The Monster That Created The Subsidy

Subsidy is a derivative of the Latin word "subsidium," and it means assistance: one of its several definitions denotes a social consideration for the majority in a society. By lowering the price of a key commodity below the commercial price, those whose buying power is beyond the reach of that essential commodity are able to afford it . This is the meaning that typifies the current situation in Nigeria; its removal - a new year greek gift from the government - has caused an imbroglio. Nigerians are not happy and they were on the street, protesting. Government and Labour agreements, notwithstanding, a platform for a more enduring solution should be sought. However, it is necessary to understand wh

As the buying power of majority of ordinary Nigerians was being eroded by the deregulation of the monetary system in the late 1980s, the government of the day decided to cushion the effects of the programme (SAP) by subsidising petroleum products, amongst other key commodities. By doing so, the few who could afford the commodities at the commercial rate, petrol for instance, also enjoyed the subsidy and often had the lion share - which seems inequitable. A responsible government has to do something. One of the ways to address these inequalities should have been to apply differentials in taxation. That would have been an equilibrium; making the rich pay more through higher tax regime. The tax system in Nigeria, however, is faulty.

The buying power of people in a country is governed by the value of the currency in their pockets: in Nigeria, it is the value of the naira. Since the beginning of the Industrial Revolution, wages and incomes have become the recompense for services rendered by people. The distorted valuation of naira, which is the currency of exchange for services, incomes and purchase of commodities in Nigeria, is the culprit, the monster, that has necessitated subsidies in the first place. Let me say at this point that typically, Nigerians do not face up to problems squarely; we often circumnavigate it. From the early 70s, the national treasury that ought to have been funded by tax receipts, was largely financed by oil receipts. This is an aberration, and it killed incentives to hard work both in government and the general populace.

As the country relies more on oil receipts for daily living, the production of other commodities suffers a setback. Nigeria thus imports almost every commodity, which is priced in foreign currencies. Since the value of the naira is not fixed to any of the currencies in which commodities are costed, variation between naira and major foreign currencies has to be kept at a minimum in order to reduce the effect of inflation. This is a herculean task, particularly with so many variations in the economy. Government is right to try to fund the treasury through taxation, but using the withdrawal of fuel subsidy as a form of tax is like the failed poll tax that Margret Thatcher tried in the 70s in the UK. The rich must be made to pay their fair share of tax for the running of the government.

In economics, inflation is when there is a general increase in prices within a backdrop of a fall in purchasing value of money. Policies have to be put in place to curtail inflation and the withdrawal of subsidy, for instance, must, therefore, be handled with great care. The government in Nigeria seems not have the political will and the capacity to tax the rich or curtail their excesses, hence this blanket withdrawal of fuel subsidy from the general populace. This will hurt ordinary people more, particularly as cheaper commercial electricity is inadequate. It will necessitate expensive self generation of electricity that unfortunately now will be more expensive than before because most of them use the premium motor spirit (petrol) to generate electricity.

Still on taxation; how much tax (money back to the treasury), for instance, have those purportedly importing the controversial premium motor spirit paid - maybe less that you and I? These are the people that have milked the treasury. In all of this, it boils down to a faulty tax system that requires urgent attention and the time to do something is now; otherwise this situation will continue with a recurring decimal. Nigeria cannot afford to delay tax reform any longer. It is what will free the oil revenue from the strangulation of government overheads. It is what will allow, largely, the oil receipt to fund developments in Nigeria.

This is the time to press for legislation for zero percent (0%) use of our oil revenue to fund government, legislature and executive overheads. This does not preclude funding the armed forces, because those are our insurance for the resources of the country. Nigerian governments should make do with a size and overheads of the civil units that fit within Nigeria's tax receipts; the oil receipts would then be earmarked only for capital projects and must be openly tracked (transparency in contract awards).

Christopher Kolade, if government are still willing, could still oversee the spending of the resultant 100% oil receipt for capital developments and not just the paltry savings from the withdrawal of fuel subsidy.

I reckon the people in government will not agree, as this will tantamount to committing economic suicide for the individuals. This protest could be translated into the building site for Nigeria's economic freedom, where we could lay a lasting foundation. The future of Nigeria rests on this premise. Let government go and work hard for tax collection, which is what responsible governments do. Only then will there be progress in the land as they claim. After that, they may remove all the subsidies in the economy - that will be the contribution of the rest of us to the survival of the economy as they allege.

I propose that this protest should be a platform to press for tax reform and reform in the insurance industry also, so that government could borrow at a lower interest rate for development. Proceeds of insurance premium would become the largest single deposits in our banks. Government could then use that as a leverage to control interest rate. This will bring the cost of borrowing under control. Or, we may continue to delude ourselves for a while longer. The bottom line is that Nigeria is earning too little. The less than $65 Billion U.S. dollars that Nigeria earned last year is too little for a teeming population like ours; considering our taste for good life. We should be earning 4 to 5 times more, in the region of $300 billion U.S. dollars annually. This can only be achieved by attracting foreign investments.

By the way, unless we find a way to guarantee the value (in dollar terms) of investments by foreigners for a minimum of 10 years or maybe more, I doubt if we will attract any. The process by which the value of the naira is determined by the bi-weekly Dutch Auction at the CBN is a key disincentive to foreign investment, except for a quick get in and out investment. If we must continue with this system, we could offer to put investments by foreigners outside the naira system. Their fear is that the value of their investments could be diluted in dollar term in a regime where the value of the naira is determined by Dutch auctioning of the petrodollar. This is uncomfortable to their home lending banks. We may of course continue to wait for a miracle that they will soon show up in spite of this singular monetary policy.

Samuel Akinyele Caulcrick

Lagos.