Nigeria’s new president, Muhammadu Buhari, is considering whether or not to end an expensive fuel subsidy programme, although many Nigerians see cheap fuel prices as perhaps the only benefit they receive from living in an oil-rich country. One way forward might be through more effective use of the potential of cash transfers for achieving a measure of social protection.
What is the alternative to the fuel subsidy?
The fuel subsidy in Nigeria reflects the continuing challenge facing Buhari’s Government in seeking to build an inclusive society. Removing a billion dollar fuel subsidy is particularly problematic in a developing nation as it inevitably impacts the poor and growing middle classes hardest.
The ‘right price’ for fuel
The IMF’s methodology for ‘Getting Fuel Prices Right’ requires adjusting market prices with ‘corrective taxes’ in order for fuel prices to reasonably reflect the pollutant side effects of these resources.[1] Given the ironic reliance of Nigeria on imported fossil fuels, the current price of petrol falls well below the commodities recommended cost (N87 per litre, $0.44) considering its contribution to environmental degradation. However, in many developing countries, these corrective taxes would produce a far higher price than the average daily consumption could bear. If this particular methodology was applied in Nigeria, the price of gasoline would nearly double, from $1.77 a gallon to $3.3 a gallon. The median daily consumption is currently $1, and the resultant change in fuel prices per gallon as a percentage of this consumption would be 155%. .[2]
Redistribution of wealth
Delivering the ‘right’ price in Nigeria would have devastating consequences for the country’s poorest. Many are now pointing to direct cash transfers as a way to overcome the human and political costs of adjusting these costs. The World Bank’s 2012 report ‘The Cash Dividend’ stated that it is not whether cash transfers should be used in sub-Saharan Africa, but how. The UK’s Department for International Development (DFID) has since supported numerous projects involving cash transfers to citizens.
The rationale behind cash transfers is that you can more efficiently catalyse development by placing resources in the hands of the people. State transfers are designed to advance individual empowerment over ‘top-down’ initiatives which have previously cultivated the dominant rent-seeking culture. Recent research by the Center for Global Development concludes “Creating citizen shareholders and putting the wealth of nations into the hands of the true owners—the people—is a powerful idea that deserves attention. Now is the time to put it to the test.” (Oil to Cash: Fighting the Resource Curse through Cash Transfers 2015).
An obvious choice?
Pledged by Buhari in the 2015 election campaign, and favoured by many international NGO and donors, cash transfers are an in-style policy choice for the Nigerian Government. It is also a policy that can boast success in other developing nations such as India, South Africa and Mexico. Last year Goodluck Jonathan officially announced the introduction of biometric identity cards for all Nigerian citizens, the dual-functioning cards certify identity as well as providing a payment function delivered by Mastercard. Universal provision of identity cards is the natural prerequisite of delivering a cash transfer system. India swapped its subsidies for monetary payments in 2013, using biometric identity cards to administer payments.
The yet-to-be-passed Petroleum Industry Bill contains a provision for 10% of oil revenues to be allocated to the development of petroleum-producing communities. If this bill is passed this 10% allocation could be also be used to fund the cash transfers, as well as the revenue allocated to fuel subsidy.
Building citizenship
Of course, a clear case for cynicism at the efficacy of cash transfers is easy to construct given the administrative headache it presents. One could easily lament that a new redistributive system would inevitably fall under the auspices of corruption and would not necessarily deliver the welfare gains that it intends. However, Buhari’s government is running out of options. The continuing financial burden of the current fuel subsidy, alongside its failure to alleviate poverty and extend a helping hand to the poorest Nigerians, means there is a need for decisive action. Cash transfers both attempt to redistribute the countries vastly unequal wealth, as well as developing a greater sense of citizenship with the government delivering to the individual.
[1] http://www.greenfiscalpolicy.org/wp-content/uploads/2014/11/Getting-Energy-Prices-Right-Full-Publication.pdf
[2] http://www.cgdev.org/blog/reducing-energy-subsidies-without-hurting-poor?utm_source=150714&utm_medium=cgd_email&utm_campaign=cgd_weekly&utm_&&&
