Fuel Subsidy Removal: The Mistake Tinubu Made – Kalu Idika Kalu
...If you don’t manage your exchange rate, fuel subsidy will reemerge
Fuel Subsidy Removal: The Mistake Tinubu Made – Kalu Idika Kalu
The former Minister of Finance, Dr. Kalu Idika Kalu, has faulted President Bola Ahmed Tinubu on the handling of the fuel subsidy removal.
In an interview with VINCENT KALU, the four-time minister warned that subsidies will re-emerge if the federal government fails to manage the exchange rate properly.
What is your position on the removal of the petrol subsidy that has brought untold hardship to Nigerians?
It is most unfortunate that there appears not to have been broader discussions on the issue, probably because the government wanted to hit the ground running. That issue also underscores the rather unfortunate grasp understanding of simple economic concepts in the country. If you look at our history over the 40 to 45 years, all attempts to restructure the economy, and to restructure the policies failed because of the same frame of incomplete understanding of our economic concept.
There are so many instruments to effect a certain change in the economy on income, on prices, on the distribution of income, on savings, investments, production, etc. Virtually, in all economic areas, you have a sense of this notion of giving the economy time to adjust what the market price would yield in every area – agriculture, industry, services. In every area of human endeavor, where a government might decide that in order to nurture something that is productive, something that is eventually profitable, you have to help the lag in the development process, whether the manpower or the materials or the physical construction.
There are subsidies in just about every area. This notion of saying, ‘Look at the US, look at the UK and other countries that enjoy subsidy, why are they telling us to remove subsidy?’ This question is not relevant because the question of how you spend your money, and public funds depends on the priority that you set. If the priority you set can lead you to subsidize everything like we always cite the US or the UK and other advanced countries, if they have net positive savings from other areas, they are at liberty to subsidize whatever they want.
So, for us, what is relevant should be our priorities. If we establish this, you don’t have to gauge what we lose in setting funds in some areas rather than in some other areas. You don’t just start subsidizing agriculture, industry, or whatever because somebody else does the same thing. You still have to bring it home to your own priorities.
During the Babangida era, some issues were raised on whether to remove subsidy or not and I wrote the paper on this when I was leaving Imo State to become the Finance minister in 1985. I made it clear that economic rationalization, economic deregulation, and efficiency in resource allocation, are the basic questions to decide how much you subsidize, which direction you subsidize, and for how long you continue to subsidize.
If you want to remove subsidies at any given point in time, you have to check: Do you remove the whole subsidy? What amount do you want to remove or you don’t want to remove all? How do you do it or do it in one fell swoop as has been done under this new administration? The question goes back to assessing all these factors that determine the level of subsidies, the use of the subsidies, and its impact on opportunity cost in other areas where this fund should be going.
It sounds very complicated but let’s make it simpler. If you remove subsidies, it means that you are going to rationalize economic policies across the board. The only way subsidy requirements would not reoccur is that you should decide to manage all the things that brought about subsidy in the first place. If import prices plus the landing cost are different from the domestic prices, the importer has to be sure that he will recoup his import. Part of that determination comes from something that he has nothing to do with, namely, the management of the exchange rate.
It is the exchange rate that enables you to convert the imported price to the domestic price so that the importer, the investor, and the economic actor will feel convenient to import and sell and make the profit he expects. People say they should have removed the subsidy in 2014, but if you had done so and proceeded to not manage your exchange rate so that those prices reflect the relative position regarding the import, the landed price, and the domestic price, it would come back. You have to continue to manage them so that the subsidy, that differential does not emerge.
How could the subsidy have been removed without the bedlam in the country?
When you want to remove subsidies and you determine how much subsidy there is; then you have to relate the quantum of subsidy, which means deviation from the normal price. If the deviation from the normal price is so high like we have now and had in 2014, the issue should not be to remove or not to remove, the issue should be over what time frame could you get the prices to even up by removing subsidies in a way that it should not unduly dislocate the entire system. This is where we are now. If the subsidy is just N5 as opposed to N500, N1, 000, etc., what matters is how you do it.
The normal thing after you have allowed the subsidy to be sustained for so long is not to overnight announce that you are removing it. If you do so, you are going to make a drastic change in relative prices, relative costs, in relative incomes; that means you are going to ignore the time it takes to grow the production or the service within a time frame. Most things don’t happen instantaneously. It takes a season for so many crops to grow.
There was no sufficient discussion; that discussion would have said, how much subsidy do we have, where are the subsidies, how did the subsidies stimulate up till this moment? In order not to dislocate the income structure, the tax structure, the cost structure, and the earning structure. From all these other considerations, you make a determination that there would not be a subsidy, but phase it out over three months, six months, nine months, one year, 18 months, two years, etc. The time you used to phase it out means one: You don’t go back on it, (which the issue of summersault, you go forward and you go back comes into play). Of course, certain events may force you to stay a little while.
