Life post-PMS subsidy – Ensuring we do not let a “crisis” go to waste
I woke up on the morning of January 1st to Facebook updates from friends denouncing and disparaging the Nigerian government’s “heartless” decision to remove subsidies on PMS (Gasoline) effective immediately. I completely relate to the sentiments expressed by many Nigerians as the pump price of Gasoline is expected to increase by at least 200-250% and this is money from the pockets of ordinary people. The government has advanced a fiscal argument for the removal of subsidies: since Nigeria lacks any meaningful refining capacity, the rise in crude oil and freight prices have made these subsidies increasingly expensive for the government. The finance minister and central bank governor have both stated that sustaining the subsidies will place the government on the path of higher deficit spending financed by unprecedented domestic borrowing. The major buyers of these bonds are Nigerian pension funds and banks, so a worsening fiscal condition can (in an extreme scenario) can potentially weaken our banks and threaten pensions. A clear result of this borrowing, which is probably beyond contestation, is that it has led to the crowding out of private borrowing as rising yields have made government bonds a lucrative risk-free and high-yielding investment that has increased the cost of private borrowing. However, whether you buy this argument or not, there is an opportunity for the country to use the removal of this subsidy to effect some structural changes in the economy
A key reason the removal of the subsidy is generating so much uproar is due to the Gasoline-intensive nature of the Nigerian economy. A possible unintended consequence of decades of government subsidy is that we have effectively subsidized and encouraged inefficiencies because of the artificially low cost of PMS. Nowhere are these inefficiencies as prevalent and absurd as those of the transportation and logistics sectors: two sectors that affect everyday things as the cost of getting to work and the cost of food. Anyone who has visited Lagos will witness the huge number of cars on the road as almost the entire middle class (or anyone who can afford a car) drives to work, with carpooling being taken up by only a minute percentage of the population. That’s why the recent moves being made to introduce commuter rail to Lagos is a big, cost-effective step in the right direction. We need every metropolitan center in the country working on similar schemes.
These inefficiencies are not limited to intra-city transportation; they also extend to inter-city travels. It is beyond absurd that the vehicle of choice for inter-state transportation in Nigeria is the 18-seater bus. This is an inefficient vehicle for providing mass transit services over long distances. Other countries have the good sense to consign these buses for shuttle services between airports, tour sites etc. Spreading fuel costs over only 18 people gives us more expensive transit than we would have if we used 42 or 50-seater buses for inter-city transportation. Hopefully, higher fuel costs we force us to make this switch into large-scale, efficient transportation choices.
Obviously, I have saved the most egregious for last. And that is the logistics and haulage system in the country, which is the primary reason food costs can be expected to skyrocket following the removal of subsidies. Nigeria must be one of a few countries in the world where bulky, non-perishable goods are shipped almost exclusively over long distances (i.e. over 1,000 Kilometres) by trucks. Name the bulky stuff (cement, grains, steel rods etc), we transport it by road! We even transport petroleum products (including Gasoline) using trucks, no wonder everything costs more than it should. As a country, we need to revamp our railway network to transport bulky products in a much more cost-effective manner and also better monitor our pipeline systems so we can stop the lunacy of transporting Gasoline over 1,000 Kilometres by road.
I know adjusting to a life without PMS subsidies will be difficult for most Nigerians but we should not let this opportunity go to waste, we need to use this opportunity to correct the structural deficiencies in our economy.
