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• Seek measures to mitigate impact
Despite initial challenges faced by Nigerians over removal of subsidy on Premium Motor Spirit (PMS), experts in business and energy sectors have highlighted long-term benefits of the policy.
The recent decision to eliminate petrol subsidy has caused a surge in prices, leading to higher transportation cost and increase in cost of living for many Nigerians.
But the experts, during an advocacy dialogue by Chartered Institute of Bankers of Nigeria (CIBN) on the theme, ‘Fuel Subsidy Removal: Opportunities for Individual Businesses and the Way Forward’, said the challenges, which are short-term, should be viewed in the context of long-term gains.
They asserted that removal of petrol subsidy encourages efficient use of resources and offers incentives to explore alternative and more sustainable energy sources.
Head, Department of Economics, University of Ibadan, Prof. Adeola Adenikinju, said Nigeria has been under a subsidy illusion, which has imposed huge damage on the economy.
He said before introduction of subsidy, petrol price was fully determined by market forces, reflecting cost of crude, cost of processing, as well as transportation and marketing costs; hence prices varied across the country. While they are lowest in towns and cities close to refineries, they were quite high in locations miles away.
With rising population imposing growing demand on the product, the burden of sustaining fuel subsidy, year-in and year-out, has become quite heavy.
“In 2011, the government spent $8.4 billion on gasoline subsidies. An estimated N10 trillion was reportedly spent on subsidies between 2006 and 2018, while in 2022, an estimated N5 trillion was spent,” he said.
He revealed that subsidy has made it difficult for government to have adequate funds for provision of basic social amenities and critical infrastructure.
According to Adenikinju, 50 years of implementing fuel subsidy has imposed huge costs on the Nigerian economy, resulting in substantial loss of revenue and an exponential growth in domestic oil consumption, as low price does not signal real cost of consumption.
Adenikinju said attempts in the past to remove subsidies generated opposition from consumers who were already used to cheap energy prices, due to presumptions that any price increase would bring inflation and reduce economic welfare.
Analysing what a post-subsidy era economy would look like in the long term, the expert maintained that removal of subsidies would encourage efficiency in fuel consumption and promote switch to green energy.
He said government-controlled refineries are likely to be sold to the private sector or run like private sector companies, noting that the country would no longer spend N13 billion every month on refineries that are not producing and are inefficient.
According to him, the country would have saved over $19 billion spent on Turn Around Maintenance (TAM) of refineries in the past eight years.
He said: “There will be less dependence on inefficient fuel tankers to deliver fuel over long distances. Normally, fuel trucks are supposed to carry fuels from the nearest depots to fuel stations in cities or towns. The current practice of using trucks to move fuels from Lagos to different parts of the country has destroyed our roads, led to the deaths of innocent Nigerians and destruction of property.
“Smuggling of fuel to neighbouring countries will no longer be profitable, as prices of fuel across the region will closely align. Nigeria will no longer subsidise fuel consumption across neighbouring countries and provide a source of revenue for their governments through taxes imposed on fuels smuggled from Nigeria.
“The rich folks will pay for the fuel they consume, while some support will be provided for the poor, for instance, by diverting more government expenditures to social goods.
“After the initial shocks, the adjustment process in fuel prices will follow those of other normal commodities delivered by the market. Fuel prices will move more instantaneously around their long-term trends, rather than proceed in fits and jumps that have caused major shocks in the economy.”
He explained further: “The 1.3 trillion barrels per day Nigeria is producing now was what we were producing in 1970. Looking at our total production between 1970 and now, per capita, it will cost 160 barrels per household. And what we produced in 2022 was about two barrels per household.”
He called on government to remove some of the supply constraints at ports by waiving or reducing demurrage and other charges. He recommended an orderly scheduling of imports for faster discharges of fuel cargoes.
“There is a need to allow for more competition in the supply chain, especially in the issuance of import licensing. Importers should compete on freight charges, product costs and margins.
“The current low pricing regime for crude oil should allow the government to put in place some form of taxes on fuel imports. Nigeria needs to keep to a formula-based approach for determining fuel prices in the short term, while expediting actions in respect of putting in place a vibrant domestic refining industry.”
Adenikinju stressed that removal of subsidy may be painful but it is needed to arrest the country’s downward trajectory.
Founder and Chief Consultant, B. Adedipe Associates Limited (BAA Consult), Dr. Biodun Adedipe, called on government to take urgent measures in mitigating the impact of subsidy removal on businesses and households.
He said government should practise regulatory impact analysis for intervention, noting that as fuel prices increase, transportation costs also skyrocket, leading to increased expenses that affect citizens’ cost of living.
He said impact of subsidy removal on businesses could not be ignored, due to increased cost of production and agitation for wage and pension increase.
Adedipe called for collaboration among governments, private sectors and citizens, noting that citizens’ engagement is critical to implementing the policy.
He said: “Citizens engagement will deepen collaboration, leading Nigerians into an environment that works both for the government and the governed, most importantly, businesses and households.
“Business owners should consider operating hours, operational cost management, provide employee support, in terms of one-off allowance or hybrid working, seek affordable options with alternative energy sources and less energy intensive operations.”
Partner and Chief Economist, KPMG Nigeria, Dr. Yemi Kale, said the country is already experiencing disruptions associated with subsidy removal, noting that inflation rate in energy and transportation directly impacts food prices and energy use.
Kale said he believes the net benefit is long-term and positive, despite significant challenges experienced by households and businesses.
“The removal will affect micro, small and medium scale enterprises than larger enterprise, because they tend to use PMS for their operations, compared to larger enterprises. But I consider the impact of government revenue, which is the main objective.”
He said removing subsidies could foster a more competitive market and attract investment.
According to him, “in business, there might be increased competition for exports by increasing cost of production, because as prices go up, it makes import cheaper, hence, there are alternatives from other countries cheaper than locally made produce.”
He tasked government to ensure clear communication with Nigerians on removal of fuel subsidy to allay fears and avoid misinformation.
Also, co-founder, Falcon Corporation Ltd., Audrey Joe-Ezigbo, said removal of subsidies would free up funds for public spending on infrastructure and social projects.
According to her, government would be able to allocate funds to targeted social welfare programmes, infrastructure development and healthcare, which have a long-term positive impact on the economy and citizens’ overall well being.
Speaking on the long-term benefits, Joe-Ezigbo said: “On transportation, we are no longer constrained to PMS or AGO power vehicles, rather we would engage in auto gas, which ultimately brings down cost of transportation.”
Meanwhile, Director, CBN Centre for Economics and Finance, Ahmadu Bello University (ABU), Zaria, Prof. Muhammad Auwalu Haruna, explained: “In Nigeria, what we take for granted is transmission economics. We do not take it as a very important factor in our development. Now, it is becoming very clear that our transportation structure is not as organised and seamless as we see abroad.
“Our transportation systems are fragmented. It will be extremely difficult to achieve desired impact in a shorter time. Government should look at the transmission system and what can be done to ensure the pain and cost do not become sticky.”
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