Removal of Oil Subsidy: President Jonathan Breaks Social Contract with the People

Bola Tinubu

As Nigerians gathered with family and friends to celebrate the New Year, the federal government was baking a national cake wrapped in a scheme that would instantly make the New Year a bitter one. Barely had the public weaned itself from last year when the government dropped a historic surprise on an unsuspecting nation. PPPRA issued a statement abolishing the fuel subsidy. By this sly piece of paper, the federal government breached the social contract with the people. This government, which owes its very existence to the people’s desire to be governed by someone more humble than elitist, has turned its back on the collective will.

By bureaucratic fiat, the government made the most fateful economic decision any administration has made since the inception of the Fourth Republic and it has done so with an arrogant wave of the hand as if issuing a minor regulation. Because of the terrible substance of the decision and the haughty style of its enactment, the people feel betrayed and angry. At this moment, we do know not where this anger will lead. In good conscience, we pray against violence. Also in good conscience, it is the duty of every citizen to peacefully demonstrate and record their opposition to this draconian measure that is swiftly crippling the economy more than it will ever cure it.

By taking this step, the government has tossed the people into the depths of the midnight sea. Government demands the people swim to safety under their own power, claiming the attendant hardship will build character and add efficiency to the national economy. It is easy to make these claims when one is dry and onshore. The government would have us believe that every hardship it manufactures for the people to endure is a good thing. This is a lie. The hardships they thrust upon the poor often bear no other purpose than to keep them poor. This is such a time.

I am not calling President Jonathan an evil man. I do not believe he is perverse. However, the economic ideas controlling him are so misguided that they have a perverse impact. Because he is a slave to wrong-headed economics, the people will become enslaved to greater misery. This crisis will bear his name and will be his legacy. The people now pay a steep tax for voting him into office. The removal of the subsidy is the “Jonathan tax.” This situation shows that ideas count more than personalities. People may occupy office but how that person performs depends on the ideas that occupy his mind.

Bola Ahmed Tinubu: President of Nigeria on Subsidy

Though someday, Nigeria will have to remove the subsidy, the time to do it is not now. This subsidy removal is ill-timed and violates the condition precedent necessary before such a decision is made. First, the government needs to clean up and throw away the salad of corruption in the NNPC. Then, proceed to lay the foundation for a mass transit system in the railways and road network with long-term bonds and fully develop the energy sector towards revitalizing Nigeria’s economy and easing the burden any subsidy removal may have on the people.

But we know this is about more than the fuel subsidy. It is about the government’s ideas on the role of money in bettering the lives of people, about the relationship between the government and the people, and about the primary objective of the government’s interaction with the economy. It is about whom, among Nigeria’s various social classes, does government most values. This is why the public reaction has been heated. It is not so much that people have to spend more money. It is because people feel short-changed and sold out.

Government seeks to convince us that the Jonathan tax is an unavoidable decision mandated by immutable economic principles. If you accept their premise, you must agree with their conclusion. However, their argument falters at its inception. There are few immutable economic principles. Economics is not an exact science with unbreakable rules like physics.

Economics is no less subjective than politics. It was born an offshoot of politics and there it remains. What this government claims to be economic decisions are essentially political ones. As there is progressive politics, there is progressive economics. As there is elitist politics, there is elitist economics. It all depends on what and who in society the government would rather favor. The Jonathan tax represents a new standard of elitism.

This whole issue boils down to whether the government believes the general public is worth a certain level of expenditure. It is like the situation where a man dates more than one woman. To each, he promises love thus nothing can be deduced from his words. However, we know he will spend and dote more on one and she will be the one he loves above the others. When banks were in distress, the government-produced billions of naira out of thin air and in record time. It was explained that swift expenditure was needed to stop the banking system from imploding. There was no worry that the government would be bankrupted. If the banks were to fall twenty times in the future, the government would jump twenty times to their rescue. It does so because this government lives a conservative economics placing it in close alliance, if not collusion, with corporate power.

However, because the distance between the government and the people is far and the genuine level of affection is low, the government sees no utility in continuing to spend the current level of money on the people. In their mind, the people are not worth the money. The government sees more value in “saving” money than in saving the hard-pressed masses.

Yet, what does the government actually save by this measure? The concept of a government that has the unfettered ability to print its own currency needing to save that currency for fear of insolvency is an anachronism. That his economic advisors would cling to this notion is like a person insisting on taking to the expressway in a horse-drawn carriage. For a government that prints its own currency, attempting to save in that very currency in order to defend against bankruptcy in that currency is a relic of the gold standard abandoned forty years ago. If the government thrashed the fuel subsidy based on considerations that it will run out of naira then it based its decision on a factor that has not been relevant since the time of the Biafran war.