Generally, once you decide that subsidies are not right because they are distorting the incentive structure, and are not allowing enough funds for other sectors. In other words, if the operative cost is too high, you still have to determine over what period you remove it so that you would not create a chaotic situation such as you get where you have allowed the subsidy to fester for so long and overnight you think it was a lack of political will that prevented the past regimes from doing it; you think it is just about summoning the political will to do that. No, it goes beyond that. It goes to assessing the amount you are going to remove and over what period you should remove it so that it doesn’t upset the entire apple cart – savings, investments, incomes, production lines, construction lines, planting, etc. These are imperatives you cannot do much about. You cannot plant rice or cassava or wheat and expect to harvest in one week. All these things have their gestation periods. So, you have to take into account the gestation period to build some incentive to supply and demand so that the price will be manageable by those who are going to sell in order to produce; those who are going to invest in order to produce, those who are going to import in order to increase supply. That was the basic problem and that always remains the basic problem. That is why in many countries, first of all, you allow the market to operate so that the subsidy that comes from the gyration of supply and demand will be taken care of through the market system.
To cushion the effect of the subsidy removal, the federal government is giving each state N5 billion and some bags of rice; some states are getting 3,000 bags; some 2,500 bags. What is your view on this?
That already tells you that it’s a very arduous task to just come out with a quantum amount. Reducing subsidies will arise over time to make sure that the differential between the imported price and the domestic prices is evened up over time. Once you deregulate or start deregulation, some of that burden on the government would be taken up by the fact that the consumer would immediately adjust when they see the incision of changes in imported price with the subsidy level in the domestic price. So the government does not need to worry about that differential. What the government has to worry about as I said, is the time in which they allowed these increases or decreases in import price to automatically reflect in the domestic price. It is the consumer that would then readjust their budgets; their spending – shopping, hairdos, travels, etc. The consumer would say, the prices have gone up and so they decide on how to adjust within their budget.
It is very difficult for a government to budget for sufficient palliatives where you have allowed subsidies to grow large over time without doing anything about it and where you have not managed the exchange rate so that the changes would not be as substantial as what you have done. The management of the exchange rate, the management of interest rate, the management of capital, the sourcing of funds, the allocation of resources; all those things have to be brought to bear when you decide to remove subsidies and you have to manage better. It is that improved management that should absorb all the challenges that you have needed to compensate the consumer.
You have to set up a system where these palliatives are now being taken up naturally through the pricing system and through the allocative system. Once you have done that, you need to sit down and make the calculations because it is not something that you bamboozle the public by announcing something that shines big. By the time you break it down into the needs of the people and what the government can really afford, then you will be coming closer to what you need.
The funny thing is when you start reducing those billions of naira, which is an off-the-cuff allocation, but you have to go from the other side – the essential needs, supply of water, supply of transport, supply of basic food, etc., you have to start from that angle to estimate what you need. And what you need depends on what period you are going to remove the subsidy.
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As you stretch the removal of subsidy, it reduces the quantum of palliatives that you have to estimate for at a timer point in time, whether on a quarterly basis or monthly basis. The two sides of the scissors have to go together and only in that sense that you can begin to approach what is meaningful in terms of palliatives. You have to stretch the time over which you allow the economy, the people themselves to adjust to the differences in increased cost. You have to spell it out because they cannot absorb it overnight, the economy cannot absorb it overnight, and the consumer cannot absorb it overnight.
Over what period can they then adjust as oil prices are going up now?
As it goes up, if you don’t adjust domestic prices, the subsidy is being built up again and that is what happens to the other commodities. So, you have to allow the economy to adjust to those prices on their own. For the one that has already accumulated, you decide how much money you can afford and then you time it to make sure that you have a certain effect. You select the target of essentials – food, transport, power, water, and housing. It is not a simple process where you just come up with an amount. The phrasing is not just of the removal of the subsidies, but it is also the phasing of the distribution of the palliatives; those have to go together.
What impact will N5 billion and the rice make in the lives of Nigerians when a village gets a half bag of rice?
You have to identify who is getting what over what period. That answers the question. We are used to making subjective superlative answers without going back to the quantum, and that is where the local governments have to come in, associations, NGOs, the states, and others. During COVID-19, this issue also came up when people were directed not to move around. It is high time a big country like Nigeria had reliable statistics on the population, composition, distribution spatially and otherwise; on economic statistics, production, storage, transportation, and health sector. It is always easy when you have these statistics but for political reasons and partly administrative deficiency. We don’t have the statistics and that is why we talk about planning without facts. If you ask a question and you don’t have statistics, how do you answer this question like: What impact would money and rice make? This presupposes that we have statistics, which will determine the quantities that you want to apply to solve the problem. So, they are all interrelated.
There is this Oresanya Report on reducing the cost of governance. The last administration had 42 ministers and now it 48. What is your position on this?
