Petrol subsidy and inequality

The unintended economic consequence of fuel subsidy in Nigeria is inequality; higher income Nigerian households have captured fuel subsidy. However, most mistakenly prefer the single narrative: petrol subsidy, in the absence of social services, is in the interest of “the masses”. Actually, “the masses” consume kerosene or choke on firewood smoke.

Mistrust of government officials, opacity in the downstream sector, and a rambunctious media are the wedges that limit an impassioned debate about the true cost and beneficiaries of petrol subsidy.

Government can afford to remain mum – the fiscal weight of subsidy payments will become unbearable, at the most, in 2015. Until then, trillions of naira that should be allocated to building roads that open markets across states will be gobbled by car owners in the city while subsistent farmers in rural areas toil. Dodgy fuel importers continue to mint cash from petrol sold across the border. In 2011, 80 percent of petrol consumed in Benin was smuggled from Nigeria.

Arbitrage, differentials in petrol prices in West Africa, contributes to frustrating growth. Nigeria’s situation is akin to that of an addict: getting high from consuming a drug without a thought for its physical and mental impact.

For how long can government fund the subsidy from its oil income? The decline in production and flat export of crude oil are projected to put pressure on government’s income. This can cause a fiscal imbalance, a budget deficit, that will mostly be financed through domestic or foreign debt.

Car owners, either passing time gridlocked in go-slows or debating politics, debt and development, are among Nigeria’s high income earners. Even though Nigeria is a middle-income country, the ability to buy more and bigger cars is growing. In low- and middle-income countries, 2 of every 10 households capture 43 percent of total petrol subsidies. Ironically, a partial or total removal of fuel subsidy hits poor households the most – especially the most vulnerable, i.e., the “floating class”: households that earn $2-$4 a day.

For instance, the impact of partial removal of petrol subsidy last January was transmitted to higher prices of locally manufactured goods, reducing the already paltry and irregular income of poor households, the same who are denied social security because public resources are diverted to petrol subsidy.

Nigeria is caught between the Scylla of unemployment and the Charybdis of petrol subsidy. Most Nigerians are young. Majority are (under-)employed in the informal sector. As a result, they are excluded economically and socially. Limited access to social safety nets restricts social and economic mobility. In contrast to this overwhelming number of poor people floating above the poverty line, the middle income group has expanded, thanks to their access to education and health.

Social unrest has risen, despite significant economic growth in the past decade. Poor perception of living standards, local job market, freedom and access to internet increase the risk of social unrest. The elite, unfortunately, are immune from unrest; what the Federal Government does with oil revenue is a question of prebendalism, i.e., “extractive institutions” that design policies and practices that capture the resource for a small but politically powerful elite.