A closer look at Buhari's idea to replace subsidies with grants

The Nigerian government has been treading carefully in its efforts to halt gasoline subsidy payments for years.

When faced with the choice of lowering expenditures and igniting public outrage or utilizing cheaper gasoline to maintain popular support, the administration frequently chose the latter.

Those in favor of the program argue that it lowers the cost of living and helps millions of Nigerians living in poverty. Nonetheless, critics such as the International Monetary Fund argue such subsidies are an unsustainable drain on public funds that could otherwise be used for essential economic initiatives.

Diesel and kerosene prices have been substantially deregulated, and retail prices at filling stations vary according to market forces, while the price of gasoline remains controlled. Nigerians commonly use petrol to power their cars, tricycles, and motorbikes, and millions rely on gasoline to power their generator sets due to the country's unpredictable power supply.

According to a report backed by the British government, Nigeria spent over N10 trillion on subsidies between 2006 and 2018, more than the health, education, and defense budgets combined.

The Nigerian National Petroleum Corporation (NNPC) says it spent over N816 billion subsidizing fuel prices in the first seven months of this year.

Ending the subsidy in order to pay the subsidy?
The Nigerian government has set a target of mid-2022 to entirely remove gasoline subsidies and switch to a market-based pricing mechanism, backed by the recently approved Petroleum Industry Act.

"Well-targeted social assistance... should buffer any negative repercussions on the poor, particularly in light of continued rising inflation," according to the Washington-based organization.

To do this, the government claims it would provide N5000 in monthly transportation allowances to "poor residents."

The handouts would target between 20 and 40 million Nigerians who make up the country's poorest population, according to finance minister Zainab Ahmed, subject on the availability of finances and assistance from state governments. She estimates that the treatment will last six to twelve months.

"We are working with our partners on ways to cushion the possible negative impact of the withdrawal of subsidies on the most vulnerable at the lowest 40% of the population ahead of the projected date of mid-2022 for the total abolition of gasoline subsidies," Mrs Ahmed added.

"One of these solutions would be to implement a monthly transportation subsidy in the form of a N5,000 cash transfer to between 30–40 million qualified Nigerians," she continued.

When the figures are added up, the proposal looks to be a ruse, and it appears to be a standard government scheme to deceive individuals.

First, even for a six-month period, the transportation grant alternative is rather costly. Paying N5000 per year to 40 million individuals will cost Nigeria N2.4 trillion in 2020, or nearly 15% of the country's overall budget.

Subsidies, on the other hand, would save the government a lot of money if they were kept. Mrs Ahmed's "costs as much as N150 billion" monthly estimate puts the annual petrol subsidy at over N1.8 trillion.

In a year when the government's borrowing is likely to reach N6 trillion, the grant option practically implies the government would forego one subsidy payment in favor of a more expensive one. This has been characterized as a blunder by some.

Those in favor of the grant claim that in a country where four out of ten people are poor on a daily basis — a figure that may reach nine out of ten in some areas — the monthly stipend would provide a major boost to their purchasing power.

Regardless, the government will not set aside funds for development projects, which is at the heart of its campaign to eliminate subsidies.

Second, the government's spending habits belie its claim to be devoted to programs that actually benefit the general public.

Despite Mrs Ahmed's frequent assertions that Nigeria has an income problem rather than a spending problem, the country continues to suffer. Despite the government not performing massive recruiting, personnel costs have continued to climb year after year. The government plans to spend N350 billion more on employees and N167 billion more on overheads in 2022 than it did in 2021.

Overhead (administrative costs) totals N792.4 billion for 2022, implying that expenditure on overheads will increase by more than a quarter in the coming year if the legislature approves the budget bill. This year, the National Assembly budgeted N3.76 trillion for personnel expenditures, and the government expects to spend N4.11 trillion in 2022.

The planned overhead and staff expenditures for next year are N4.9 trillion, which is 8.9% greater than Nigeria's whole 2015 budget of N4.5 trillion. These two areas of spending also surpass the N4.89 trillion in cash that Africa's largest economy expects to devote to development projects in 2022.

President Muhammadu Buhari's office would spend N1.6 billion on new vehicles in 2022, the fourth highest amount spent by any government office. The president's administration has spent N5 billion on cars since taking office six years ago, enough to create 500 health centers at a cost of N10 million apiece. It has also spent billions on meals, uniforms, travel, a massive presidential air fleet, the president's hospital, and other items.

The government may claim differently, but there is no guarantee that savings from subsidies will not be used to fund regular government administration that does not benefit citizens.

Moreover, despite Mrs Ahmed's assurance to lawmakers last week that "the government will ensure that the payments go to the rightful recipients by using biometric verification numbers, national identity cards, and bank account numbers," the lack of a verifiable database of potential beneficiaries casts doubt on the cash handout's efficiency and raises suspicions of financial mismanagement.

As an example, some have pointed to the lack of transparency surrounding social investment programs such as Tradermoni and conditional cash transfers, which are worth billions of naira.

It will also be difficult to determine if the government has paid up to 20 or 40 million individuals as claimed. Furthermore, the government's proviso concerning "availability of resources" makes it harder to hold it accountable if payments are not provided.

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These payments are not sustainable because they are simply another consumption subsidy that is not productive in any manner," said Cheta Nwanze, a lead partner at SBM Intelligence.

"I would have liked that such incentives go to small enterprises so that they may expand and help to reduce our high unemployment rate," he said.

An rise in the price of gasoline at the pump is possible.
According to energy and power data tracker, the worldwide fuel price, petrol prices in all West African nations (excluding Guinea Bissau and The Gambia, which were not reported) are more than double those in Nigeria.

According to the tracker, the price variance is due to various taxes and subsidies for the commodity.

When the subsidy is gone, the pump price is expected to rise to N344 per litre, according to Melee Kyari, group managing director of the Nigerian National Petroleum Corporation.

Every increase in gas costs has a knock-on effect on transportation and food expenses. So it's always a political risk to ask Nigerians to pay more for gasoline.

When the Jonathan government reduced subsidies in 2012, it played into the opposition's hands. One of President Buhari's All Progressives Congress's political salvos in 2015 to unseat former President Jonathan was the reaction that ensued.

Nigerians will elect at least 30 state governors and a successor to President Muhammadu Buhari next year, around the time the subsidy deadline expires.

Some have seen the transportation payments as a populist attempt by President Muhammadu Buhari's APC to win supporters ahead of the 2023 federal elections.