Thinking Again


Dedicated to Nigeria's socio-political issues




October 3, 2007 - December 2, 2007



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Thinking Again: Fuel Price Deregulation




Bala Funsho


A  lot  has  been  said  about  the government's recent moves to deregulate fuel
prices.   This  article  intends  to  inform  this  discussion  by presenting an
objective  and  fact  based  look  at  some  of  the commonly heard views on the

"Fuel prices are not (really) subsidised"

Wrong.   Current  world  market prices mean that it costs about N40 per litre to
purchase  petrol  abroad,  ship it into Nigeria, distribute it in coastal cities
such  as  Lagos  and  sell  it  at  a  reasonable  mark-up  for distributors and
retailers.   It  costs  even  more to ship it further inland.  If it is mandated
that  petrol  be  sold  at  N26  per  litre, as it was when the current round of
deregulation  started,  this  represents  a  clear  loss (or subsidy) of N24 per
litre.The  government  was  covering  this difference and was therefore paying a
heavy  price  to maintain fuel prices at this level.  This cost was estimated to
be  about  US$1.5.billion  in 2002, or approximately 8% of Nigeria's budget ($18
Billion),  or   almost  twice  more than was spent on health care for Nigerians.
This  was  clearly  not sustainable in the long term.  Even the fuel produced in
Nigerian  owned  refineries  can be regarded as subsidized, although the case is
more  subtle.   Essentially  it  revolves around the fact that by selling petrol
below  the  cost price, the governments is forfeiting additional revenue that it
could  use  to  support  its budget.  In fact, even if all Nigeria's petrol were
produced  in  local refineries, the effect on the government budget would be the
same,   although it would be less obvious as it would occur in the form of lower
revenues,  rather than cash costs that would need to be paid out to suppliers of

"Subsidised fuel prices benefit the poor"

Not really.  Subsidised fuel prices benefit some people, but not necessarily the
poor.  Who  gains  more  from  cheaper fuel, the rich businessman with three big
petrol  guzzling  cars or the poor farmer who has to walk to his farm every day?
The  fact is that cheap fuel benefits richer, more urbanized people more than it
benefits poorer, more rural people (15% of urban Nigerians own cars, compared to
only  4.5%  of  rural  Nigerians).   It  is  true  that urban workers do benefit
somewhat  from  lower  bus  fares  and other ancillary transportation costs (and
since  the  labour  unions  tend to represent those who tend to be urbanized and
have  jobs,  this  could  explain  why they were so opposed to this deregulation
process).   But  what  of  those  who  are unemployed or those who live in rural
areas.  Even for the average urban worker, how much more would they benefit from
having  well paid teachers for their children or a better functioning healthcare
system  than  getting  a small subsidy on their daily bus fare.  This highlights
one  major missing component of most analyses ? what are the alternative uses of
the  always  limited resources.  The $1.5 billion mentioned above could be spent
on  improving  health  or  education status of poor Nigerians.  These would also
have  a  much more direct effect on the often neglected rural poor ? who tend to
be  much  worse  off  than the city dwellers.  For example, only 50% of Nigerian
children born in the poorest half of Nigerian households are immunized, compared
to  almost 90% who are immunized in the richest half of households. Only a third
of  the  poorest  pregnant  Nigerian  women  have  access to a medically trained
person, compared to 90% of the richest.

"Subsidised  fuel  is  the  only  way  the  average  Nigerian sees benefits from
Nigeria's oil endowments"

Probably.   This is probably the strongest argument in favour of continuing with
regulation.    Virtually   all  past  Nigerian  governments  have  succeeded  in
squandering  Nigeria's  oil wealth.  Since, the 1970s, over a hundred billion US
dollars  of income has accrued to Nigeria from its oil resources.  Despite this,
the  country  is worse off that it was 25 years ago. While the income per capita
in  Botswana  (another  country with a mineral windfall) increased seven fold in
that  time  period, that of Nigeria declined by at least 30% in real terms.  The
reasons  for  this  are  no  secret:  corruption  and mismanagement.  Given this
history,  it is understandable that Nigerians have come to see cheap fuel as the
one benefit of the oil resources that they actually see.  However, this is a bit
like treating a malaria patient by putting him in a bath of ice water ? treating
the  symptoms  rather than the disease itself. If Nigerians spent the energy and
resources  fighting  corruption  and mismanagement in the same way in which they
have  fought  against  deregulation then there would be real improvements in the
Nigerian situation.

Nigeria  has  some  of  the lowest human development indicators in the world. In
terms  of child survival and maternal health, we are in the company of countries
like  Rwanda, Sierra Leone and Liberia that are in, or just emerging from, civil
wars or other similar domestic conflicts. One in every ten Nigerian infants born
dies  before  the  age  of 1, compared to one in every 20 Ghanaian infants. This
does  not  take into account, the new scrouge of HIV/AIDS. A health system, such
as ours, which cannot cope with basic diseases of infancy and has been unable to
eradicate  polio  (Nigeria  is  now one of  less than 20 countries in the entire
world  where  polio is still present), should be truly fearful of having to cope
with HIV/AIDS.

Of  the  85 million Nigerians who live in urban/semi-urban areas, less than half
have regular access to water and modern sanitation.  To improve this coverage to
80%  of  the  entire  Nigerian population, about $1 billion per year is required
annually  over  the  next  20  years.  Yes,  an extra $1.5 billion annually from
removing  the fuel subsidy could help make a significant change to the health of
all  Nigerians  by  immunizing the other half of Nigerian children not immunized
today,  by  funding our deteriorating primary health care system or by improving
our   almost   non-existent   water   and  sanitation  system.  Yes,  given  our
innovativeness  and  vast needs there is no shortage of alternative  options for
expenditure. But, Nigerians should ask the Government where these funds would be
spent.  You  should  ask  your local representative or your senator, where these
funds  (and  the  rest of Nigerian funds) are spent. The Labor unions could help
Nigerian  workers  monitor this expenditure on services that would benefit them,
their families and the future Nigerian families of tomorrow.

This article has been written by Bala Funsho, a patriotic Nigerian interested in
the welfare of all Nigerians.



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This page was last updated on 10/27/07.