Which one to decapitate – subsidy or corruption?

July 7, 2023 | By Umar Yakubu

Corruption is reported to be pervasive in the key service sectors of health and education.

In principle, subsidy is not bad as some have been made to believe. It’s a requisite for economic growth and development. Why ours seems like an enigma is the ‘other hand’ we don’t want to talk about because most are either engaged in it, while others are waiting for their turn to do so. The cancerous hand of corruption! Although it was not in their campaign promise, let us be aware that much may not be achieved until the fingers of that hand are cut off.

“…impunity becomes the very foundation upon which systems of corruption are built. And if impunity is not demolished, all efforts to end corruption are in vain.” — Rigoberta Menchú, Nobel Prize laureate.

In 1949 during a meeting with the American Economic Association, Dr Nourse was a classic “on the one hand—on the other hand” economist. That infuriated the then President Truman, with his failure to present a clear policy for him to adopt. He was tired of listening to consequences of economic decisions that were usually “on the one hand, X is good, but ‘on the other hand, Y will happen.” He wanted a “one-handed economist!”

But that’s the dynamics of economics. Everything seems simple on paper but complex in application and has multiple effects on diverse sectors. Economic decisions are supposed to be well thought out. In the globalised world, there will never be easy-to-adopt scenarios. Unfortunately, politicians are trained to be politicians. They usually opt for what is easier and not necessarily what is logical within a wider context.

Since 2011, several arguments have been pushed for the removal of energy subsidies. The neo-classical proponents have pushed the narrative so hard that all our problems will vaporise once subsidies are eliminated. The debate about corruption has been pushed to the margins. Government has forgotten that it is its responsibility to combat grand corruption in the oil and gas sector, control the borders and ensure efficiency in governance. Since abdicating these responsibilities, especially in the oil and gas sector, the dominant narrative has been to remove subsidies. So, just like how President Truman was looking for a linear solution and didn’t want to listen to the ‘other hands’, let’s highlight some of them.

Government will ‘save’ at least two trillion naira from the removal of subsidies on PMS. We should recall that subsidies have already been removed on all other components of the energy sector, such as electricity, diesel and kerosene, and have been saving trillions from there. The immediate effect will be that headline inflation will rise from 22.2% (April 2023). Food inflation was 24.7% this April, whereas it was 18.37% in April 2022. Statista had projected that this inflation would come down to 15.83% in 2024. With the removal of subsidies on PMS, even the International Monetary Fund (IMF) has slashed our growth prospects, and the revised projected inflation rate will be at least 25%.

Based on that singular action, the existing incomes of about 10.1 million Nigerians will remain the same but with reduced purchasing power, as food inflation, which accounts for the bulk within Nigeria’s inflation basket, climbed further to 24.45%, owing to increases in the prices of oil and fats, bread and cereals, potatoes, yam, etc.

…you have trillions saved from the removal of energy subsidies but with no inflation containment strategy. All that has been contemplated are the usual lazy initiatives. One is to provide buses that will be off the roads within two years and the earlier mentioned cash transfer palliative. These are always the easier things to do. Has any ‘hand’ looked at the importance of transportation on economic development and how a few buses will supposedly cushion the rise of transportation prices by more than 100%?

Effectively, 10 million Nigerians will join the current 130 million already categorised as multi-dimensionally poor. That’s another 10 million people who cannot afford the basics of life. Small and medium enterprises (SMEs) generate most of the employment in the country and this single policy of government will drive most of them under. For the major industries, there is a limit to which they can pass on rising energy costs to consumers. The purchasing power is simply not there.

The World Bank thinks an $800 million loan (less $33 million, being payment for consultancies) will bring ‘relief’ to 10 million households. They want to rely on the same social registers that other billions have previously filtered away through. Assuming the registers are true reflections of the information on qualified Nigerians, the relief will come down to about N7,000 per person! We have been down this path a number of times with no meaningful impact.

On the other hand, you have trillions saved from the removal of energy subsidies but with no inflation containment strategy. All that has been contemplated are the usual lazy initiatives. One is to provide buses that will be off the roads within two years and the earlier mentioned cash transfer palliative. These are always the easier things to do. Has any ‘hand’ looked at the importance of transportation on economic development and how a few buses will supposedly cushion the rise of transportation prices by more than 100%? What about the rise of other factors that drive production and industrialisation? These have been the previous prescriptions that soothed the psychological aspect but did little about disposable incomes.

On another ‘hand’, the cost of implementing projects will rise because most of the components usually used are imported. You will be needing more naira to buy fewer dollars. So also is the cost of debt servicing, although this has more to do with the harmonisation of the exchange rate. Foreign exchange is a large part of our budget component. Let us not forget that the Buhari administration left a N77 trillion ($167 billion) debt to local and foreign creditors.

On yet another ‘hand’, salaries will be increased to douse conflict with the labour unions. Aggregate demand will increase, and this is another inflationary pressure. Labour will usually demand what the government can never afford. So what happens? I think the days of abusing the ‘Ways and Means’ grants are over, but salaries will increase with reduced purchasing power. The naira will further weaken, as more of it will chase fewer goods. Let us not forget another hand, which is that cheaper imports affect our balance of trade and generally have negative effects on prices.

…with regard to transparency and efficiency, what mechanism has been put in place to utilise the trillions saved effectively? They say it will be put into hospitals and schools. Fine. Will it be through the same system and procurement processes utilised in building previous schools and hospitals, or have changes been made to the system? Multiple sources still report that over 70% of public sector corruption is through public procurement.

On still another hand, with regard to transparency and efficiency, what mechanism has been put in place to utilise the trillions saved effectively? They say it will be put into hospitals and schools. Fine. Will it be through the same system and procurement processes utilised in building previous schools and hospitals, or have changes been made to the system? Multiple sources still report that over 70% of public sector corruption is through public procurement. Corruption is reported to be pervasive in the key service sectors of health and education.

In terms of the spending patterns, what has been the improvement in our education and health sectors in the past decade? Have those two sectors delivered value for the trillions spent so far? Since the government has not provided the data that things have improved in the last ten years, why do we assume that pumping more money into the sectors will automatically improve our education and healthcare?

And another ‘hand’ will argue that you have to reform the civil service for the effective delivery of public goods. Where do you start the reforms from? One hand will say dust up the Oronsanye Report on the rationalisation of agencies. I believe the government can effectively run with less than 30% of its current force. So, it would help if the service is trimmed for efficiency and reduced recurrent expenditure. Then another macro-economic hand rears its ugly face – unemployment and underemployment. Cutting out 70% of the current public servants effectively means removing the livelihoods of 1.5 million public servants, out of the current estimated total of 2.2 million workers. Being an African society, each of those 1.5 million will have at least five persons he or she is benefactor to. So, that is another 7.5 million persons. Anyway, civil servants are a miniscule portion of the general population.

Another hand will emerge that the only way to maintain our national security is to ensure that the private sector gainfully employs those 7.5 million and the other 130 million Nigerians. To engage such a number needs a proliferation of industries to produce at a level lower than imports from China. When the energy cost calculation is done, another hand will argue for introducing energy subsidies to ensure energy security, food security and hence national security! The countries we like to use in our powerpoint presentations all have subsidies in critical sectors that drive both. The UK places a cap on energy costs. In 2022, Bloomberg reported that Germany was to spend €83.3 billion to subsidise energy prices, €43 billion to reduce the cost of electricity and €200 billion on energy support for Euro-area members.

Umar Yakubu is with the Centre for Fiscal Transparency and Integrity Watch. Twitter @umaryakubu