Fuel Subsidy: Success or Failure? UPDATED

The way Baobab tells the story, Pres. Jonathan caved. He "bowed to pressure" and "buckled." I'm not so sure.

Consider that previous governments have also tried to remove the fuel subsidy and had no successes to show for it. Jonathan accomplished what his predecessors couldn't, a cut in the subsidy by 40-50% and an agreement that further cuts would be sought in the future. UPDATE: yet it has persisted despite the decreases from previous governments. Jonathan's subsidy reduction is the largest in nominal terms, but is only the fourth largest in percentage terms. The very short-lived Shonekan presidency increased the price of fuel 614% compared to Jonathan's request for 110%. More information here.

In my first reaction and in many people's, the government ought to have done things little by little, gradually reducing the subsidy so people had time to react and respond, and could see that (if) he was genuine in channeling the money to health, education, roads, electricity, and other public goods.

But there is a real political economy argument to be made for asking for the full subsidy in the hopes of getting half. People are no doubt happier and more docile today about a price of N97 per liter than they would have been had the government simply announced N97 on January 1.

Baobab could have just as easily said that the opposition buckled because they had demanded removal of all the subsidy and gave up the strike with a 50% increase in the price of fuel. If Pres. Jonathan succeeds in obtaining further reductions, he will have done exactly what I and others asked, gradually phasing them out.

UPDATE: Having found the above source, I am much less impressed about a 50% increase since it is the smallest decrease on record. What I would like to know is what the non-subsidized prices were during those other regimes, though, which Sobowale does not report.

"I started the war against subsidies."

Head of the Central Bank, Sanusi, explaining in more detail why he is against the fuel subsidies in Nigeria. There is a pretty thorough description of how the subsidy really supports corruption and some of the evidence of it. Interesting throughout.

So for two years I have been convinced that this thing is a scam and that it cannot be stopped because the entire controls have been compromised. ... So yes, I am willing to take all the criticism and labels and be unpopular but this has to stop and govt can find other ways of alleviating pain.

Removing it has costs in terms of nigerians paying more for PMS-which by the way is not the fuel for genrators, power plants, production facilities, heavy duty goods transportation trucks and even luxury buses. It is fuel used by the middle class and car owners to drove around town and from city to city not to employ workers and produce goods and services. Diesel which is critical to manufacturing and employment creation is not subsidized

1. I am a strong advocate for subsidies if they are for production and not consumption, and if they benefit the poor and not middle men and rent seekers. The US government subsidizes cotton and wheat farmers and nigeria spends its reserves importing wheat from america and keeping american farmers employed....

Finally: removing subsidy is not a silver bullet that solves our economic problems. And there is a huge trust deficit that government has to address. Government needs to investigate subsidy payments and punish any violations of extant guidelines. It needs to cut on unnecessary and waste ful expenditure. It needs to fight corruption and show seriousness in that. It needs to deliver on capital projects, power and infrastructure including irrigation, farm-level storage and agri-processing. These are all valid issues that are to be taken IN ADDITION to and not in place of subsidy removal.

Best tweets of the protests

This is another post I will be updating occasionally: some entertaining tweets about the fuel subsidies (in some cases, spelled out further for the Twitter-impaired)

On economics:
This is the point where I wish I concentrated during those classes on Economics
There are 3 groups of Nigerians at the moment: 1, those fighting for the fuelsubsidy; 2, those fighting against the fuel subsidy, 3. Those who don't even know what subsidy is. I'm no. 3.
The market for high heels have died with the market for cabs.

On cars:
If he puts on the AC in his car for you, marry him!
Abuja Bigboy spotted Oppressing as he left his engine on while waiting for girlfriend

Tried on a new shirt. Kinda tight. I'm not there yet but I'm on my way. My Fuel subsidy "strolls" should do the rest!
Lol! We be blaming everything on the fuel subsidy. Employer: "why are you 2 hours late to work" Employee's reply: fuel subsidy.

The government's side on the fuel subsidy

The BBC had a brief interview with Ahmed Ali Gulak, Special Adviser to the President on political matters. Among the more interesting talking points, the government claims that prices and protests will have calmed down within 3-4 weeks. Here's hoping it's calmed down by the time classes start!

UPDATE: BBC's interview with the central banker, Senusi, who argues that subsidies should be for production, not consumption; that they should be paid for with savings not debt (our children are paying for our consumption); and that much of Nigeria's subsidies are re-exported to other West African countries. He admits the cost of living to go up and that other prices will rise. It was not unexpected. The crash in Europe and other countries requires greater fiscal responsibility. Improvements may not be seen for 6 months-3 years.

Price transmission in Nigeria

With the fuel subsidy's disappearance, the price of gasoline increased from N65 ($0.40) to N140-N150 (just under $1). What other prices go up and how quickly? I'll be updating this post from time to time with new prices as I learned them:


Small plastic bag with water: N5 up to N10; larger bag in Lagos from N60 to N150 Jan 4   (reported through Twitter from numerous sources)


Jan 5 from our shopping - taxi service price up from N1000/hour to N2000/hr; water jug refills unavailable; most food sold at the same price; lower selection of bread than usual; 


Jan 5 NigeriaNewsDesk Twitter report: Many filling stations outside Calabar, the Cross River State capital, are selling premium motor spirit, popularly known as petrol, for N250

Fourth-hand Twitter report: Packet of St Louis Sugar was N100. Post subsidy N250


A student reports: A bowl of raw foreign rice has gone from N250 to N270 in Kaduna while a similar bowl of black eyed peas has gone from N120 to N180.