In 1971, the world left the gold standard replacing it with “state” or “fiat money.” Under the gold standard, a nation had to save gold to support its currency or risk insolvency. After 1971, bondage to gold was broken. Since then, the worth of a nation’s currency is not tied to gold which means that the ability of a nation to print currency is not determined by its holdings of gold. The worth of the currency is based on the strength of the economy and the amount of money the nation prints is determined by that strength as well as the nation’s future economic objectives. A nation can no longer fall insolvent concerning debts or payments issued in the national currency. As long as the fuel subsidy is paid in naira, then Nigeria cannot go bankrupt paying it any more than the ocean can run out of salt water. In a fiat money system, the problem with the fuel subsidy is not impending insolvency as the government asserts. The serious constraint is inflation. Here we must ask whether the payment is so inflationary as to distort the economy. We have been making the payment for years and inflation has not wrecked the economy. This historic evidence refutes the imminent disaster claimed by the government.

In advancing the argument that subsidy would lead to imminent bankruptcy, government reveals its lack of trustworthiness on important matters of fact. Is this the same government that several weeks ago claimed Nigeria was among the world’s best-performing economies with a GDP growth rate of 7 percent annually? It seems the government has a vast canvas on which it can paint a number of different scenarios of Nigeria depending on the whim of the moment. While the government may alter its portrait of the nation, the people are forced to live one reality at a time. Is Nigeria a fast-growing economy? If the nation’s GDP is growing so strongly, the subsidy or a similar expenditure on the people cannot be the lethal burden government now maligns it to be.

Nigerians have a collective stake in the ownership of our oil resource held in trust by the government of the day. What we need then is the effective management of this scarce resource that will beget long-term prosperity to the suffering people of Nigeria and not the present racket in which those in power abuse access and control of NNPC and oil revenue to warehouse money to fund their election campaigns.

This brings us to another inconsistency. On one hand, the government states the expenditure is unsustainable yet on the other it claims the amount now earmarked for the subsidy will be used to fund other people-oriented programs. However, the two assertions cannot exist at the same time. If the subsidy is bankrupting us, then reallocating funds to different programs will be no less harmful. A bankrupting expenditure retains this quality whether used for a subsidy or another purpose. Earmarking the funds to something else will not change the fiscal impact. If the government is sincere about using the funds for other programs, then it must be insincere about the threatened insolvency.

The concern about the government saving naira is purely superfluous. Officials cry that Nigeria will become like Greece. Those who say this disqualify themselves from high office by their own words. Greece sits in a terrible situation because it forfeited its own currency. Thus, it cannot print itself out of insolvency and it must save or earn euro to pay its bills. Because Nigeria issues its own currency, it does not face the same constraint. Again, Nigeria’s problem with the subsidy is not insolvency. Therefore, to go from subsidy to nothing is not wise economics for it “saves” the government nothing. What it does is produce real havoc and misery for the majority of the people while the governing elite worships their mistaken fiscal rectitude. Ironically, by acting like the old gold standard fiscal constraints are real, this government will incur the very thing it seeks to avoid. It will subject Nigeria to a crushing economic contraction. The difference between us and the Greeks will be that their situation is the inevitable result of being a weak member in a monetary union dominated by a strong economy, while our downturn will be a discretionary one artificially induced by the backwardness of our policymakers.

By its action, our government placed itself on the list of conservative governments imposing unwise austerity programs on tired and weak economies. The results have been alarming. Greece, Ireland, Spain, Italy, and the UK have imposed stiff austerity. Each nation that has done so now has an intimate relationship with recession. Must we travel the same path? Why does our government think an independently-minded Nigerian success is inferior to the mimicry of European failure? I don’t understand why we take this road. Our government has allied itself with the goals of the European conservatives and not with the needs of the Nigerian populace. No one plucks a chicken to feed his children feathers. Nor does a man set his house on fire just so people can bring him water.

However, this is the spirit behind government policy. There has been no nation on the face of the planet that has developed or achieved long-term prosperity by devotion to conservative, ultra-free market economic ideas that dominate this government. America, the United Kingdom, and now China all based their initial thrust toward national economic development on significant government interplay in the economy and on sustained government fiscal deficits. If no nation has grown using these conservative ideas when growth was constrained by the gold standard, why would we shackle ourselves to these ideas when we operate under a monetary system that provides the federal government greater policy latitude to achieve economic development objectives?

