Subsidy removal: The UAE experience

Also published in Daily Trust

Now that it increasingly appears that the controversial fuel subsidy regime in Nigeria will almost certainly soon be abolished, my experience, so far, following similar removal here in the United Arab Emirates has greatly dispelled my worries about its impacts on the cost of living. After all, even before its removal, the subsidy regime here was already transparent and the fuel supply management was already perfectly efficient, contrary to what obtains in Nigeria where it is characterized by monumental corruption and operational mediocrity. 

Like other crude oil producing countries where oil remains their primary source of revenue, the UAE government’s finances have been affected by the dwindling oil prices in international markets, hence it opted for the removal of fuel subsidy in order to save the huge amount of funds spent on the subsidy in favour of investment in more beneficial and sustainable economic endeavours. The new deregulated fuel price regime came into effect on August 1, 2015. Consequently, ever since then, on the 28th of each month the prices of diesel and petrol for the following month are announced based on crude oil prices in international markets.

Interestingly, due to the persistent fall in crude oil prices in international markets particularly over the past few months, the price of petrol in the UAE has been fluctuating below the pre-deregulation era price for the fifth month in a row. Also, though fuel prices are likely to keep fluctuating accordingly, yet, in any case, whatever impact this price fluctuation  might have on the cost of living in the country it isn’t likely to be disproportionate compared to people’s standards of living anyway. This is due to the country’s increasingly diversified economy, which is also vibrant enough to withstand the economic repercussions of the deregulation, and indeed has the potential to stimulate further microeconomic growth to overshadow its impacts.

Now, despite the fact that, unlike the UAE’s economy, Nigeria’s already exhausted economy lacks adequate systemic immunity from the economic repercussions of fuel price deregulation, and that the absence of adequate economic infrastructure has rendered the already largely poverty-stricken Nigerians more vulnerable to the devastating economic impacts of the collapse of oil prices, yet the federal government can opt for fuel deregulation anyway and still avert, or at least mitigate  its microeconomic impacts substantially.

After all, the fear being peddled against its removal by the corrupt and greedy vested interests benefiting from the subsidy regime and which some civil organizations, trade unions, professional associations and millions of Nigerians have innocently subscribed to, is simply too exaggerated be true. The general assumption formed from that peddled fear that fuel price deregulation per se necessarily triggers disproportionate inflation is simply erroneous.

Besides, the current drastically low crude oil prices in international markets, which has caused a significant reduction in the cost of fuel production negates the necessity for subsidizing the fuel prices, as President Buhari rightly maintained in his maiden presidential media chat last Wednesday.

However, for Nigeria to achieve effective and sustainable deregulated fuel pricing regime that will guarantee an adequate and uninterrupted supply of the products in the country at reasonable, even though fully deregulated, prices, the federal government needs to identify the particularly peculiar challenges that bedevil oil industry in Nigeria. This is imperative because obviously under the current terribly messy and extremely corrupt fuel supply system, mere subsidy removal can’t bring the recurrent fuel crisis in the country to an end for good, after all. In fact, removing it without addressing such pressing issues will simply create more avenues for the vested interests that have benefitted from the corruption-ridden subsidy regime to continue shortchanging and defrauding Nigerians with impunity. 

Besides, the failure, or rather the reluctance of the successive federal governments in Nigeria to maintain effective supervision on the fuel supply firms in the country despite the fact that the subsidy should ordinarily and rightly make it easier to do so, necessarily means that once the sector is fully deregulated the situation would definitely get worse both in terms of fuel supply, its pricing and other related services.

To avoid this scenario, therefore, government should, first of all, purge its relevant regulatory authorities and supervisory agencies of the accomplices who connive with the fuel suppliers to swindle Nigerians and get away with it. It should then draw up a comprehensive strategy with a clear implementation mechanism to enforce and ensure transparency in the process of fuel production, sourcing, supply and pricing.