he growing drumbeat by the government for fuel subsidy removal suggests that this is an issue that the government is serious about implementing. Nothing can be more catastrophic for the nation at this present moment than the removal of fuel subsidies. Of course, the moral and humane arguments against subsidy removal remain valid - fuel subsidies are the only benefits that Nigerians gain from their nation and given the challenges that the average Nigerian already faces, more should be done to help them, not make their situations worse. But, the arguments for fuel subsidies to remain go much deeper.
The government claims that about 1.5 trillion naira will be spent on fuel subsidies in 2009. Based on the estimated consumption of 300,000 barrels per day of petroleum products, and a conversion factor of 142 liters per barrel, the average subsidy on petroleum products will come to about N97/liter of petroleum products or about N30 per day for each Nigerian. With petrol prices being about N70/liter and diesel costing about N120/liter, on average fuel costs are subsidized by as much as 50%.
Fuel subsidy removal will effectively cause a reduction in productivity with severe implications for wages and employment. What this means is that every N1 applied to production will achieve much less. Why? I will attempt an explanation. Say for instance that a company engaged in soap production spent 30 kobo of every N1 on the purchase of fuel products for running generators to produce power and for fueling its fleet of distribution trucks, while the remainder 70 kobo is spent on other aspects of the production process - raw materials, labor, etc. Once oil subsidies are removed, fuel prices will effectively double, implying that the portion of capital that is apportioned to fuel purchases would increase from 30 kobo to 60 kobo on every N1 of available capital. The implication is that only 40 kobo on every N1 investment is now available for raw materials and labor, and effectively, N1 capital employed in production will now generate less goods and services than before. Once that happens, an inevitable cascade of devastating events will occur. With a fixed labor supply, a reduction in productivity will cause lower wages and possibly job losses. The economy will be expected to suffer from any reductions to productivity and output. In essence, Nigeria's already prostrate economy will suffer even more.
For the Macroeconomic purists, traditionally it is mainly technology changes that shift the productivity curve. But that is where "all things are equal". In Nigeria, those ceteris paribus conditions do not hold. With electricity generation and transmission in a comatose state, the power needs for both industrial and domestic use are provided by the Nigerian people themselves. So, while the impact of power on production costs can be taken for granted in most economies, the cost of power and the efforts made in its generation must factor squarely in any discussions about productivity in Nigeria.
It is worthwhile discussing the challenges that Nigerian industry faces because of the power situation in the country. When diesel or petrol fueled generators are used for electricity generation, the costs of energy are approximately $0.35/kWh or about N45/kWh at the current subsidized fuel price. Factoring in the capital costs of the generating system and the associated costs of maintenance and repairs, raises power costs in Nigeria to about N60/kWh or $0.50/kWh. Average power costs for industrial concerns in most nations around the world are about $0.05 to $0.10/kWh (i.e., N6 to N12/kWh). With power costs making up as much as 10-40% of the input costs for most manufacturing sectors, it is no surprise that the Nigerian industrial sector has essentially ceased to exist. When subsidies are lifted, we can expect that effective power costs will go to about $0.75 to $1/kWh (N94 - N125/kWh).
Virtually every facet of life will be touched by a removal of fuel subsidies, and Nigerians can expect changes in the cost and efficiency of service delivery in areas as far ranging as Food processing, Transportation, Telecommunications (base station operations, charging of cellular phones, etc), Educational institutions (lecturer & student preparation), Hospitals and general healthcare & General manufacturing.
To put things in context, the total fuel subsidies amount to no more than about 7% of GDP, which pales when compared with the 25% of GDP that is lost to corruption in Nigeria. If the government is trying to free up funds, it should concentrate on tacking corruption. Yet another argument for maintaining subsidies is the fact that it is probably one of the more effective means of allocating revenues. It is hard to embezzle funds allocated for subsides because fuel inventories are very carefully monitored. By maintaining subsidies, Nigerians can at least guarantee that a portion of the national wealth is indeed getting back to the people, even if it amounts to no more than N30 per day for each Nigerian. And when it comes to fuel subsidies, there are a number of nations that go much farther than Nigeria. Venezuela for instance has maintained fuel prices at $0.05/Liter (N6/liter) since 1998.
Rather than remove subsidies, the government should increase them. In fact, fuel subsidies can potentially solve one of the dilemmas the government has grappled with which in a nutshell is this: how does the government raise wages for workers without triggering inflationary pressures? This is a real problem. Every time that wages have been raised, the gains to workers have been eroded by near simultaneous increases in prices. However, wage increases can be done indirectly. Rather than some arbitrary inflation triggering announcement of wage increases, the government could raise fuel subsidies in lieu of wage increases, or in a more targeted fashion, provide fuel subsidy vouchers to workers in lieu of direct wage increases. In either case, the principal driver of the causality between wage and price increases is broken and the intent of wage increases which is to enhance the buying power of workers is achieved without penalizing all Nigerians.
advertisement