Again, we must rid ourselves of the old notion that government saving and budgetary surpluses are inherently good and that deficits are always bad. For the government to save naira, that means it brings in more than it pays out. Where does this influx come from? It comes from you and me, the private sector. If the federal government saves more, it means the private sector will have less. Government surplus means private sector contraction. This shows that the administration has its priorities confused. It acts as if the people are there to help government run itself. The more beneficial relationship is that government should be giving people the help needed to better live their lives. The government’s position is akin to a wealthy parent demanding his young children bring home more food for him to consume than the parent gives them to eat. We would deride any parent for such meanness. Yet, this government believes this conduct is wise and prudent.

Another argument government has presented is that the removal of the subsidy will stabilize the exchange rate. This makes no sense. True, since marketers convert much of the naira from selling petrol gained into dollars, there is downward pressure on the exchange rate and foreign reserves. However, this pressure is not a byproduct of the subsidy. It is a byproduct of importation. With the subsidy lifted, the marketers will earn the same or more from the sale of petrol. For there to be less pressure on the exchange rate would mean the marketers would seek to exchange significantly less of the same amount of naira into dollars simply because the subsidy was removed.

There is no logical basis to assume the new Jonathan tax will have the behavioral impact of causing importers to want to hold more naira. The downward pressure on our currency and reserves will not change simply because the imported items are no longer subsidized. In fact, the higher rate of inflation caused by the removal may make importers keener to change naira into dollars. Thus, the real challenge in this regard is for government to pave the way to increased domestic production.

There is another “philosophical mystery” in the government’s position. They state the subsidy must be removed to end the unjust enrichment of the importing cabal. There is a major problem with this assertion. If this is truly a subsidy, there should be no unjust enrichment. A subsidy is created to allow the general public to pay a lesser price while sellers earn the prevailing market price. Subsidy removal should not increase or decrease the amount earned per liter by the suppliers. If the amount earned by the suppliers will diminish materially, what the government had been operating was in part a pro-importer price support mechanism on top of the consumer-friendly subsidy.

If this is the case, the government could have abolished the unneeded price support while retaining the consumer subsidy. More to the point, the government has failed to show how the system it plans to use will be protected from the undue influence and unfair dealings of those who benefited from the discarded subsidy regime. Because it is capital-intensive by its very nature, this sector of the economy is susceptible to control by a few powerful companies. Most of the players will remain the same except that a few cronies of the administration will be allowed entrance into the lucrative game. Sending the economy into the gutter is a steep cost to pay just so a few friends can reap a new windfall.

The government claims that subsidy removal will create jobs. This is misleading. The stronger truth is that it will destroy more jobs than it creates. For every job it creates in the capital-intensive petroleum sector, it will terminate several jobs in the rest of the labor-intensive economy. Subsidy removal will increase costs across the board. However, salaries will not increase. This means demand for goods will lessen as will sales volumes and overall economic activity. The removal will have a recessionary impact on the economy as a whole. While some will benefit from the removal, most will experience setbacks.

What is doubtless is that the Jonathan tax will increase the price of petrol, transportation, and most consumer items. With fuel prices increasing twofold or more, transportation costs will roughly double. Prices of food staples will increase between 25-50 percent. Yet this is more than about cost figures. Most people’s incomes are low and stagnant. They have no way to augment revenue and little room to lower expenses for they know no luxuries; they are already tapped out. The only alternative they have is to fend as best they can, knowing they must somehow again subtract something from their already bare existence. There will be less food, less medicine, and less school across the land. More children will cry in hunger and more parents will cry at their children’s despair.

This is what the government has done. Poor and middle-class consumers will spend the same amount to buy much less. The volume of economic activity will drop like a stone tossed from a high building. This means real levels of demand will sink. The middle class to which our small businessmen belong will find their profit margins squeezed because they will face higher costs and reduced sales volumes.

These small firms employ vast numbers of Nigerians. They will be hard-pressed to maintain current employment levels given the higher costs and lower revenues they will face. Because the middle-class businessman will be pinched, those who depend on the businessmen for employment will be heavily pressed. States that earn significant revenue from internally generated funds will find their positions damaged. Internally generated revenue will decline because of the pressure on general economic activity. The Jonathan tax will push Nigeria toward an inflation-recession combination punch worse than the one that has Europe reeling.

This tax has doomed Nigeria to extra hardship for years to come while the promised benefits of deregulation will never be substantially realized. People will starve and families crumble while federal officials praise themselves for “saving money.” The purported savings amount to nothing more than an accounting entry on the government ledger board. They bear no indication of the real state of the economy or of the great harm done to the people by this miserly step.

