The Yar’Adua Study on Subsidies (1)
“Sometime in 2008, my late boss, President Umaru Musa Yar’Adua commissioned a study on ‘subsidies and tariffs in Nigeria’ in five critical sectors: Electricity, Petroleum, Education, Health and Agriculture. The main objectives were to determine the effectiveness of subsidies in these sectors, examine the need or otherwise for continuity and finally, suggest the framework for a gradual elimination with the overall aim of improving the general welfare of Nigerians. I am going to be relying on that report (submitted shortly before Yar’Adua fell ill in 2009) very soon to engage why we need a change of approach in Nigeria…”
The foregoing is excerpted from my 20th May column, ‘Nigeria and the Standing Fan Metaphor’. Following the publication, I received numerous requests to share the paper but have been reluctant to do so because we live in a country where many read their texts upside down. Knowing the contentiousness of the subsidy issue and given how desperate government has become to raise revenue, I don’t want to be seen as pursuing an agenda. However, following the latest (October 2021) World Bank Nigeria Country Report, a copy of which I glimpsed from a top government official on Tuesday, I believe a serious conversation on the economy is in order.
Between 2020 and 2021, according to the report, inflation shock is expected to have pushed an additional 5.6 million Nigerians into poverty while “food insecurity is increasing in both poor and non-poor households” across the country. I already know this from the tales I hear from my wife after every market experience. Since Vice President Yemi Osinbajo is leading a crusade against the huge arbitrage created in the foreign exchange market vis-a-vis its implications for macroeconomic stability as well as transparency and accountability, I also do not need to deal with that aspect of the report. So, the bit that is relevant to this intervention is the issue of subsidy, although the report is restricted to the oil and gas sector.
In 2021, according to the World Bank, Nigeria plans to spend $8 per capita on health whereas subsidy on PMS alone could cost $25 per capita and is not well-targeted. This is even though revenue from oil and gas in the first five months of this year (January to May 2021) were about half of what was projected: N872 billion instead of N1.736 trillion. If crude prices, the cost of imported PMS and current fuel pump prices remain at current levels, the World Bank projects that Nigeria would have spent N2 trillion on fuel subsidy alone in 2021! “With leakages (smuggling or over-invoicing) also being a concern, this—if validated—would make the subsidy even more regressive.”
Our population growth is far outstripping economic growth amid declining per-capital incomes. The World Bank believes that Nigeria must therefore take certain hard decisions to stay afloat. One, we must free up space for the private sector to serve as the engine of growth and job creation rather than continue with a fixation on bubble jobs that are neither sustainable nor capable of taking anybody out of poverty; two, we must “promote Nigeria’s inherent competitive potential by tackling the behind-the-border barriers” that impede the entrepreneurial abilities of our young people; three, we need to “redirect public spending from subsidies and incentives that disproportionately benefit the rich” to investments in the most vulnerable of our society: children, women and the millions who live below poverty line.
Those conversations are important, but the series I am starting today concern a study conducted 13 years ago for my late boss as to how subsidies impact the Nigerian economy in five critical sectors that remain even today, to put it mildly, underperforming. Although the report is mostly in charts and bullet points, I have turned it into a flowing narrative, beginning with the power sector.