By Michael Chibuzo
After a careful analysis of Nigeria’s history with every form of subsidies, I have come to the conclusion that subsidies are counter-productive in Nigeria.
Some may disagree with this and it is normal. We all desire subsidies but it seems the Nigerian factor does not mix well with subsidies.
Let’s start with subsidies in the PETROLEUM SECTOR.
Since the 1970s that petrol subsidy started in Nigeria, our oil and gas industry became highly inefficient and corruption ridden. We wasted trillions of naira spending on consumption.
You buy 10 litres of fuel for N1000 for example, government pays another N1500 as subsidy because the true market price of that 10 liters ought to be N2500. Under few hours you have used the fuel either to move around your vehicle or to provide electricity and N1500 from the public treasury is gone forever!
I didn’t even add the many N1500 payments that are fake subsidy claims back then. Imagine this scenario multiplied by millions of times on a daily basis for more than 40 years and you begin to understand the gross net negative impact of the subsidy regime. Upon all these, we still suffered scarcity of petroleum products and imported everything we consumed. Subsidy is gone and we’ve seen the turnaround even though pockets have felt it. We should have done this as far back as the 1980s.
SUBSIDY IN THE ELECTRICITY SECTOR
That Nigeria is unable to have 24/7 electricity is simply down to electricity subsidy over the years. It started with monopoly of the electricity market by NEPA. Government is a bad businessman and they were heavily subsidising electricity. While it’s good for the pockets, it meant epileptic supply is the norm. Even after privatisation of the generation and distribution segments of the power sector in 2013, cost-reflective tariffs was never instituted. Rather tariff was freezed and the multi-year tariff order unimplemented. How do you expect the sector to grow? Inflation was not static, you raised minimum wage, exchange rates fluctuated etc yet you are reluctant to increase tariff and you expect magic to happen? We need to start being realistic in this country.
The noticeable improvement we are seeing in our electricity supply is because of partial implementation of cost-reflective tariffs on some section of the electricity market (aka Band A) while tariff in other sections or bands remained frozen even with the Naira losing up to 150% of its value. It is simply impossible to achieve constant power supply under these circumstances.
For 65 years since our independence, we have not generated and distributed up to 6500MW of electricity on the national grid despite having at least 14,000MW of installed generation capacity in the national grid. WHY? It’s simply pricing and simple Economics. Today government is owing N4 trillion in unpaid subsidy to Gencos (this is apart from the other tens of trillions that FG had been spending as subsidies over the years).
To build a power plant is not difficult (Dangote alone generates 1500MW for his factories), to build transmission stations is not difficult, to build distribution substations is also not difficult, to buy transformers is not a problem either because there is no transformer scarcity in the world. The problem revolves around FINANCE. So, as long as electricity subsidy remains, constant power supply will remain an illusion. The best case scenario in the short to medium term would be constant power supply to those who can pay the cost-reflective tariff (band A).
OTHER SUBSIDIES
There are other subsidies that have been counterproductive for Nigeria. One is dollar subsidy. This comes when we have a fixed exchange rate that is arbitrarily pegged by the CBN. We have seen this practice breed speculation, dollar scarcity and outright grand corruption due to huge margins between officials exchange rate and black market rates. In Nigeria, the moment you are subsidising something, be rest assured that the item will become scarce.
When dollar rate was fixed and subsidised to help keep import prices low, dollar was scarce in banks. They got dollars from the CBN at official cheap rates and channel it to their agents in the black market where they sometimes make 100% profit. If you come to the bank to look for dollar, they will direct you to the streets. In the end importers of goods fix their prices based on the value of the currency they bought at the parallel market. So, what’s the point of subsidy, just float the currency.
Today, we have a floated currency and we are still living. Shockingly, today black market rates are sometimes cheaper than the official exchange rate. What God cannot do does not exist!
The same thing is seen in subsidised agricultural inputs such as fertiliser and even agricultural loans. Government will subsidise fertiliser today, tomorrow you will see the subsidised fertiliser selling at normal market price out there in the market. Government will give agricultural grants or soft loans, the beneficiaries would divert the funds for unrelated use and in most cases refuse to pay back the loans. Also, government will subsidise drugs in government hospitals but if you want to buy such medications in their pharmacy they will tell you they are out of stock and direct you where to buy the prescribed drugs.
So, when you aggregate all the subsidies we have expended on petroleum products, foreign exchange, electricity, agriculture, health and education (especially tertiary) over the past few decades, it becomes easy to conclude that these monies have not added any net value to our economy and the wellbeing of our people, rather they have hindered the economy from blossoming and held back majority of our people from enjoying sustainable prosperity.
It is however good that we are beginning to recognise the futility of these unending subsidies and the fact that the federal government has now began to gradually ditch such unsustainable subsidies that have a drag on our march to economic transformation march. It is going to be a long and painful march and we woke up pretty late. However, I believe it is better late than never!