As stated before, the threat of bankruptcy is nothing more than a ghost of something long dead. The real consideration is not whether this sum should be spent but whether it is better spent on the subsidy or on other programs. Nigerians do not need to be wedded to the subsidy. It is not the subsidy that gives life to the social compact; the amount of the expenditure is the better litmus. When attempting to douse popular sentiment, the government pretended that the social contract would remain intact because the government would spend the money saved from the subsidy on other programs. This would be nice if supported by action. If the government were sincere in this regard, it would have used an entirely different strategy.

It would have looked at the removal as an evolutionary, long-term process instead of as a sudden event accomplished by executive decree. If the government had proceeded along these lines, it would have first perfected the plans for the new programs and projects that would receive the funds previously allocated for the subsidy. These plans would have been in place and ready to implement. Only then would the subsidy be removed. To say that they will develop programs once the subsidy is removed suggests government‘s heart is not in these alternatives. The government only raised this possibility as a public relations afterthought to douse public opposition.

For instance, the government’s top spokesperson said it was obvious the Administration had guillotined the subsidy since it was not included in the 2012 budget. If we take this as the measure, there is no evidence in that budget of the government transferring the bulk of “subsidy savings” to other programs. Using the reasoning employed by the government itself, the budget reveals no sympathetic plan to buffer the effects of the Jonathan tax.

Even if the government wanted to engage in naira-for-naira alternative social spending, it would take well over a year for the programs to have even minimal effect. Such expenditures would require new legislation. Given the pace of the National Assembly, such legislation would take months even if fast-tracked. Then appropriations would have to be made before the process of procurement began. If the federal government were to buy sufficient buses to subsidize urban transport across the nation, orders would have to be placed for the purchase and importation of these buses. Again, months would elapse. If we are aiming at major road construction, the processes of project planning and contract bidding will require well over a year after a project is approved and funds appropriated. Last, the government has just established a large committee to oversee this alternative expenditure. We have no need for another such body. If competent, the government would not require this help. Moreover, we have seen this tactic before.

Time and money will be devoted to running the committee. More attention will go to the committee’s emoluments than to its fundamental work. The actual parameters of the committee’s scope of work are nebulous and ill-defined. Will it have the authority to act or only advise? This looks like another blind alley where the government hopes to misdirect our attention. This committee is not meant to accomplish anything except to numb public opposition. The government hopes people will posit confidence in the body because of the eminent people named to it. By the time the public discovers the committee is a zombie creation, too much time would have elapsed and it will be too late to reignite public protests. The people then will resign themselves to their fate. This trick has worked in the past; it will not work today because the people are much too aware and too agitated.

In the end, the federal government has done the nation an awful disservice at the worst time. This is an unneeded and avoidable emergency.

Pursuing the grail of elitist economics, the federal government brings economic disaster to our doorstep. Attempting to protect government bank accounts from false bankruptcy, they push the people into real bankruptcy. The government is relying on the fact that the people are long-suffering and patient. They think the people will quickly forget this latest assault and return to the grueling challenge of daily survival. The government thinks people will be so fixated on survival that they will forget government has made survival more difficult. Rarely has a government been this cynical. Not even the reclusive Yar’adua or the dictator, Obasanjo placed this hardship on the people. Of course, Nigerians know that Obasanjo failed spectacularly to lay the necessary infrastructural foundation which could have made the recent removal of subsidy an easier decision for President Jonathan and a lesser burden for Nigerians to bear.

Nigeria in Jonathan is confronted with a government “on top of the people” rather than a “government for the people”. It is as if Jonathan has turned from president to pharaoh and has decreed that the people make bricks without straw. What manner of leader has he become? I don’t know. However, there is only one just way out of this distress. Government must modify the sudden and complete removal of the subsidy. Either we restore the subsidy or use the funds for other social purposes. If we are to use the funds for other programs, those programs shall be placed on a parallel track with the subsidy. As more of these programs are ready to go online, then the subsidy can be lifted in phases. In this way, the public is assured the government will not lower its total expenditure on their behalf, thus maintaining the spirit central to the social contract. Fuel price increases will be moderated so as not to cause extreme economic distress. And the people will see and feel the benefit of the alternative programs at the same time as the cost increases, thus further blunting the adverse impact of those increases. Until this change occurs, the people must remain vigilant or else we will sink under the weight of what the federal government has done.


Signed: Asiwaju Tinubu

January 8, 2012

Credit: Bayo Onanuga’s PM News


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