Photograph by Pius Utomi Ekpei, AFP/Getty Images
Published March 7, 2012
The fierce protests over fuel prices that rocked Nigeria in January have subsided, but the effects of a rollback in subsidies are still keenly felt, at the gas pump and beyond.
President Goodluck Jonathan delivered an unwelcome New Year's Day surprise to the public when he announced the elimination of Nigeria's fuel subsidy, which kept gas prices artificially low, at about $1.50 per gallon (40 cents per liter). In short order, fuel prices more than doubled.
"When they removed the subsidy, I immediately had problems filling my tank," said Bola Thomas-Davis, a pharmaceutical sales representative in metropolitan Lagos (map). "My coverage area is really wide; I have to visit places that are all over. Before, I never had to think about gas, but now, I haven't been to the farthest outposts in two months."
The price hike sparked protests and a general labor strike in a country already reeling from Christmas Day church bombings perpetrated by Boko Haram, an Islamist sect based in Nigeria's majority-Muslim north. After several days of unrest, President Jonathan partially restored the subsidy, which eased the price hike but left prices still about 50 percent higher than they had been before.
Church-bomb attacks have continued, and so has the economic strife. For Thomas-Davis, and for the remote villagers who depend on his deliveries of antibiotics and anti-malaria drugs, the rise in fuel costs is a crippling development.
"The company gives me 6,000 naira ($38) each month for fuel," said Thomas-Davis, who makes his deliveries from the Lekki area of Lagos on a motorized tricycle. "1,200 naira ($8) fills the tank, and if you visit 16 clients a day, you'll need to fill the tank the next day."
Now that his fuel allowance is gone within the first week of the month, Thomas-Davis must dip into his 300,000 naira ($1,900)/month salary to pay for fuel to make his deliveries to areas up to 80 kilometers (50 miles) away.
"The problem starts at filling your tank, but it doesn't end there. Fuel affects everything you can think of in one's life," he said.
Subsidies: Popular, but Inefficient
Though they are meant to shield a nation's poorest people from price volatility, fossil-fuel subsidies often fail to meet that objective.
"Only 8 percent of the $409 billion spent on fossil-fuel subsidies in 2010 was distributed to the poorest 20 percent of the population," said Fatih Birol, chief economist at the International Energy Agency (IEA). "[This] demonstrates that they are an inefficient means of assisting the poor."
In Nigeria, much of the subsidized gasoline generates profit for smugglers, who sell it at a higher price to neighboring countries. A legislative committee investigating the subsidy program noted that of the 59 million liters (16 million gallons) per day Nigeria imported, only 35 million liters (9 million gallons) were consumed within the country.
Nigeria's fuel subsidy cost its economy $8 billion in 2011, more than double its estimate for 2010, according to the IEA. President Jonathan said the money saved by cutting subsidies would be used to develop the country's nascent infrastructure.
But in a country where a majority of 170 million residents live on less than $2 per day, the immediate hardship of price hikes eclipsed any potential long-term benefits.
"The pure economics argues for removing subsidies," said Darren Kew, an expert on Nigerian policy and executive director of the Center for Peace, Democracy, and Development at the University of Massachusetts Boston. "But it's flying in the face of the reality on the ground."
The International Monetary Fund has also signaled its support for Nigeria's subsidy reform, and the fact that Jonathan's announcement occurred just days after a meeting with IMF chief Christine Lagarde led to speculation about the IMF's role in the decision.
"There was certainly a foreign policy motivation at work behind the elimination of the Nigerian subsidy," Kew said. "The IMF is seen as an important potential partner for a number of reasons. I don't know all the motivations, but one was to demonstrate to the IMF that, 'Indeed, we are going to follow through.' "
Breaking Tough News
It could be argued that Nigeria represents a textbook case of what not to do when rolling back fuel subsidies. Though the government had been holding consultations on the matter before the end of 2011, "most people consulted didn't support the idea," according to Chinedu Nwagu of the Nigeria-based human rights organization CLEEN Foundation. "The government was to continue the broad consultations. It was thus a big surprise and an unwelcome new year's gift when the government announced the subsidy removal on New Year's Day."
"What Nigeria really had was a public relations problem," said Rolake Akinkugbe, an oil and gas specialist at pan-African Ecobank and West Africa expert. "There was no constructive dialogue about the government's plan and there was no substantive communication about timelines. The real issue is good governance."
