Dr. Ayo Teriba
An economist, Dr. Ayo Teriba, tells BAYO AKINLOYEthat the Federal Government should not talk about fuel subsidy removal when the refineries have not been fixed
Recently, President Muhammadu Buhari’s transition committee recommended that the fuel subsidy programme should be ended. Do you subscribe to removal of the subsidy?
We don’t know how much is the subsidy but we have people who are arguing for its removal. We need to enlighten ourselves in this country. There should be a proper understanding of what constitutes a subsidy. The Federal Government runs the risk of removing subsidy today and coming back a few weeks later saying it doesn’t want to remove it again. People need to focus more on crude oil refining in this country instead of focusing too much on subsidy. Otherwise, we will just be chasing shadows. It is the inefficiency of the government; why should the government tax people for its own inefficiency? Until one can gauge how much the subsidy is, one’s basis for asking for its removal is weak. The government will be chasing shadows if it decides to remove fuel subsidy. Government should stop paying out subsidy; in other words, fuel subsidy should disappear from its budget completely. The Federal Government should stop paying out subsidy (to oil marketers) and wait to see what the market price will be in the absence of government’s pay out; that is clear communication. And, I am on the side of those who argue that pump prices should be in reference to domestic refining cost and not according to the imported stock. We will have cheap stock when we have our refineries functioning.
How will you define fuel subsidy?
Subsidy is the opposite of tax. Take for instance, if the government is adding to the price of any item then it is called value added tax or sales tax or an indirect tax. A subsidy on any product means that the buyer is paying less than the market price and the government is paying the balance. For oil, where it gets complicated is that we have four refineries that I believe have the capacity to produce in excess of what we need domestically. Therefore, if our refineries should work, the pump price of petroleum products (produced and refined locally) will be much lower than pump price of imported petroleum products. The refineries are owned by the government and they don’t work. The question is: why did the government abandon the local refineries that can be made to work and why did it go ahead to license companies to bring in refined crude that was produced here? And the government wants to sell 100 per cent of its products and wants to price 100 per cent of his stock based on imported prices that include transportation costs, incurring unnecessary export and import costs. The Federal Government is unnecessarily taxing the public for the government’s inefficiency –it’s a tax and not a subsidy –because if we produce and refine oil locally the price will be much lower than the present pump price. That’s the argument of some.
What should be done?
If the Federal Government can tackle the root causes of the problem; let our crude be locally refined then we won’t be talking about subsidy. The only discourse that will be left on the table will be the implied price of the locally refined fuel; how much tax do we want to add? Because, in the interest of the country we have to include the implied cost; we don’t live in isolation of other countries. We are bordered by 15 other West African countries who are net importers of refined products. If the fuel price is too low in Nigeria smuggling will resume. We used to have that problem – we are talking about appropriate pricing and not removal of subsidy of petroleum products to discourage smuggling. At that price, appropriate pricing means that we need to price the petroleum products high enough to ensure that it is well distributed in Nigeria. We can’t sell fuel at N40-something per litre as suggested by Prof. Tam David-West.
Why?
If we refine our stock locally, we can’t say we will now sell for N40 when it is being bought at a higher price in neighbouring countries. We still have to price it in such a way that we do not give incentive to smuggling of our oil into other African countries. Let’s say we are selling for N40 and the neighbouring country’s pump price is N80, fuel distribution will be diverted there, creating scarcity at home. It may be in our own interest to charge N70 as pump price. We should refine locally and then we should price and add a tax then Nigerians can debate what government will do with the proceeds of such tax similar to what was done during the Gen. Sani Abacha regime when the Petroleum Trust Fund was created. The Nigerian public will determine the best way the money can be reinvested into the system. That government should stop paying out subsidy is a different thing from saying that subsidy should be removed. People are being tried for receiving billions of Naira as subsidy payment from the government but they are not known to have imported any product. That the Federal Government is paying huge sums of money in subsidy does not mean that the product is subsidised; because there is a lot of fraud involved in it.
What will you say is responsible for the moribund state of the nation’s refineries?
The problem of local refineries boils down to the inefficiency of the government. Why does the government want to tax the populace for its own inefficiency? One can say that government should stop paying subsidy out of government’s budget, then wait and see how much the product will be at the pump. Removing subsidy is like entering a controversial zone because it can be argued because there is no subsidy. The concept of subsidy is not a transparent one. It’s going to be very difficult for anyone to define what subsidy is. Consequently, it’s going to be difficult for anyone to agree on how much should be removed. Therefore, we do not need to dabble into the area of trying to ascertain whether there is fuel subsidy or there is no fuel subsidy. The government should let market forces determine the pump prices depending on where the stock is bought. If we are buying refined stock locally, we can buy it for this amount today and buy it for that amount tomorrow. That’s the kind of system the government should run.
What do you think at this point should be the priority of the Federal Government?
I think that just as subsidy itself is like a mirage, the debate whether the Federal Government should remove subsidy or not is chasing shadows. What Nigerians need to address is: why Nigeria as a major exporter of crude oil — we are the sixth largest exporter of crude oil in the world — have to import refined crude? It’s a big failure for the country. It’s a big failure on the part of all involved; the government and the populace. Nigeria needs to stop importing refined crude products. Nigeria needs to at least, refine its own component that’s required for domestic consumption. It would be better if we can refine all our crude so that we consume all we need and export refined products rather than crude oil. But it’s a shame that we continue to import refined products. And instead of addressing that big failure on the part of the country and everyone involved we are discussing removing subsidy on imported refined products. That’s just my biggest reservation about this discussion (to remove fuel subsidy).
Countries smaller than our country, refine their crude and export it easily. One of these countries produces about 700, 000 barrels of crude oil per day and refines all of it. And that’s roughly what the country uses for domestic consumption. Nigeria produces three times the country’s output. We can’t boast of any domestic production and we wake up every two to three years to debate whether we should have subsidy or not for crude. It’s time we woke up to start refining our own crude oil. If we refine our crude locally and we are debating now on subsidy, that will be a healthy discussion. But to continue to import what we could refine locally and then discuss whether to remove subsidy or not; whether to remove it again or not to remove it again, is like chasing shadows. It’s a waste of everybody’s time –that’s my view.
Source: punch
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