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Lagarde’s subsidy principle, govt’s laggards and miscellanies

By Sonny Atumah

The Managing Director of the International Monetary Fund, IMF, Ms Christine Lagarde has come again, and from a familiar and turfy terrain, the strictures of subsidy in Nigeria. At the IMF/World Bank Group Spring Meetings in Washington DC last week, Lagarde explained why the Fund is insisting on fuel subsidy removal in Nigeria.

Lagarde’s subsidy principle, govt’s laggards and miscellanies

In her strong opinion, the huge amount spent on subsidy would have freed resources to enable the government to spend more on infrastructure and build roads, hospitals and schools, for the people. Her footnote for Nigeria was that with the low revenue mobilisation that exists in the country in terms of tax to GDP, Nigeria is amongst the lowest.

On a global note, Lagarde looked at the numbers from 2015, and asserted that it is no less than about US$5.2 trillion that are spent on global fuel subsidies annually. Ordinarily Lagarde offered advices that could caution managers of our political economy.

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The public finance management of successful administrations has put us on a low pedestal that the issue of subsidies keeps reverberating. But the argument of subsidizing the rich with fleet of vehicles falls flat because progressive taxation takes care of it.

Are Largarge’s pills to be swallowed now? It was the same probable economic theorems from axioms to jettison subsidies four years ago. It was the same story that money saved from subsidy removal could be channelled into infrastructures for the good of Nigerians. They were in Nigeria then to drum into President Muhammadu Buhari who had just reincarnated politically that Nigeria was on a cliffhanger and in no time may be in an economic emergency.

The experts came with diagnostics that the economy would collapse unless Nigeria took the full dosage of their prescriptions. How tenable the advices from these institutions are would be for Nigerians as deciders now. Call it logic; subsidy is for the good of the people of Nigeria who do not have any public good.

Subsidy is a global phenomenon with the largest economies as the biggest subsidizers. Respective global economic powers whether in the G7, G20, OECD, EU have tacitly taken to fossil fuels subsidies for their citizens even when their global appeals have been for abandonment in the name of global warming and climate change.

The more developed countries have been more inclined to production subsidies, while the less developed countries are stock with consumption subsidies. Our Bretton Woods experts would do us more well if they drum into our leaders that the greater good is to add value to crude by refining locally petroleum products  we import. That is how to tackle issues that have a high potential to boost not only revenue but also growth and inclusion.

Lagarde and her team visited President Muhammadu Buhari with what appeared like pills in January 2016. She advised Nigeria to devalue her currency, increase value added tax, withdraw petroleum subsidy etc.  Buhari rejected Lagarde’s advice to devalue the currency and withdraw subsidy. But her team worked with the Nigerian fiscal and monetary authorities to address the economic challenges occasioned by low oil prices of the period.

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President Buhari’s government eventually succumbed and withdrew subsidy to fund the 2016 budget. It was bitter for Nigerians that woke up on May 11, 2016 to discover that the Minister of State for Petroleum Resources who was also the Group Managing Director and Chairman of NNPC, Dr. Ibe Kachikwu had made the greatest leap in petroleum products pricing increments from N86 to N145. Kachikwu called it price modulation and avoided using the phrase subsidy removal.  But in a modulated regime, a change in the price of crude translates to an adjustment in the pump price (up or down). In context price modulation is where prices are determined by the dictates of the market. Nigeria’s imported petroleum price modulation introduced by Kachikwu that increased petrol was when international crude oil prices were falling with China, India, Japan and South Korea, biggest oil users as beneficiaries enjoying an overflow of oil.

It raised additional revenue for government, but the panicky policy coupled with the floated exchange rate regime that was introduced almost simultaneously created a greater socio-economic problem of acute inflation for the people.

The CBN in June 2016, devalued the currency by floating the currency with the flexible exchange rate between N300 and N350 an adjustment difference between 52.28 and 77.66 percent respectively. The subsidy withdrawal via price modulation became an oppressive burden for Nigerians because it did not follow the standard principles.

This time Kachikwu is under cover that he would advise President Buhari on subsidy. He must eat the humble pie and admit failure as he now believes the reality that Nigeria has a unique situation. This was a Minister who on May 22, 2017, in a BBC World programme, HardTalk anchored by Stephen Sackur vowed to resign if Nigeria continued to import fuel by 2019. Kachikwu promised to deliver on the rehabilitation of the refineries, noting that he was committed to delivering a future for oil in Nigeria. Like President Buhari would say: Kachikwu where is the refinery?

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