In addition to the abruptness of the announcement, the Nigerian government had not established any means of helping those hardest hit by the price increases. Nigeria's Federal Ministry of Finance did create the Subsidy Reinvestment and Empowerment (SURE) program, which promised safety net measures including health services for women and children, public works and youth employment programs, urban mass transit schemes, and vocational training—but the programs were not in place in January, and are reportedly being reevaluated. (The IMF did note the need for these "social safeguards" in its consultation with Nigeria.)
"Truth is, the government has built for itself a reputation of failed promises, and almost two months after the removal of the subsidy, little or nothing has been done," Nwagu said in February.
Nigeria is certainly not alone in its predicament; other nations have faced major resistance to subsidy rollbacks. Bolivia suffered a similar crisis in 2010. But other countries have made a smoother transition to deregulation. Since 2003, Gabon, Cameroon, Central African Republic, Mali, Burkina Faso, Ghana, Uganda, Mozambique, Madagascar, and Senegal have all removed or reduced their subsidies without the violent protests seen in Nigeria. Each of those countries had plans in place long before the subsidies were cut to mitigate the economic effects of the change.
For example, when Ghana increased domestic fuel prices by 50 percent in 2005, the government simultaneously eliminated fees for elementary and middle school, and made extra funds available for primary health care programs in the poorest areas. Also, mass transit systems in urban areas were expanded and expedited, according to research by Sanjeev Gupta of the International Monetary Fund. Gabon and Mozambique introduced cash payments to the poor and provided free water and electricity to the poorest households, among other measures.
(Related: "New Oil, and a Huge Challenge, for Ghana")
Just before Nigeria's subsidy removal, Ghana announced a new hike in fuel prices, albeit a more modest one of about 15 percent.
"People talked about it for a little bit, but nothing [violent] happened," said Nii-Shippi Quaynor, a financial analyst who lives in Accra, Ghana. "We've always paid higher fuel prices than Nigerians, so there was talk, but nothing happened," he said.
Still, Ghana's government proposed to ease the fuel price hike when labor unions threatened a strike, a reminder that such moves remain politically treacherous even when the public response is mild.
"The drastic reaction we witnessed in Nigeria after the price increases do not justify the indefinite maintenance of subsidies," Birol said. "They highlight that reforms need to be implemented gradually and include targeted assistance for the poor."
The United Nations Secretary-General's High-level Panel on Global Sustainability earlier this year recommended a global phase-down of fossil fuel subsidies. They are "not merely expensive; they also distort trade markets, harm the environment, increase greenhouse gas emissions and slow poverty alleviation," the panel said. The cause is certain to be taken up in June at the UN Conference on Sustainable Development in Brazil, known as Rio+20, marking 20 years since the original Earth Summit where world leaders pledged action on environment and development.
The panel affirmed, however, that there are steps that governments need to take to cushion the blow when eliminating subsidies.
"Subsidies that the poor rely on least should be reduced first, accompanied by targeted support for the poorest and most vulnerable people where needed," the panel said.
"Removing subsidies is particularly challenging in oil-exporting countries such as Nigeria," the IEA's Birol said. "Resource wealth generates a public sense of entitlement to low energy prices."
But Nigeria's wealth of oil is accompanied by a dearth of domestic refining capacity, which forces the country to import most of its fuel. With the subsidy in place, that situation was unlikely to change.
"Subsidies on petroleum products and price controls have historically been a major disincentive to would-be refinery investors," said Ecobank's Akinkugbe. "A refinery's profitability hinges on its margins; that is, its ability to sell its finished products at a higher price than it bought its crude feedstock. Market-determined prices are essential for investment," she said.
Since the subsidy elimination, the government has signed new contracts meant to boost the capacity of its four refineries to at least 90 percent by 2013.
Long Road Ahead
"Getting rid of fossil-fuel subsidies is a triple-win solution," argued the IEA's Birol. "It enhances energy security, reduces emissions of greenhouse gases and air pollution, and brings economic benefits."
While the logic of subsidy reform may be sound, the Nigerian government has a challenge ahead in helping its people through the transition.
"Since they removed the subsidy, public transport fare has been hiked, pure water has tripled; jeans, shoes, food, rice, beans, yam, all," said Thomas-Davis, the pharmaceutical rep. "There are people who don't work and they come to you because they haven't eaten since morning. You want to do some things for yourself, and by the time you've done five of ten things on your list, your money is gone. Things were already tough, and this subsidy thing doesn't help."
This story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.
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