FG should consider dual gas pricing to reduce subsidy payment – Yusuf

The Managing Director of the Center for Promoting Private Enterprise, Dr. Muda Yusuf, former Managing Director of the Lagos Chamber of Commerce and Industry, tells TUNDE AJAJA his views on how government can reduce the amount paid as a gasoline subsidy

Despite its limited resources, the federal government is expected to spend billions of naira on fuel subsidies following the plan to suspend the removal of the subsidy. What is your position on this issue?

From a purely economic point of view, the removal of subsidies is something that should have happened because the cost to the economy is appalling. But politically and socially, it’s a very difficult thing to do, especially right now. Politically, we all know that is a difficult thing for any politician or the government in power to do right now. Socially it is also difficult because the majority of citizens are on the edge due to extreme poverty inflicted by factors like inflation over the last one or two years. It has massively eroded the purchasing power of citizens. These are the two major concerns. My proposal is that between labor and government there should be a strategy that can be worked out on how this can be done. Many options were already being discussed, such as workarounds. Labor put on the table the proposal that if we could get the refineries running it would be easier to transit. If we refine domestically, the shock of withdrawal will not be as large as if we import. These are proposals on the table.

What do we do now that we face a fiscal sustainability crisis?

If we had acted on all of these proposals, we might not need to suspend implementation for 18 months, as is proposed. This is my position. But as I said, from a purely economic point of view, we should have removed the subsidy. The cost to the economy is enormous. You can see what the Nigerian National Petroleum Company Limited is asking for; it is in billions of naira. So there is a cost that you cannot bear. If you continue like this, the country will go bankrupt. It’s reality; you become insolvent. Look at the oil price on Wednesday, it was $90/barrel and we don’t know how far this Ukraine/US/Russia crisis will go. If that’s a factor, we’re looking at maybe over $100 a barrel, so we’re even looking at a much higher number when it comes to subsidies. For me, there is a problem of fiscal sustainability; is it financially viable? The second factor is the credibility problem that this issue creates, even for all oil and gas industry reform. If you signed a law (Petroleum Industry Act) last year and there were a lot of ceremonies around it, about six months later, you are already saying that you want to suspend part of it. How do you expect investors to take you seriously, even when it comes to other parts of the law? So there is a very strong investment argument to support the fact that this thing needs to be done urgently. There is also the opportunity cost argument. We do not have enough funds for roads, railways, electricity, hospitals, educational institutions and even for security purposes. All are asking for funds. Some states can’t even pay the new minimum wage, but we want to spend N2tn to N3tn to pay the subsidies. These are my arguments. For this kind of situation, it is not easy to say “do it now or do it later”. NNPC is asking N3tn for the subsidy, where will they get this from?

What is the output?

An alternative that I see here is that maybe we have a dual pricing regime. If it’s 500 billion naira the government can realistically afford, set it aside and call the workforce and tell them that’s the amount you can afford to budget and c is the number of liters it can cover this year. They can then identify the service stations that would distribute this subsidized fuel, which we can call social pricing. We can then leave the consumption balance to the private sector to settle, so that if they have the money, they import and fill that gap. We have this approach in many other utilities, like electricity, in which case if you can’t use electricity, you use your generator. In the health sector, if you do not want to use a public hospital, you can go to a private hospital. In the education sector, if you cannot go to a public school, you can decide to go to a private school. So in those areas, we have private sector and public sector options. In the public sector you have social pricing, and in the public sector you have commercial pricing.

Won’t price inequality create another layer of problems, because most people would want to buy where it’s subsidized?

No, it won’t. If you are rich and can afford it, you drive to the gas station where they sell at commercial prices and buy fuel. But those who cannot afford it can go to the stations where it is subsidized. In any case, the subsidy is intended to ease the burden of the poor, not the rich. If it is well supervised and there is no racketeering, you would have solved this problem. With this, you would have removed those who have the ability to pay from the lot and they will no longer be part of the queue where it is cheaper. In the education sector, federal universities are cheaper, but some prefer to take their children to private universities and some even take their children to study abroad. This option would segment the market and this segmentation approach can work, which the government can explore. In situations like this, you need to put all options on the table.

The price of crude oil is going up, and to the extent that it helps us make more money, it also means that Nigerians would pay more or in this case the subsidy would increase. Do you foresee a time when the subsidy would be completely removed and the impact on people would be minimal?

Yes, it will, if we have the right leadership and invest in the right things. In the UK and some other countries, the public transport system is superb. In terms of transportation, middle class people in these countries tend to complain more if such things happen. Most other people get on the bus and train and barely feel it.

But it will increase our freight rates here.

If we had an efficient public transport system, the burden would be much less. Take the example of Lagos, if there is a safe and reliable intra-city train system, many more people would use the train rather than driving. Even with sanitized and decent commercial buses, coupled with the elimination of chaos on the roads, many who drive would park their vehicles somewhere and take commercial buses. They would choose this option over sitting in traffic for hours. These options can make things easier. Most of these long commercial buses run on diesel, and a liter of diesel costs over N300, but nobody talks about it. Many factories with big generators and trucks that transport raw materials use diesel, but no one talks about it. But for gasoline, some people are making a lot of money from this subsidy.

The Senate Speaker questioned the authenticity of the number of liters the NNPC claims we consume daily, why has it been so difficult to rid the subsidy scheme of corruption?

Previously, importation was done by both the private sector and NNPC, but in recent years, only NNPC imports refined gasoline. When the private sector has been involved in the import, there have been allegations of fraud and some people have been taken to court. Now it is only NNPC that imports fuel, so we have to hold them to account. There must be proper verification. We are talking about a single importer, so it should be easier to deal with him.

The President of the Senate also complained about the smuggling of gasoline to neighboring countries, how come the illegality is growing to this day?

I must tell you that the incentive to smuggle fuel out of Nigeria is extremely high. The frontiers are occupied by people who are not well paid, so when they and their superiors on the frontiers are offered millions, they might compromise. The system has created an irresistible incentive, so it is very tempting for people to be corrupt, because of this huge differential. It’s like talking about the differential between the official window and the parallel forex market, you can only have corruption in this system. Any system that has this huge price differential and any system where you can easily move the product from a low priced segment of the market to a high priced segment, there is a very serious oversight and monitoring problem. ‘application. It’s reality. With the increase in the price of oil, the incentive is greater and greater. You see that in the West African sub-region down to Cameroon, they would use our fuel. There are some forms of corruption that the only way to correct is through your politics or by letting the market dictate. But to say that we want to be physically respected would perhaps be a waste of time and it would be less effective.

You talked about how the proposed extension of 18 months for the implementation of the PIA could affect investments in the sector, could you tell us more?

This was another example of a political somersault and reflects the lack of political will to reform the oil and gas sector, which would heighten the political and political risk of investing in Nigeria. This sector has been deprived of investment for decades, simply because of political and regulatory problems. This suspension of a major instrument of reform is not good for our perception by investors as an investment destination and will affect our risk rating. As I said, the economic cost of surrender is heavy. You can’t have your cake and eat it. Macroeconomic risks would become high as the fiscal deficit and borrowing significantly exceed the 2022 budget projections. The Central Bank of Nigeria may need to continue to cover financing gaps by ways and means. This of course has serious inflationary implications. The macroeconomic results would have a negative impact on the exchange rate, leading to a further depreciation of the currency. Potential investors in the downstream sector could suspend their investments until the political environment becomes conducive. This is the price we would have to pay as a country for this extension.

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