How not to remove fuel subsidies …. The vicious cycle of foreign exchange liberalization on fuel prices
Since the President announced the removal of fuel subsidies on May 29th, 2023, it has been difficult to estimate the accurate subsidies been paid by the government. The government is only not transparent, it is also not clear what volume of petroleum products is imported into the country and how demand and smuggling across the border is changing in response to changes in prices. Fuel prices, demand, and the level of smuggling area also affected by changes in the exchange rates while lags in timing for payment and receipt of imported products also makes it difficult to estimate levels of subsidy. Finally, the government /NNPC has not been forthcoming about the dynamics of the volume of fuel imported since the announcement of the removal of fuel subsidies by the President. Though there are many variables, and these variables are shifting, ThinkBusiness analysis show that the most devastating effect on fuel prices have come from changes in the exchange rate. As argued in the piece [insert link] the floating of the Naira on June 14th have been done without understanding its implications on fuel prices. This means that the government did not think through the implications of another major policy so soon after removing fuel subsidy before going ahead. It shows a gross lack of understanding of how reforms are handled 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. The exchange rate changes, therefore, contributed to the rise in fuel prices more than any other thing. In June 2023, crude oil prices averaged about US $71 per barrel, about the same price this week. Since June 2023, whereas crude oil prices have been largely flat as shown in fig. 1 Nigeria’s fuel prices has increased by over 500 percent, as shown in fig. 2. Fig. 1. Nigeria’s Crude oil prices, production, and OPEC Quota. The table below compares the price changes in fuel in six countries in the last seventeen months since fuel subsidy removal. Comparing the changes in prices rather than differences in absolute prices allows us to focus on what is driving the changes. Without any change in policy or taxation in these countries, all the other prices responded to changes in the price of crude oil and other internal industry conditions, but Nigeria largely responded to the changes in the value of the naira against the US dollar. Fig. 2. The Changes in fuel prices in six countries, including Nigeria The president and his team have tacitly agreed that the casual and non-preparedness of the removal of fuel subsidy has led to some chaos. What they have not admitted to is the scale of not only not considering the implications for prices of food and transport, but that the president thought that the market will sort itself and the policy was taken in isolation. Fig. 3. The Exchange rate of the Naira against the US dollar. Unlike in the past, it thus appears the government is determined to see through the removal of fuel subsidies. From all indications, the government is currently passing on to Nigerians all fuel price changes arising from all the price changes relating to exchange rates, crude oil, transports, and all other related costs. However, the complexity and uncertainty surrounding the removal of fuel subsidy and the resultant fuel prices changes can only be minimised through stable exchange rates. With stable exchange rate, fuel prices will now only be affected by changes in the market conditions of the industry and not how the exchange rate shift prices significantly. And the entrance of the products from Dangote refinery will not help. Though supply have increased from Dangote refineries and the government has allowed the payment of crude in Naira, it does not change the fact that crude oil and its by products are international commodities and that removal of subsidy automatically integrates the Nigerian market into a global supply and demand chain. In the context, the outlook for a stable fuel price is weak. The government has focused on the metric and not the conditions. The government has focused on prices rather than working on the market conditions that improves stability and predictability for Nigerian consumers. And this is the most fundamental flaw of the reforms the government has embarked on. Invariably, the government has moved from one price fixing to another. Instead of focusing on improving the market conditions that dictate the price of the fuel and that of the exchange rate, the government has focused on the prices themselves. By focusing on prices, it has now realised that the market conditions do not support the new price targets.
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.
Tahir Mamman goofed.
Until last week, very few knew who Tahir Mamman was. It was fitting therefore that he announced himself in a way symptomatic of this government. The minister announced during his interview with Seun Okinbaloye on Sunday Politics that students under the age of 18 will not be allowed to sit the West Africa Examinations Council (WAEC), National Examinations Council (NECO), and the Joint Admissions Matriculation Board (JAMB) exams. According to the Minister, This policy is not new. It is inbuilt in the 6 – 3 – 3 – 4 or the modified 9 – 3 – 4 system of education that started in 1983.Students not yet 18 will not be allowed to write the three major exams in tertiary education – WAEC, NECO, and JAMB.Third, that students will not be able to write these exams if they have not adhered to the 6 – 3 – 3 – 4 structure. The objective of the directive is simple. The minister, and by extension, the government, seeks to prevent immature students gaining admissions into Nigerian universities. However, by simply saying the implementation will commence next year does not solve the problem. Indeed, it is symptomatic of the way and manner serious policy issues have been handled under President Bola Ahmed Tinubu. There are many examples, including the fuel subsidy removal, the levy of US $10,000 on the companies with foreign directors, the change of the national anthem, the policy on 5 Percent digital levy, the ongoing 70% on banks windfall profit on exchange rate transactions, and the recent change in the CBN Act. Back to the minister’s announcement, it is possible for a student to have gone through the entire system and not be 18 years old. So, to fix the problem requires going back to the foundation. But that requires hard work and diligence that our policy makers are not known for.The policy affects everyone and applies to everyone from Primary 1 to Senior Secondary School (SSS) three if they are not at the required age to reach 18 when they write the exams. Since last week, I have checked the Ministry’s website, waited to see if a detailed policy document, or guidelines, will be released, and I have not seen one. I suppose the Minister thinks since he has announced it, that is the end. I am not the only one to think in this direction. Dr. Mike Ene, the Secretary General of the Nigerian Union of Teachers (NUT) thinks the same, as interviewed in the Tribune and Punch. If schools and parents only require a year to prepare for this directive, does the minister know how many students will be affected next year? Does the minister have a plan for those students that will be affected, or they don’t matter? Is the minister aware that significant number of students in private schools write other forms of exams and this further alienates them. Is the minister aware that we have near complete polarized education where majority of the private school students are trained with British and US curriculum and the students are prepared for universities abroad. In conclusion, some have argued that underage children in universities is one of the problems. I agree. But the manner you judge a serious policy maker is how he or she focuses on what everyone believes are the top three problems. In Nigeria today, poor quality education is number one problem. And by extension, poor skills. Second, there are over 20 million children our of school. Third, there are extensive poor teaching and learning resources across the country. While the Honorable minister was pursuing the small trophy of ensuring our universities only admit students above 18 years old, I do not know of any credible plan for the over 20 million that are out of school. In conclusion, I do not believe anyone less than 18 years should be in university, except in special circumstances, but this will not work. It will not work because it is rash, ill thought and ill prepared. Policies for and that affect over 200 million people should be thorough, rigorous, and comprehensive. If we are to solve problems, and not just symptoms, our policy makers should not be lazy, distracted, and pedestrian to think of and show how a policy works in practice.