Poor, not rich, benefit from fuel subsidy, economists counter FG
• Records show how previous price hikes have worsened inflation, unemployment
• Fuel subsidy removal endangers survival of million households
Available statistics from economists indicate that the planned removal of the Premium Motor Spirit (PMS) subsidy will put the survival of millions of households in the balance.
Over the years, the Federal Government has repeatedly argued that the social scheme benefits a few wealthy marketers, who have cashed in on the weak distribution monitoring system to rip the government off at the expense of the common good, alongside the super rich with fleet of cars in their garages.
Government’s regular refrain has been that wealthy Nigerians, not the poor, benefit from fuel subsidy. This was recently reiterated by the Minister of State for Budget and National Planning, Clem Agba.
He said: “Some will say if you take out fuel subsidies, ordinary Nigerians will suffer; how will the ordinary man suffer? Is it in terms of food? Vehicles that are used for moving food are heavy-duty vehicles. They don’t use PMS; they use diesel and that has since been deregulated. Those that we are actually subsidising are the very rich.”
But economists have suggested that an increase in the cost of energy triggers inflation, weakens purchasing power and fuels poverty.
A regression analysis on data dating back to the 1970s validates the argument, indicating a strong positive correlation between PMS price and inflation.
According to the data trend, Nigeria experienced stable or negative inflation in periods when the PMS price was held constant. This suggests that the likely increase in the current price could hit millions of Nigerians, who are barely surviving, below the belt and widen the inequality gap.
In the data analysis, extremely high PMS prices were also marked with extraordinary fast inflation rates. For instance, between 1986 and 1993 when the official pump price was hiked from 20 kobo to N5, inflation also increased from 5.7 per cent to 57.2 per cent.
The 2,400 per cent increase in the price of PMS in that seven-year period triggered (alongside other factors) a 51.5 percentage point jump in the inflation rate. The economy witnessed the fastest inflation and the steepest rise in PMS pump price then.
In one fell swoop on November 8, 1993, the interim administration of Chief Ernest Shonekan increased the price from 70 kobo to N5 (about 614 per cent). Prices of essential commodities responded, leaping to an all-time high of 72.8 per cent yearly inflation rate after a year.
All through history, the data followed a fairly similar trend. The inflation rate had moderated from 13.7 per cent in 2010 to 10.8 per cent, translating to a year-on-year change of -3.7 per cent until Goodluck Jonathan tinkered with the price of PMS, which had remained at N65 per litre since 2007 when late Umaru Musa Yar’Adua reduced the going price immediately after Olusegun Obasanjo left.
The general price crisis that followed the N85 per litre Jonathan settled for after a laborious negotiation with the organised labour raised the headline inflation in 2012 by 1.38 per cent.
From 2012 to 2016, the steepest annual inflation growth was 0.95 per cent. In 2013 and 2014, the inflation change was negative. But the 67 per cent pump price jump, which saw a litre selling for N145, altered the inflation figure in leap and bound. In that same year, inflation jumped from a single digit to an average of 15.7 per cent.
From 1973 when Gen. Yakubu Gowon’s regime moved pump price from 6 kobo to 8.45 kobo, till date, PMS price and inflation curves tend to move in the same direction and at similar speed.
A rising inflation has also been associated with escalating unemployment. As the cost of PMS and inflation growth increased in 2012, the number of unemployed Nigerians also increased from six per cent in 2011 to 10.6 per cent. A similar trend played out from 2015 transiting to 2016, pump price increased by about 70 per cent in 2016 just as inflation growth escalated by 74 per cent. Expectedly, unemployment followed with about 49 per cent increase.
Similarly, the past year has witnessed a consistent increase in the cost of PMS and other energy sources. Inflation and unemployment rate have remained extremely high with the former hitting 18.17 per cent before a gradual retreat that saw it moderating to 17.75 per cent in June.
The country’s headline inflation rate had accelerated consistently in the past three years; so is the number of people that have lost jobs or are unable to secure employment. The rate of unemployment in the country, which is currently facing its worst labour market crisis, was 33.3 per cent at the end of last year.