I feel very strongly and every Nigerian should also feel very strongly about this because the high cost of governance reflects inefficiency in our system. A minister should only be required to focus on the work he is doing officially. At times, it is in our attempts to make sure that the needs of the minister, the president, senator, etc. are met to the extent that it is supposed to be full time and then you are trying to make up for providing him the services that he should be providing for himself, like the government giving so much money to do this or that is the issue.
In other climes, the system doesn’t change the needs of the minister. He is given a certain amount to take care of his needs and those things are predictable in terms of the quantum, etc. The same goes for his assistants. But here, you find out that because it is the duty of society to provide for so many of those things that is why we begin to rationalize, having a certain salary and padding it up with all kinds of additional things like buying a tanker to supply a minister with water, and other things. These are ridiculous things that reflect the inefficiency of the system. Everybody in the system has to face the difficulty that the system has prepared for itself. Therefore any attempt to pad up these things without taking account of what is happening to the net resources and to the rest of the society will be improper.
Every Nigerian should be very concerned if there is any step taken at this juncture to increase the cost of governance. We shouldn’t do that, we should in fact reduce the cost of governance; and reduce the gross emoluments because we are way out of line. The real emolument to the gross is a function of the level of prices and inflation.
Even a blind man can have a sense of the fact that the perversion of services in the public sector from the presidency to the senators, the Reps, the governors, commissioners, etc. need to be reviewed to reflect what is real in terms of what the society can absorb given their other essentials – education, health, transport, power, etc. You cannot just give these people emoluments that are out of line.
To cushion the effect of the subsidy removal, the federal government is promising salary increases to the federal workers. Presently, some states are not meeting up with the minimum wage; companies are folding up and cannot meet up with salaries. What is your take on this?
Some of these things also affect peace and tranquillity in the polity. Under normal conditions, each of these things has to be studied. Politicians are under pressure to announce something, and to demonstrate even more than nominal action; demonstrate some quantitative action, which is why you see them buying rice, beans, and other things in volumes to the citizens, and you know that these things cannot last more than a few weeks. I saw a cartoon of how a bag of rice would be shared by so many families. The quantum sounds right, but by the time you reduce it to families and by the time the families reduce it to the average member in the families, you talk of somebody getting a cup of rice or a pint of oil.
Well, you can announce a salary increase but what is meaningful is something that increases the real purchasing power of the consumer, or if your salary is taken up by price adjustment, then the quantum effect is minimal. As long as they are under pressure to announce this salary increase, there has to be some minimum calculation to know how much you can comfortably announce – 10 percent, 15 percent, or 20 percent, etc., salary increase across the board. You have to think of the implications of inflation from every level to make sure that you can even deliver. Then you talk about the necessity of simultaneously looking at the quantum impact in real terms – how much more in terms of feeding, health, and transport with this adjustment impact for the salary earner? Out there, you still have lots of people who are not even subject to any particular public sector salary. So if the public sector announces an increase, there will be pressure on the private sector and of course, the non-corporate sector and the private corporate individual still have to see what adjustment they have to make to their staff, who are not in the formal sector.
Everything requires planning and you have to constitute a panel to look at all these so that by the time you come out with a policy, it gives the impression that you have looked at all the possible impacts that this removal will have. The announcement that comes up with it will sound more like: ‘This thing is not productive; it is not what should be continued; we are determined to remove it; we are going to make sure that in removing it the impact will not unduly affect incomes, production, services beyond what cannot be managed by the economy.’ When this announcement comes across as already recognizing the wide-ranging impact, then the tension that we have will be so much reduced because we will be aware of the fact that taking this major action, we have already considered what impact it should have and have also taken action commensurate with that.
How can the insecurity in the South-East be tackled?
The South East is not a separate country; it is a part and parcel of Nigeria. It is the responsibility of those in charge of the Federal Republic of Nigeria from Abuja to the zones to the states and to the communities. Everybody is responsible for this and that goes for all the other five zones. There is no reason local government heads, traditional rulers, the police, the army, the senators, the Reps and the governors should not be fully involved in the issue of security; they should be fully together to mobilize people who are armed to counter elements of insecurity. They cannot abandon law and order to any non-public state actors.
Under no condition should non-state actors be giving instruction to Nigerians regardless of what villages or states they come from. If anybody does that he is directly challenging constituted authorities in the local governments, in the states, and at the federal level. It is their responsibility to organize and halt it. Any indication that people are using it for their political ends, whether it is Boko Haram, you say it is in the North; Chibok girls, you keep quiet because it is in the North, and you come to the South East, you say, it is this or that organization, it is wrong.
There will never be anywhere to rationalize what has brought this level of insecurity, where the ordinary citizen is now left with their own fate and everyone seems to look the other way. The traditional community leaders should make sure that the ordinary citizen is free to go about their businesses. It is the responsibility of all the constituted authorities to make sure that there is security. There is no reason to abandon security to non-state actors. We have got to a level that cannot be explained in any modern society.