De-risking fuel Subsidy; before the pack fall

Popular opinion is building on the total removal of fuel subsidy by Nigeria’s new government led by President Muhammadu Buhari. Subsidy is “reverse taxation” and its removal brings a feeling of being taxed twice. However, classical economics and even common sense (apologies to Nigeria’s Senator Ben Bruce) in today’s Nigeria bears witness to the necessity of fuel subsidy removal. Despite a seeming consensus, subsidy issue has not been completely de-risked in Nigeria.

A wrong approach can permanently drag down the reputation of an administration.  The question then becomes how and not If?

The economic chaos and social strive that follow failed reforms are very difficult to curtail; they often impact the most crucial elements of daily lives. This is probably the reason why Nigeria’s new government delayed it, despite high pitched calls that followed after its inauguration in May. Wise move! But the risk still looms.

Political will is not enough to implement a subsidy reform configuration that will generate minimal conflict. Very few nations have succeeded in peacefully removing subsidy. The present security and economic condition of Nigeria should abhor any form of national protest or action. Hence, the timing, strategy and context have to be right.  People will show aggression and even violence to their very own party, tribe and religion once economic tensions become very severe. They are already severe in Nigeria! With a struggling economy, mitigating the negative impacts of a failed or mismanaged subsidy reform in this present economic/security climate will be very catastrophic; a situation that the government must utterly avoid.  Fuel subsidy in Nigeria must be thoughtfully de-risked.

Wrong approach and the pack will fall!

The people’s feeling of reverse taxation does not justify the many inefficiencies that come with subsidies. However, to address that bad feeling, a strategy called “real exchange” is used. Real exchange enables governments to show the people “tangible impacts” of subsidy removal right from the onset (not many months later). The populace should immediately identify the benefits of subsidy removal. This simply means that the machinery for the exchange element must be ready to take off as soon as the subsidy is removed (or even prior); be it free education, improved transport system, wage increase or social allowance for the unemployed. Alternatively, it can be made to coincide with a parallel ameliorative program.  Subsidy reforms rarely work without an immediately tangible exchange, In Ghana an anti-poverty program and an expanded transport network was used, this was in addition to other macroeconomic cushions.

Phased approach 

One fell swoop removal of subsidy has led to crises in 90 percent of the cases. A phased approach is a viable option to explore. 50 percent removal per annum on a two year plan or 25 percent per annum on a four year plan are possible options. Depending on the outcomes of a benefit-cost ratio analysis or a Poverty and Social Impact Assessment (PSIA) which should precede the reforms, a phased approach should be applied to gradually expose “addicted” consumers to unpleasant new realities.

Timing is fundamental 

Even more important than the strategy is the timing of the implementation.  With the best design for subsidy reforms, wrong timing can greatly undermine all the efforts. Every nation has a period of laughter and a period of “triste”. Nigerians are very upset in the first 3 months of a year (yuletide economic hangover), very sensitive in the last three months of the year (yuletide euphoria) but they laugh uncontrollably whenever Nigeria is doing well in any football tournament.

Local refining capacity

With limited local refining capacity, the immediate harsh implications of subsidy removal (inflation included) will be amplified. While it is not appropriate to wait till Nigeria’s four refineries scale up in processing capacities or rely on Dangote group’s private refinery (coming on-stream in 2017 or thereabout), the pathway to growing local refining capacity must be clear prior to subsidy removal. Modular refineries offer a fast 18-20 months pathway to bringing multiples of 30,000 to 50,000 (bbl/d) processing capability on stream. One possibly in each geo-political zone could bring about 300,000 bbl/d on stream by second quarter of 2017. A Public Private Partnership (PPP) can be seeded with investors.

Institutionalized

Subsidy reform is not a technical challenge; it evolves to become a political and social issue and as such must be approached with utmost care. It can and has been known to undermine 50 year political goodwill, simply because it is painful and addictive. If the big “change” is well managed, data driven and contextually right; reforms would not pose serious challenge.

Chijioke Mama is a Senior Research Analyst and the founder of “Africa’s Barrel Equations” (Energy Policy & Investment Advisory Initiative) e-mail: chijioke.mama@yahoo.com