on education, health, and infrastructure. However, there is no evidence that these expenditure ratios on these items have been significantly more than when the fuel subsidy was in place.

These situations persist. The government is not having a debate within itself about what can be done. The federal government is not having the debate or consultation with State governments about what can be done to improve market conditions and not spike the foreign exchange markets. And the government continues to believe the “right pricing” will bring about the investments, growth, and jobs. That same partial analysis has made the World Bank Chief Economist Indermit Gill suggests that it will take 15 years of continuous reforms for Nigeria to break the cycle of low growth. But Gill did not tell his hosts that this is not the way reforms are done.