By The Economist
Seldom has one tycoon so tantalised a nation. On September 3rd Aliko Dangote, one of Africa’s richest men, announced that his new $20bn refinery in Nigeria was starting, after many delays, to produce petrol. Nigerians are now frantically debating whether that will ease chronic fuel shortages and help pull the country of 230m people out of a destabilising economic crisis.
Once it reaches full capacity, the refinery will be big enough to supply all the petrol Nigeria needs. Yet how much that will help Nigerians depends on politics. To make a profit, Mr Dangote must be allowed to charge a fair price for his fuel. Yet for decades the government has decreed that petrol be sold at artificially low prices.
This policy is typical of a state which is simultaneously too big, in that it asserts control of countless things best left alone, and too small, in that it fails to supply basic services. If Mr Dangote is allowed to charge market prices for his petrol, that could remove government control over a thing best left alone while freeing up funds for services such as health care and education.
Cheap petrol is financed by a subsidy so vast that it squeezes all other public spending. The subsidy is not paid directly. Instead, the state-owned Nigerian National Petroleum Corporation (NNPC) swaps crude oil pumped in Nigeria for petrol refined abroad, then sells that petrol to the public at a big loss. That loss is deducted from the oil royalties the corporation is supposed to remit to the treasury. The system is corrupt and leaky: much of the cheap petrol is snaffled and smuggled abroad, though how much no one knows.
Last year Bola Tinubu, Nigeria’s president, announced that he had scrapped the subsidy. Yet it has swiftly crept back. This year Escap, a consultancy, expects it to gobble up around 5.4trn naira ($3.3bn). That is 2.3% of GDP, four times the health budget and nearly half the oil revenues on which the state depends (see chart).
Other petrostates try to turn fossil-fuel revenues into human capital. Nigeria, not so much. Annual public spending per head on education is a derisory $6; on health it is $4, according to Escap. Primary school enrollment is only 65%, far lower than in poorer countries such as Sierra Leone, where it is 97%. The World Bank estimates that Nigerian children achieve barely a third of their potential. That is, if they received proper health care and education, they would be 2.8 times more productive as adults.
Because the petrol subsidy is so costly, the government cannot afford it, and subsidised petrol often runs out. For days the streets of Lagos have been snarled, as huge queues of cars form outside petrol stations. “I’ve been waiting 16 hours,” grumbled one frustrated motorist. Not far away, black-market traders holding jerry cans and plastic tubes were offering to fill tanks for three times the official price.
The simplest way to solve the problem would be to charge a market price for petrol. On September 5th Bloomberg reported that the government was considering letting Mr Dangote do just that for the fuel from his new refinery. That could free up large sums for health care, education and other public services.
Yet reform faces steep obstacles. The opacity of the current system makes it easier to loot, so insiders will strive to preserve it. Mr Dangote has said he will sell all the petrol he produces to the NNPC, meaning the government will remain in control. Confusingly, the NNPC denies this.
More importantly, Nigerians have long planned their lives around cheap fuel, so scrapping the subsidy would be both painful and unpopular. Many Nigerians see subsidised petrol as the only concrete benefit they receive from their government, rather than as a drain on revenues that could usefully be spent on other things.
A price increase last week from 568 naira ($0.35) per litre to around 855 has sparked fury but done little to shrink the fuel queues, as it is still well below the market rate of over 1,000 naira. Ibrahim Yahya, an Uber driver in Lagos, says he has half as many customers as before. “People have decided to work at home so that at least they can save money,” he says, adding that he is sapping his savings just to eat. Costlier petrol makes everything from food to home-generated electricity less affordable. Zeinab Usiabulu, a shopkeeper, laments that a 50kg bag of rice has gone from 81,000 naira to 86,000 in a week. “My customers are very angry.”
In August more than a dozen people died when security forces shot at protesters angry about the rising cost of living. Inflation in July, the latest month for which data are available, was 33% year on year, with food inflation at 40%. At the University of Ibadan, one of Nigeria’s most prestigious, charges to students for such things as rent roughly doubled in July, provoking such big protests that students were sent home. Even so, the university’s finances are “unsustainable”, says Ganiyu Saliu, the registrar. “What we get from the government is like a spit in the ocean.” A student still on campus says the government should subsidise education instead of petrol.
The government’s weak mandate and fear of provoking riots may tempt it to keep at least part of the subsidy. Moreover, because so many politicians squander public funds, they are unpersuasive messengers for painful changes. “It is difficult to tell people to be patient and to convince investors that Nigeria is prepared for reforms when the presidency is spending hundreds of millions of dollars on another jet,” laments Esili Eigbe of Escap.
Yet there are reasons to hope for change. The government’s finances are so parlous that it cannot keep on as before. Debt service was equivalent to 91% of government revenues last year, falling to a still-terrifying 68% this year. The ratio of total debt to government revenues is higher than in any other country save war-torn Sudan and Yemen, and hyper-corrupt Venezuela. The NNPC owes so much to foreign suppliers that it is struggling to import more refined fuel. It has little alternative but to do business with Mr Dangote, who taps into the popular view that Nigeria, as a big oil producer, should be refining its own crude.
That means a deal of some kind will probably be struck, though it will take time for its effects to be felt, not least because so much of Nigeria’s future oil production has been mortgaged. If the end result is a big, permanent cut in subsidies, “we will need to strengthen the social safety net,” says Tony Elumelu, a banker-turned-entrepreneur.
Meanwhile, Nigerians are finding creative ways to cope. As people avoid long journeys to the bank, more small shops are offering customers cash via newly ubiquitous point-of-sale machines. Some shopkeepers are installing solar panels to save on generator fuel. “The sun is from God, and more reliable,” says Biodun Badmos, who uses solar power to run a welding machine. And the middle classes send their drivers to sit in mile-long petrol queues for them.