In wage relation modeling, energy is treated as a distinct input manufacturers consider with a relatively high degree of attention; it has huge impact on a firm’s operation and efficiency. In Nigeria, historically, when the cost of PMS and other petroleum products coupled with inflation increases, the pressure on companies rises astronomically. In extreme cases, this has led to the closure of some.
According to the Manufacturers Association of Nigeria (MAN), 820 manufacturing companies closed shops in the first nine years of the current democratic dispensation, throwing thousands of people into the labour market. The body linked the closure to the high cost of energy, inflation and other factors responsible for the high cost of operation.
Former director-general of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, blamed the rising unemployment on the high cost of energy, fast inflation rate among other factors, which he said, caused the inefficiency of local businesses. He said the challenges must be combated to address rising unemployment.
Some economists have predicted that the planned subsidy removal would ultimately worsen the inflation rate. The Head, Retail Investment, Chapel Hill Denham, Mr. Ayodeji Ebo, in an earlier interview with The Guardian, said the removal of social safety nets such as electricity and PMS subsidy would increase inflation and complicate the poverty rate. He said many Nigerians’ purchasing power would further shrink even as they would spend more on energy bills.
Already, Nigeria’s poverty rate and dimensions are extremely high and complicated. The most recent data by the National Bureau of Statistics (NBS) predated the COVID-19 pandemic figures during which declining incomes, low purchasing power and job losses, according to the World Bank, have pushed more people below the poverty line.
According to the 2019 NBS data, 40.1 per cent of Nigerians (or four out of every 10 people) live below the country’s poverty line of N137,430 per year. In terms of headcount, 83 million Nigerians live below the poverty line.
Earlier in the year, the World Bank predicted that the economic impacts of COVID-19 would push the rate of extremely poor Nigerians to 45.2 per cent before the end of next year.
“The macro-micro simulations show that more than 10 million Nigerians could be pushed into poverty by the economic effects of the COVID-19 crisis alone. Were the crisis not to have hit (a counterfactual scenario), the poverty headcount rate — as per the national poverty line — would remain virtually unchanged at a little over 40 per cent, although the number of poor people would be set to rise from 82.9 million in 2019 to 90 million in 2022 due to natural population growth.
“Yet with the economic effects of the COVID-19 crisis, the national poverty rate is now forecast to jump from 40.1 per cent in 2019 to 45.2 per cent in 2022, implying that 100.9 million Nigerians will be living in poverty by 2022. Taking the difference between these two scenarios shows that the COVID-19 crisis alone is forecast to drive an additional 10.9 million people into poverty by 2022,” the World Bank noted.
If the depth of the poverty rate is scary, the distribution is even more frightening. The poverty headcount rate in Sokoto, Taraba and Jigawa states, which topped the ranking, was above 87 per cent. On the bright side, the poverty rate in Lagos, Delta and Osun states was between 4.5 and 8.5 per cent.
The poverty gap was also extremely wider in states in the north than in the south, underscoring the unevenness of economic prosperity.
Godwin Owoh, a professor of applied economics, said the gap between the poor and rich would continue to widen when government pulls the subsidy rug, as struggling households would spend a higher percentage of their incomes on essential consumptions.
A subsidy is considered as a transfer payment, which aims at redistributing income and wealth, thus reducing the gap between the rich and the poor. Each time the social protection scheme is removed, the income gap between the poor and rich widens.
But critics, including the International Monetary Fund (IMF), dismiss subsidies, especially on consumption, on the ground that it is inefficient in resource allocation. Moves by successive administrations to remove PMS subsidy were based on this resource allocation efficiency premise, arguing that part of the subsidy recovery would be channeled to refurbishing the refineries. The government, however, has never kept to its promise.
Economists, including Owoh and Ebo, said low-income earners, civil servants inclusive, students, widows and the unemployed who would not be able to afford the higher transportation and other essential commodity price hikes, would suffer subsidy removal more than the rich.
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