Jan 9 - water jug refill up from N350 to N375. Tailoring services and fabric same price as before.

Fuel protests in Nigeria

The Nigerian government ended the fuel subsidies on January 1. Prices were expected to rise from N65 to N140 per liter overnight. Protests have been ongoing since. Over dinner with friends, they were certain the money saved would just go to politicians. I asked them what the difference was between the money going to political fat cats and going to oil fat cats (and the fact is that there is less difference between the two than one might wish). To that there was less answer. I also overheard some weeks ago that this may in fact be part of reducing corruption as the oil companies have charged the government for importing their own oil.

From my vantage point in a housing compound removed from any main road in Yola, things have been very quiet. The rest of the country, not so much:

BBC's bullet points.

From Reuters, who puts the new price at N150:

Economists say the subsidy filled the fuel tanks of middle-class drivers at the expense of the poor, encouraged massive corruption and waste, and handed over billions of dollars of government cash to a cartel of wealthy fuel importers. ...
"Our struggle is not just against fuel subsidy, it is against bad governance. Jonathan has shown that he can't be trusted," Issa Aremu, vice president of the National Labour Congress, told demonstrators.
"He said he was engaging in dialogue and all of a sudden he went ahead and increased the price." ...
the funds are transferred to a special account in the central bank which would fund poverty alleviation programmes, Jonathan's statement said.

Nigeria's Daily Times has been keeping tallies on who is arrested and who released. 300 policemen have reportedly joined the protests. One person confirmed shot, another rumored.

Previous governments have also tried to end subsidies, but eventually backed down. I confess being divided. The "Economists" Reuterse cites and "The Economist" magazine make very good points. I'm rarely in favor of going cold turkey on policies of this magnitude, if the political process will allow it. It might provoke fewer riots to go more slowly, allowing the price of fuel to increase a certain percent every month for instance, but it puts up more and more opportunities for someone to block it and stop progress. UPDATE: Here is the World Bank arguing for phasing out fuel and utility subsidies in Angola.

Arbitrage in Action

You say smuggler, I say arbitrager (HT:Poverty News Blog):

Social Solidarity Minister Gouda Abdel Khaliq cited smuggling to Libya and Gaza as a reason for [gas] cylinder scarcity in Egypt… . "Smugglers benefit from the difference in the price of the cylinders in Egypt," said Hossam Arafat, chairman of the petroleum section at the Federation of Commerce Chambers. "What makes this possible is that the government subsidizes the cylinders to the tune of 90 percent here."

Arbitrage in … used t-shirts?

Now along comes the notion of Project Repat that wants to exploit hipster demand for the double-irony of used t-shirts from Africa by buying these shirts at developing world markets, shipping them back to the United States, and using the profits to finance charitable activities.

Arbitrage in … investment opportunities

The arrival of large numbers of Chinese over the past few years is not something that Africans are so worried about (compared to the fixation in the western press). A Minister in Angola looked at us incredulously asking why we were so obsessed with the Chinese. He said they were only one amongst a range of new investors, and his country was open for business to all of them. …

A Chinese businessman in Accra told us “I don’t think I will be able to make more money in China than I can do here. The conditions in China are getting quite bad, and will be worse with this world crisis”. Commonly businessmen talked about earning anything up to three times what they could make in China for the same investment.

You say “misuse of scarce development funds,” Moss says “development” (emphasis added):

The project will also turn a disused old hotel site into an active hive of economic activity.  If that’s not development, then what is?  … When President Bill Clinton visited Ghana in 1998 he couldn’t spend even one night in Accra because of a shortage of suitable hotels.  Today, Ghana has several world-class business hotels, but if the country is going to live up to its ambition to become a regional business hub, then it needs places for business elites and tourists to sleep, eat, and meet.  Even if this is somehow distasteful to critics who may imagine that poverty-reduction is only about romantic notions of selfless activists helping peasants, development is really about building a vibrant business sector

While staying at one of these more luxurious estates for a development conference for the first time, I proposed a research agenda to my advisor: measure the importance and attention of development institutions in a country based on the presence or absence of luxury hotels. It seems there is some interest in coming to more of an answer of that question. Now if only I can get a grant to stay at a few more of them so I can do some data collection....

Oil Shortage in Nairobi, Kenya

Sadly, there is little analysis in the video below the fold (HT: PNB) of why there is a shortage, just discussion of really long lines, frustration, scalping, and a government denying there is a problem. Just a little digging reveals what might well be expected: 1) the government sets the oil price and changes that price every 30 days. Oil companies would therefore rather hold on to oil stocks and wait for the price to go up before releasing more to the market. Rather than liberalizing the price mechanism, the government's solution appears to be to change the amount of time oil companies can hold on to stocks to 10 days. The government also announced tax cuts to bring prices down about 2-3%.

The unintended effect? This system favors large oil companies who have greater access to capital. Expect greater concentration in Kenyan oil markets, which the government will blame on anti-competitive behavior despite its own regulations being the cause. Speaking of which, another cause appears to be hinge on a dispute between the largest oil firm and the government, with both sides blaming the other.