Wise petrostates seek to turn oil revenues into human capital. By investing in better clinics, schools and other public services, they nurture healthy, well-educated citizens who will thrive long after the oil runs dry. Nigeria offers its people cheap petrol instead.
Nearly half the government’s oil revenues are wasted on petrol subsidies—2.3% of GDP, or four times the health budget. It should scrap this subsidy, a hard step that could be made politically easier by the start of petrol production last week at a huge refinery owned by Aliko Dangote, Nigeria’s richest man.
The subsidy has survived for decades, despite several attempts to get rid of it. President Bola Tinubu announced at his inauguration last year that the fuel subsidy “is gone”. Yet it quickly returned.
In its current form, it is convoluted and opaque. The state-owned Nigerian National Petroleum Corporation swaps locally pumped crude oil for petrol refined abroad, and sells that petrol to Nigerian motorists at a below-market price. The vast losses it makes on this are deducted from the oil revenues it is supposed to pay to the state. This dramatically reduces what is available for public services.
It is hard to exaggerate how terrible this policy is. It is inequitable, because the benefits flow disproportionately to the car-owning middle class. It is dirty, encouraging Nigerians to burn more petrol. It is an open door to graft. Lorryloads of subsidised fuel are smuggled into neighbouring countries.
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And because it costs a fortune to keep supplying cheap petrol, which the state cannot afford, petrol often runs out. In recent days mile-long fuel queues have caused huge traffic jams. Some drivers wait all night to fill their tanks.
Worst of all, lavishing more public money on fuel subsidies than on health and education combined makes it hard to improve the dismal quality of either. This is one reason why Nigeria is home to a sixth of the children who die before the age of five, and why the average Nigerian child absorbs only five years of schooling, against 8.5 in Kenya (measuring what is learned, not how long is spent in class).
The waste of human potential is spectacular. Nigeria will be the world’s third-most populous country by mid-century.
The World Bank estimates that, with proper food, schooling and health care, Nigerian children would grow up to be 2.8 times more productive.
The difficulty is that the petrol subsidy is popular. Although it lopsidedly benefits the better-off, every Nigerian swiftly feels the pain when it is reduced. A recent sharp increase in the official price of petrol has raised the cost of everything from groceries to electricity (since Nigerians often use petrol-powered generators at home). People are furious.
Last month police fired on crowds protesting against the high cost of living, leaving more than a dozen dead. The government is terrified of provoking further unrest. Yet a failure to reform will only prolong the misery.
There are two possible ways to persuade voters that scrapping the subsidy will ultimately benefit them more than it hurts.
One is to end the fuel shortages by letting Mr Dangote (and anyone else) sell petrol at market prices. The transition will not be smooth, owing to bottlenecks in the domestic supply of crude oil. And it will mean higher prices, which people will hate.
But Nigerians are sympathetic to the nationalist view that, as an oil producer, their country should refine its own fuel. And the government might find political cover by blaming higher petrol prices on Mr Dangote.
More important, it should invest the money saved by scrapping the fuel subsidy in health care, education and a less threadbare social safety-net. Mere promises to do so will be widely disbelieved.
Many Nigerians assume, with some justification, that any spare cash in state coffers is likely to be stolen or wasted on vanity projects. It is up to Mr Tinubu’s government to prove them wrong, and quickly.
Much could go wrong, as it has before. But Nigeria’s public finances are so wobbly that it can’t carry on like this. It should stop subsidising petrol, and subsidise people instead.
The Economist.
