Spreading the love: subsidies, diversification, and direct cash transfers


Chart extracted from NASDAQ

Someone recently posted on my high school alumni page on Facebook about the reduction in pump prices in Ghana on the back of the drop in oil prices. He lamented that Nigeria wasn’t doing the same and cried out along the lines of “when will we ever see this type of move in Nigeria.” Truth is it wasn’t that long ago when a President cut back on the pump price on the back of reductions in the underlying rates. I’m referring to Yar’adua’s minor price adjustment. Admittedly it was small reduction but the principle was allowing prices to move with the market, something that normally doesn’t usually happen in markets with  artificially determined prices (read subsidies). I’ve written about subsidies before, here and here during the #OccupyNigeria protests. In one post I explained that while I do not support subsidies in general, I didn’t think the Jonathan administration was capable of matching subsidy removal with the right sort of reforms that will make sure that the savings actually are put to good use. Like I noted, “it would even seem that the Jonathan administration is setting a benchmark in inefficiency, squandering billions in foreign reserves, excess crude savings, etc.” That was in 2012, absolutely prescient. In the second article I talked about how restructuring politicians pay would help redefine the incentives for taking office and consequently affect who gets interested and the behaviour in acquiring such offices. You should have a look. Moving on. Oil prices are at a 6 year low. For a Nigeria that relies massively on crude oil and has refused to diversify her income base, that spells trouble. And how has the government responded? Adjust benchmark rates for the budget, propose budget revisions in which 90% of spending is on recurrent expenditure i.e. forget roads, schools, hospitals.. You get the gist. They’ve also jacked up interest rates, and devalued the naira, though I sort of get the rationale for those last two. And in a message at the end of the year the good president urges us to pray harder as austerity is coming. Yesterday a 10naira reduction was announced in PMS prices. It looks like a people-centric move. It’s poorly thought out. Definitely not what we should be doing now. I’ve got a few ideas that I enumerate below:

1. Scrap the subsidy: this one is a no -brainer I believe, with the current oil prices. A subsidy regime only serves those who consume more of the subsidized commodity/product. In the case of PMS, I don’t believe the “common man” can be called a major consumer. Now, of course it can be argued that the knock down effects will affect the poorest people in the population in forms like higher transport costs etc. I agree. And this leads to my next item.

2. Implement more direct social transfers: simply put, give poor people the money directly. Now, this is a system that can easily get out of control if not carefully controlled. I agree. But it can be controlled. Brazil introduced the Bolsa Familia or Family Allowance scheme in its’s current state in 2003. It’s the largest cash transfer program in the world and has generally been quite successful. More recently, Indonesia (and we have a lot in common with that country) scrapped their subsidies and started work on a means of directly providing money to the poorest people. You can see this article from The Economist for more on that. My point here is that, though it is difficult it can be done and is worth doing if we are really serious about a social program that affects those who most need it. I believe the road to solving the problems of how to distribute the funds and cut corruption in the same vein is lined with opportunities – for expanding biometric registration or boosting mobile money penetration for example.

3. Clear the air: Nigeria’s recent growth has generally not been due to the oil industry and this is not because of crippling corruption (alone). There has been so much uncertainty in the air about the PIB and what form it will finally take. Life is uncertain, as is business, but this one is a self inflicted one and no one is going to commit billions of dollars into the big field developments we need to boost growth in the sector while they remain unsure what sorts of agreements and/or tax regimes will be in the near future. On the issue of corruption, I was speaking to a head of one of the major service firms in Nigeria late last year and he mentioned that plugging the holes alone will give us a big boost in production values – he’s been in the industry for 40 years. He must know what he’s talking about.

4. Diversify the income base: this one is a cliche. Everyone has been crying about this for years but it hasn’t happened yet. There may be stirrings though, with the recent growth in agriculture. But if the rebasing of the GDP taught us anything, it is that the government is overwhelmingly dependent on a sector that accounts for less than 15% of GDP for its revenue and forex inflows. It just goes to show how inefficient the tax systems are i.e. we really are depending on the easy money. To be honest we don’t have to go very far to see how it could be done, Lagos is the only state that could possibly keep running without the federal allocation today and that comes from a vigorous tax system leading to solid internally generated revenue (IGR). There is an interesting article about Lagos State’s funding here, please have a look. I’m not blind to the allegations of corruption in the system in it’s current form, I’m not advocating a direct copy and paste, I’m simply saying it can be done in Nigeria, it has recently been done. Time to push that across board.

Obviously there’s more layers and nuances to this all and I imagine that the good people in the government have some of these ideas as well. Perhaps they have discussed them and better information or have superior ideas. Perhaps. Or maybe they just have an election to win. Fine. Either way, going in search of additional spending in the form of subsidies seems like such a poor move I got really upset yesterday when I read it and took to Twitter after many months of silence to rant a bit. When Jokowi dropped Indonesia’s subsidies, believe it or not , the prices actually dropped. Such was how much impact these low crude prices have had on landing costs. And keeping this all in mind we really need to ask why we haven’t seen massive drops in diesel prices – after all that was deregulated ages ago. We need a diesel hashtag to rant with!


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