Finally, the Buhari administration finds the will to bite one of several bullets it perforce has to confront in the next 3 years if its “change” watchword is not to remain an empty promise. Or did it?
The long queues (at the filling stations) that we have had to put up with over the past month-and-a-half was the clearest evidence, if one was needed, that the “Petroleum Support Fund”, a federal government scheme that purported to hold the pump station price of petrol below the market clearing rate in support of the “poor and vulnerable”, had failed. As illustrated by the last tinkering with the scheme’s price structure (the reduction in petrol price from N97 a litre to the current N87/litre), part of the benefits from this scheme was appropriated by the middle and upper classes, who saw their expense on fueling their gas-guzzling sports utility vehicles drop by a tenth. For the most part, much poorer segments of the population continued to pay as much for their commute as they had previously.
However, the larger benefit from the subsidy scheme appeared to accrue to those (again richer segments of the society) who were responsible for importing fuel, and thus got paid the subsidy. Now, much of the transaction involved in this respect is murkier than the base input into producing petrol. Which may explain why despite countless court cases around the subsidy, not one conviction has yet been secured. Despite this opacity, the spike in the quantity of domestic fuel import as the subsidy scheme dragged on, against all reasonable estimates of domestic consumption suggested that much was awry in the sector.
Interestingly, government only alluded to one of these points in its justification of the decision to shut the scheme down. If newspaper reports are to be believed, a big “if” these days of phantom interviews, the Minister of State for Petroleum, Ibe Kachikwu, who also doubles as Group Managing Director of the Nigerian National Petroleum Corporation (NNPC) anchored the decision on government’s inability to pay the subsidy due to fraud having tainted the scheme, and because of the drop in the federal government’s earnings.
Fraud and its management, as an excuse for discontinuing a pro-people programme, speak to serious flaws in our criminal justice system. Thus, if this were the main reason, government’s duty would be to address the system failure, rather than its manifestations across the economy. Thankfully, there is agreement that we cannot proceed in the direction we are minded to propel this economy, and at our preferred pace, if we do not address the trust deficit that a sub-par law enforcement infrastructure engenders.
Still, this subsidy thing speaks to a much deeper concern. Targetted (means-tested) subsidies, with sunset clauses have been known to work elsewhere. However, determining the nature and size of the subsidy, its target group, and how long to provide it often require the conduct of randomised controlled trials to work. In the case of our fuel subsidy scheme, an arbitrary (though well-intended) intervention in the domestic economy quickly turned perverse incentive.
This, I believe was the point that the government ought to have anchored its decision to turn off the taps on this scheme on. If we could control the fraud that has come to characterise the fuel subsidy scheme, and the national fairy godmother somehow engineered an increase in our export earnings, would it be okay to spend these new resources on the fuel subsidy? The answer to this ought to be a resounding “No”! For the central task of government, today, is to return as many transactions in this economy, as it can, to the markets.
This way, it would have more resources to spend creating the social and physical infrastructure, without which domestic productivity levels will remain stuck at the bottom of the pyramid. It would be able to complete the needed transition from provider of goods and services, to regulator of a nascent and hopefully soon vibrant private sector. And it would provide practical support to its regularly mouthed wish to see the private sector turn engine of domestic economic growth.
This is why we should worry that the government could not make a proper economic case for its decision to shutdown the fuel subsidy scheme. This poor grasp of economics also explains the oil minister’s inability to let go. No sooner did he describe government’s decision to free the market for petrol, than he attempted to fix a new price for the good.