If Nigeria loves the poor, it must remove fuel subsidies
With the end of another cycle of fuel scarcity, Nigeria has missed a big chance
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Nigeria suspends its e-valuation for a month
For weeks, I’ve been treated to tweets and forwarded Whatsapp messages warning readers in the manner of a doomsday prophecy. The messages and tweets were loose variations of this: “if you want to buy a car in Nigeria, buy it now because custom duty is about to increase and prices will go up.”
Those tweets were in response to CBN’s introduction of the price verification mechanism (PVM) which moved the process of valuing cars from manual to digital. Basically, the PVM obtained base prices for cars and then set customs duties for those cars based on the same prices. On the face of it, it’s not a bad policy, as the aim was to ensure that the FG didn’t keep losing money to customs officers who collect bribes to help people avoid paying the stated duty on cars.
Yet, something which plagued the CBN and the Nigerian customs affected the PVM: poor communication of the policy effects for freight forwarders. So instead of a policy that made valuing cars and paying duty more straightforward, we had utter confusion. It was followed by a 4-day strike and week-long demonstrations that crippled activities at Lagos ports. In a newsletter published on February 25, I shared that one fright forwarder told me, “we’re just fighting for simplicity.”
On Friday, the Nigerian customs service announced the suspension of the e-valuation policy for one month to clear the backlog that the demonstrations and strikes created at the ports. It is worth stating that this is the second attempt at introducing a clearer way of valuing cars for customs agents. While the policy has some problems such as attempts at price-fixing for importers and exporters, there’s some merit to a simpler system for customs agents to obtain and pay valuation on imported cars.
While that is in limbo, let’s talk about something that has left Nigeria in limbo for the better part of the last two months.
As fuel scarcity eases, Nigeria misses another chance to end petrol subsidy
For the past seven weeks, Nigerians have had to queue for hours to buy petrol. The timing could not have been worse, with typically poor electricity supply getting worse with problems to Nigeria’s power plants.
The fuel scarcity started with reports that the NNPC had brought in contaminated petrol, but it got really complex from thereon. At the height of the fuel scarcity, many fuel stations sold petrol for N220/litre instead of the government-controlled price of N165/litre. Amid all of this, the price of crude oil crossed $100, meaning that Nigeria, which remains the only country in the world to subsidise petrol, would spend even more on subsidies.
The fuel scarcity and attendant artificial hike in prices would have been the perfect time to yank off the fuel subsidy policy, which will cost Nigeria around N3 trillion this year alone. In contrast, Nigeria’s budget for the healthcare sector in 2021 was N682.13 billion, surprising for a country whose healthcare sector’s inefficiencies were laid bare by the Covid-19 pandemic. Yet, no one can really be surprised, removing fuel subsidies is something that has proved impossible for successive governments.
The major argument against the removal of petrol subsidies is that it would worsen inflation and hardship for the majority of poor Nigerians. But this claim is dubious; if Nigeria really cared about its poor, it would instead have a subsidy on kerosene (N437.211/litre), which is used by most of Nigeria’s low earning households.
A recent paper by the IMF showed that removing petrol subsidies in Nigeria would in fact reduce income inequality. Per the paper published in February 2022: “A fuel price increase to cost-recovery level would reduce households’ purchasing power, which calls for a distributional analysis of the impact by income groups, especially for poor households. Richer households tend to spend a larger share of their income on PMS than poorer households, while the share of kerosene expenditure is lower in richer households (above 80th income percentile)."…Empirical studies have also supported that fuel subsidy is inequitable, finding that it is an extremely costly approach to helping the poor”
The IMF’s argument isn’t that removal of fuel subsidies would not affect the poor at all. Instead, it contends that a fraction of the cost savings made from removing these subsidies can be used to fund conditional cash transfers to the most vulnerable groups. It would also leave Nigeria, which is on the brink of a fiscal crisis, with much-needed revenue.
That’s about it for this week. See you next Friday! If you’ve got thoughts and opinions, feel free to write me: firstname.lastname@example.org