A World Bank economist thinks Nigeria’s fuel subsidy makes no economic sense

Last week, Nigeria’s parliament approved a supplementary spending plan for overdue fuel subsidy payments amounting to $2.6 billion (12 percent of the 2015 budget) in a bid to end fuel scarcity in the country. Such payment will be made again next year at the expense of several developmental needs. The World Bank Group says this is not wise economics. Nigeria has expended $35 billion in four years.

“The costs of maintaining […] Nigeria’s fuel subsidy is higher than the benefits,” said John Litwack, Lead Economist of the World Bank at the presentation of the World Bank’s third Nigeria Economic Report in Abuja, the country’s capital, yesterday.

While he admitted that the bank was in no position to influence Nigeria’s decision on the issue of fuel subsidy, it would point out the costs and benefits, and the lender thinks the former surpasses the latter.

Litwack notes that Nigeria has the opportunity to build a foundation that could support growth and rapid development over the medium and longer term, but this depends largely on whether it reconsiders the sustainability of the subsidy regime.

Mr Buhari’s Petroleum Minister Emmanuel Kachikwu agrees with the World Bank, describing the fuel subsidy regime as unsustainable. The country’s former central bank governor who is now an Emir in Kano, northern Nigeria, Sanusi Lamido Sanusi, had also in October called on the government to remove subsidy on fuel to save the economy.

“Does it make sense at this time for the government to continue paying petroleum subsidy? It does not, and we must say it.

“When you need fiscal consolidation, when you cannot borrow, when you are not earning because oil prices are down, you have to shut down, especially those expense lines that have been known historically to be the sights of those seeking rent. This fuel subsidy has to go,” Sanusi said.

Nigeria’s former Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, in an article published on Financial Times, also urged the government to cut subsidy to benefit both the rich and poor and lift some burden off the country’s economy. He dismissed fears that removal of subsidy would hurt the poor, arguing that “in reality, the subsidies benefit high-income populations and industry much more than low-income households.

Mrs Okonjo-Iweala recommends redirecting money saved from subsidy, if stopped, into investments that go directly to the poor Nigerians who are the focus of the subsidy in the first place.

But President Muhammadu Buhari had earlier in the year promised not to stop the subsidy regime, at least not now. Speaking after receiving a briefing from some stakeholders in Nigeria’s oil industry, the president said: “I have received many literature on the need to remove subsidies, but much of it has no depth.

“When you touch the price of petroleum products, that has the effect of triggering price rises on transportation, food and rents. That is for those who earn salaries, but there are many who are jobless and will be affected by it,” he said.

However, World Bank Group’s Litwack insists that subsidy related fuel shortages such as the one Nigeria is currently experiencing disrupts economic activities and imposes welfare costs on households. He also noted that uncertainty about fuel subsidy in the country had strongly discouraged investment in domestic oil refining. The cost of subsidizing fuel price has also taken a huge toll on the country’s finance, he notes. Nigeria’s foreign reserves, last week fell below $30 billion, the lowest since July.