Nigeria’s subsidies: End them at once!

Economist

31 December 2011

Nigeria’s subsidies: End them at once!

The president will be a brave man if he fulfils his promise to end cheap petrol

PETROL subsidies are thought to cost Africa’s second-largest economy $7 billion a year—and Nigeria’s president, Goodluck Jonathan, says it is a priority for him to get rid of them in 2012. But most Nigerians think cheap fuel is the only benefit they get from living in an oil-rich country. As the prospect of life without subsidies looms, queues at petrol stations are lengthening, strikes are threatened and tension is rising.

Nigeria churns out 2m barrels a day (b/d) but imports almost its entire refined-fuel needs, owing to decades of mismanagement and corruption that have left its refineries to rot. Subsidies keep the pump price at $0.41 a litre but if Mr Jonathan has his way, this could rise to $0.74, in a country where most people live on less than $2 a day.

Successive governments have tried and failed to deregulate fuel imports. Mr Jonathan may show more backbone. But despite promises of safety nets to protect the poor and the need for new infrastructure and for improvements to the ragged electricity supply, Nigerians fear that the money saved by cutting fuel subsidies will be swallowed up by political fat cats.

The fuel subsidy drains cash from the state. The government has revealed that the chief beneficiaries are the 100-odd companies owned by Nigeria’s richest people, including Oando, the country’s largest indigenous private oil-and-gas firm, which alone netted $1.4 billion. The subsidies also highlight the tortuous ways of the Nigerian National Petroleum Corporation (NNPC), which has deliberately overestimated the cost of importing refined products and then pockets what is left over. The NNPC admitted in parliament that it could not account for 65,000 b/d of crude oil it should be refining, worth $7m a day at today’s price.

The government’s chronic failure to build working refineries has benefited middlemen. Imported petrol is siphoned off by third parties who take advantage of the cheap fuel in Nigeria, then smuggle it over the border to neighbouring countries where unsubsidised fuel costs three times Nigeria’s price. Billions of dollars earmarked for renovating refineries has vanished over the years. The country’s four refineries barely function: fine for those with political connections who make fortunes from imported fuel. If Mr Jonathan stops the scam yet keeps ordinary people calm, it will be a triumph.