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Monday, January 9, 2012

The Oil Subsidy Issue - Is Goodluck Jonathan prepared to “bite the bullet”?

The petroleum industry in Nigeria is the largest industry and main generator of GDP in the West African nation which is also the continent's most populous. The country produces about 2.4 million barrels of crude oil a day. It is also a top supplier to the United States, but virtually all of its petroleum products are imported. The existing refineries in the country used to refine crude oil are either non-functional or in such a poorly maintained state that they fail to meet expected capacity.


The Federal Government of Nigeria under the leadership of Goodluck Jonathan in the last quarter of 2011 announced the government’s intention to remove Oil subsidy on Petroleum products. This policy is highly unpopular and has met with ‘stiff resistance’ from the masses. The price of petrol per litre has now risen from N65/Litre to N141/Litre, a rise of over 117%, the downstream deregulation policy came into effect on 1st January

2012. The rise of petrol is likely to affects every aspect of life from transportation, an increase in
the price of food products, healthcare, to the cost of powering millions of generators in homes and businesses across the country. In short, the removal of Oil subsidy is likely cause what we would term as “run-away inflation”.

In this article, we will analyse both sides of the argument in an attempt to come out with a solution that will be acceptable to All Nigerians. We will also attempt to answer the most frequent question asked by most Nigerians on the issue of oil subsidy.

To understand the issue of oil subsidy, we do not necessarily need to focus on contested official statistics, but directly review some persistent gaps in the Nigerian economy that explain the reality on ground. First, the Nigerian economy is almost singularly hinged on crude oil export and therefore, highly sensitive to internal and external market shocks in the oil sector. What this means is that a fractional rise in the cost of fuel has unmitigated ripple effects on the industrial sector and key components of basic need indicators such as food, housing and health. Secondly, the ripple effects  are without boundary, as social liberties for example, become less accessible to the average Nigerian and well removed from the less privileged who consist the vast majority of the over 167 million population. 

According to the Coordinator of the Economy and Minister of Finance Dr Ngozi Okonjo-Iweala, retaining Oil subsidy only benefits the following groups: 

§   The Nigerian elite and middle class
§   Oil Smugglers (bunkering activities) to neighbouring countries
 §   Normal profits accruing to Independent Marketers

She goes on to suggest the removal of oil subsidy would strengthen investors' confidence in the capital market but also highlighted that the present level of subsidy is not sustainable, we presume this conclusion was reached after analysing Nigeria’s financial position in the short, medium and long term.


Dr. Ngozi Okonjo-Iweala further argues that 30 percent of total federal government expenditure or about 4.2% of GDP is spent on payments to fuel marketers as petrol subsidies and that removing Oil subsidy will decrease smuggling to neighbouring countries. These are strong arguments in support of oil subsidy removal but AAN argues if the Federal Government has the political will and is serious about addressing the issue of corruption in Nigeria, we should be applying a holistic not a selective approach to the subject.

The government’s plan to remove oil subsidy paves the way for the much needed deregulation of the downstream sector which is likely to herald in obvious benefits. Some of these include attracting new investors into the market, allowing for better regulation and transparency, reducing scarcity by ensuring adequate supply of petroleum products. The objective of deregulating the downstream sector is to mirror the successes Nigerians have witnessed in the telecoms sectors (Today, Nigeria has one of the fastest growing telecommunications in the world).
The most frequent question asked by many Nigerians on the subject of oil subsidy is - "Why has the Nigerian government not invested in repairing our ailing refineries or embarked on building new refineries to meet expected capacity?". The answer lies in the fact that Investors are clamouring for the sector to be deregulated as an incentive to invest. Within the current regulated structure, investors cannot cover their cost let a lone make a profit hence none of the International Oil Companies (IOCs) operating in Nigeria have expressed any interest in building refineries in the country even though a number of them have been issued licences since 2000. The government is now taking a very important step to DEREGULATE THE SECTOR.
The Acting National Chairman of the Peoples Democratic Party (PDP) Alhaji Abubakar Kawu Baraje has said that arrangements have been concluded to privatise the nation's oil refineries but he maintained that the refineries are supposed to be established before the withdrawal of oil subsidy. Why the removal of oil subsidy has been fast tracked is a question the Nigerian Government need to explain to its people.

As part of a concessionary move the President announced on the 7th January 2012 that the basic salaries of all political office holders in the executive arm of government will be reduced by 25%. Should it take the threat of strike action by the Labour Unions be a catalyst for concession from the government?
On the 8th January 2012, it was announced that the House of Representatives members voted to suspend the removal of oil subsidy. What is interesting about this "Vote to Suspend Oil Subsidy" is it appears to gives the masses the perception that the House of Rep. members are against the removal of oil subsidy but at the same time it gives the Federal government an "olive branch" to remove oil subsidy at a later date.
§  The current state of the economy point to a depleting foreign reserve from $60 billion in March 2008 to $32 billion in October 2011 (a drop of 53% in three and a half years).

tThe loss of $2billion yearly as highlighted in a recent KPMG Report on the Nigerian National Petroleum Corporation NNPC (65,000 barrels of oil daily (unaccounted for) at  $97.89  as at 12.12.2011) - http://www.facebook.com/note.php?note_id=10150469036912580

hHigh cost of governance - The Minister of Finance and co-ordinator of the Economic Team, Dr. Ngozi Okonjo Iweala declared 'I am really worried about the issue of making sure our budget is not eaten up by recurrent expenditure. How can we invest in capital if we're spending all our money on recurrent expenditure (salaries and wages?). - http://allafrica.com/stories/201110310334.html

We believe the following blueprint will precipitate the process of 'true development' in Nigeria.

A- Incremental phase out of oil subsidy (This will protect the most vulnerable)

B- Reduce recurrent expenditure across all arms of Government by between 30-50%.

C- Implementation of ''Efficiency Reforms'' at NNPC (Nigeria currently losses $2 Billion a year)

§    The National Labour Congress (NLC) and the trade unions have a very important role to play not just in the oil subsidy issue but also in ensuring that the government and key stakeholders understand the high level of corruption is now becoming UNSUSTAINABLE and if Nigeria seriously intends to attract investors into the country and subsequently create jobs, reduce crime and a emerge as a strong and prosperous country, corruption is an issue that must be addressed.
(Transparency International, a Berlin based anti-corruption watchdog, showed that Nigeria is now ranked 134, dropping from its 130 position in 2009 and 121 in 2008, out of 178 countries surveyed).

§    Oil subsidy removal should be phased out incrementally to soften the blow on Nigerians and give the people time to adjust to the new reality.
§    Recurrent expenditures (which constitutes mainly of salaries and wages) should be reduced by about 30- 50% across all arms of government (not just the executive arm).

§    Nigeria could be saving a further $2 billion a year by reforms at National Petroleum Corporation NNPC
Long Live the Federal Republic of Nigeria.

For more information on the author, go to - http://www.allaboutnigeria.org/aboutus

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