Does the Nigerian government’s decision to partially reinstate its fuel subsidy program cast a pall over its much-vaunted economic reform agenda?
Recap: the government’s January 1 decision to remove the subsidy triggered a tidal wave of public protests, strikes and empowered activist trade unions, in a nation already reeling from deadly Islamist attacks.
The government claimed that eliminating the subsidy would result in an additional $7-8 billion in fiscal revenues, arguing that the bulk of subsidy dollars were in any case siphoned off illegally to a cartel of private fuel importers. But public perception of the fuel subsidy is very different: many see it as a pro-poor measure and a legitimate use of fiscal proceeds. And responding to public discontent, and threats by oil worker unions to cut off production, the Nigerian government on Monday backtracked. The price of petrol will now be set at 97 naira per litre ($0.60), compared with 141 naira following the removal of the subsidy. Pre-subsidy removal, the pump price of petrol was 65 naira a litre.
“Nigeria’s status as Africa’s largest oil producer has created fears of oil supply disruptions in global energy markets and the fact that it exports around 2 million barrels of oil per day – and thus is essential for the government’s tax revenues – ensured a compromise had to be reached between the government and trade unions,” James Zhang, commodity strategist at Standard Bank, told Emerging Markets.
Unions have yet to declare the subsidy war fully over, but markets have not priced in a major risk of supply disruptions, with Nigeria’s benchmark Bonny Light crude trading at a $2.50 premium to Brent, at the time of writing.
Reform of the fuel subsidy program had both practical – by saving fiscal firepower - and symbolic benefits. On the latter, President Goodluck Jonathan, upon his April 2011 election, pledged a reformist push unprecedented in scale, including establishing a sovereign wealth fund, ratifying the long-awaited Petroleum Industry Bill, and removing the costly fuel subsidy program.
Eliminating the subsidy was designed to demonstrate the country’s newfound reformist zeal, after years of disappointments during late president Umaru Musa Yar'Adua’s rule between 2007 and 2010.
But the government’s latest backtrack has rubbed much of the shine off the policy. Meanwhile, recurrent expenditure – mostly the wage bill and government operating expenditure – is structurally sticky, so full removal of the subsidies was seen as the best way to lighten the fiscal burden.
Still, those with a glass-half-full disposition will surely conclude that a partial subsidy is better than nothing. But the fact that the government has bowed to popular protest on this issue is nevertheless troubling for many.
Writing in the FT, Paul Collier, professor of economics and director of the Centre for the Study of African Economies at the University of Oxford, draws an analogy between the fuel subsidy protests and the US Tea Party movement. (This analogy is perhaps a little misleading given that the Tea Party are campaigning to cut taxes and roll back government intervention, whereas Nigerian protestors are calling for a reinstatement of a government subsidy, but the more general point holds).
Collier writes:
| “The legacy of past gross abuses of power is that citizens are profoundly suspicious of government. And so a needed reform has ignited protests that resemble the sad folly of the Tea Party. If ordinary people are sufficiently disbelieving of government, it is entirely possible for populist rhetoric to seduce people into fighting against their own true interest. Nigeria, despite decades of elite plunder of oil revenues by means of scams such as the petrol subsidy, the poor and the young have turned out to demand its restoration. Convinced government is theft, they cling to the pitiful benefits of a petrol subsidy.” |
The nature of the protests – based on a fundamental misunderstanding on social justice of liberal economic reforms – confirms that.
| "Nigeria, like the US, has yet to build that critical mass of economic literacy among its citizens. The necessary foundation, a burning sense of ‘never again’, is most surely there. But if popular anger gets derailed into populism, whether about petrol subsidies or tax cuts, that potentially valuable social energy is wasted." |
These are all fair points. But it’s worth remembering that with the majority of the population of living on less than $2 a day, the removal of fuel subsidies required huge political capital, despite the strong fiscal logic. Clearly, the volley of angry protests in recent weeks bodes ill for further reforms.
Further reading: When a Tea Party-style folly comes to Nigeria – FT (subscription required)