| Chinedu Moghalu |
Pull quote: The real adjustment is not monetary; it is economic, and it is about a wider base for economic production and export diversification.
PUBLIC commentaries in the Nigerian media have recently harped on a policy divergence between Nigeria and Saudi Arabia. Both countries, as well as other oil exporting countries, have been forced to make significant fiscal adjustments as the prices of oil have remained low. However, the disparities being talked about tend to exaggerate the extent of this divergence, and usually fail to provide the social context.
While Saudi Arabia dropped the hint of slashing subsidy on petrol, Nigeria announced a price cut for the product. The Saudi authorities have now gone ahead to raise the price of petrol by up to 50 percent. This percentage increase easily betrays the fact that the Saudis had been buying petrol for almost free. There is no indications whatsoever that Nigeria’s subsidy covers up to 50 per cent of what should be the market price.
The 50 kobo cut in the price of petrol in Nigeria, effective from this January, leaves the subsidy regime in place, although it would be latent as long as oil prices remain below $40.00 per barrel. However, the subsidy programme would become active again when oil prices rise higher.
The Saudi government had hesitated in scaling back its subsidy programme. But in the face of a potentially destabilising deficit, estimated at $98 billion this fiscal year, which is about 15 per cent of the GDP, the upward adjustment in the pump price of petrol became unavoidable. Yet this is a tamed adjustment. Many believe that the Saudi populace would resist deeper adjustment in prices which might cut through the utilities including power and water. The Saudis are thought to be quite used to enjoying low petrol price that hiking the price so astronomically as to completely eliminate subsidy, is itself potentially destabilising.
However, unlike the generality of the Saudis, Nigerians appeared to be welcoming of a move by President Muhammadu Buhari to remove completely the petroleum subsidy. Many argue that beyond the major cities of Nigeria where petrol sell at the regulated price, prices are up to 50 per cent higher elsewhere.
Far from enjoying the subsidy on petrol, Nigerians have seen the oil marketers hijack the programme, profiteering from it, at the expense of the poor who are the supposed beneficiaries of the subsidy. It also appears that Nigerians regularly have to choose between higher petrol price and availability of the products, occasioned by regular delays in the payment of arrears in subsidy to petrol importers.
But the more important reason why Nigeria cannot just end the subsidy programme now is the welfare implications of doing so. President Buhari must have been very considerate of this factor, and given the welfare promises his party made to Nigerians.
The similarities between Nigeria and Saudi Arabia are basically limited to their being major oil producers and members of the OPEC (Organisations of Petroleum Exporting Countries). Beyond this, the disparities among the two countries are stark. One, Saudi Arabia is a relatively small state of estimated 29 million people. Nigeria has a population of 180 million, growing to be the world’s fourth largest by 2050. Two, whereas Saudi Arabia produces 10 million barrels of oil per day, Nigeria produces roughly 2 million barrels pd. Three, as a result of the disparities in population and oil revenue, income per head in Saudi Arabia is $26,000.00. But Nigeria’s GDP per capita is $3,000.00. Four, and arising still from population and oil revenue, Saudi Arabia has $628 billion in external holdings; whereas, Nigeria’s foreign reserves hover at just $30 billion.
Given the disparities, Saudi Arabia has a lot more headroom for fiscal adjustment during this period of oil price slump that Nigeria does. That the Saudi’s have refrained from deeper fiscal austerity measures is indicative of the fact that economic policies are not always taken on the basis of some economic statistics. The social environment is much stronger indicator for formulating policies than some economic statistics. This is the thread that links together the policy responses between Nigeria and Saudi Arabia during this oil price recession. Although the Saudi authorities have cut petrol subsidy, they are not expected to be more aggressive with austerity measures than Nigeria would be in cutting petrol price. Both countries are expected to continue to avoid potentially destabilising adjustments, which, sometimes, might just be about the timing and ability to get public buy-in.
However, there are clearer meeting points between the adjustments, or the lack there of, between Nigeria and Saudi Arabia. The gulf state has foreclosed devaluation of the Saudi Riyal, for now. This is pretty much like the stance of Nigerian policymakers. Devaluation of a currency is a desperate move; but policymakers hate appearing desperate. Therefore, like the Saudi authorities, Nigeria is hoping that it would not have to devalue the currency. But, of course, that would depend on whether there would be a rally in the price of oil, and soon enough.
Nigeria has opted for a less painful adjustment. The country wants to expand the tax base and raise higher tax revenue to fund the budget. This option is the least stigmatising and the most inspiring for investor confidence, as Nigeria continues to weigh its options for fiscal and monetary adjustments. Saudi Arabia too has announced more dramatic policies to raise tax revenue.
There is always an efficiency gain for developing countries who muster the guts to widen the tax base and raise tax revenue. Since taxation is a much more accountable fiscal framework, it enhances public service delivery and infrastructure investment. More than the Saudis need the extra dollar revenue, they need a more efficient system. They, like Nigeria, need advances in infrastructure and private sector development. These are two key areas for sustainable economic growth. They can also provide resilience from external shocks like the current oil price slump. The absence of this efficiency system has pushed youth unemployment to 30 per cent in Saudi Arabia – something that is very hard to believe for those who are not familiar with economic data from the oil-rich country.
Nigeria is ahead of Saudi Arabia in the collection of taxes. While Saudi Arabia’s tax-to-GDP ratio is 5.3 per cent, Nigeria’s GDP ratio is 12 per cent. This reveals the extent to which easy oil income militates against private sector development and expansion of the tax base.
Bringing about a private sector that is prospering should be the thrust for governments and policymakers across OPEC and non-OPEC oil producers in the developing countries. The real adjustment is not monetary; it is economic, and it is about a wider base for economic production and export diversification. As we are about to see in Nigeria in respect of the 2016 budget that has 30 per cent capital expenditure and aims at higher tax revenues, raising tax collection and improving infrastructure go pari-passu. One hopes this posture would remain for the longer-term, irrespective of where oil prices rebound.
As Christine Lagarde noted during her visit to the country last week, some of the adjustments we have made in Nigeria can be suitable for the short-term. But over the long-term, government would need to continue to investment in infrastructure and power, and support the private sector prosperity as the fulcrum for lifting government’s tax income. This, I believe, is already in the works.
Chinedu Moghalu is Head, Nigerian Export – Import Bank
— Jan 13, 2016 @ 14:30 GMT