In one of his publications on subsidy reforms, Equity and Efficiency in the Reform of Price Subsidies: A Guide for Policymakers, Sanjeev Gupta of the IMF, defined price subsidy as money paid, usually by government, to producers to reduce the production cost (hence the market price) of a good or service. This largely is the definition of subsidy in Economics. It certainly does not include the notion of subsidy we have in Nigeria as deregulation of the downstream sector of the petroleum industry.When a subsidy is targeted to reduce the price of a good or service below what it would be in the absence of the subsidy, it is called a consumer subsidy. Consumer price subsidies often, are associated with over-consumption or under-provision of the subsidised item because of the below market price the consumer pays. When on the other hand the subsidy is targeted to increase the price received by a producer above its market level it is called a producer subsidy. Producer subsidies are associated with excess production because of the excess profit the producer makes. Consumer and producer subsidies are known as explicit price subsidies, because they are recorded in the government budget as expenditures, although not necessarily under the category subsidies, and are marked by actual cash payment. Explicit subsidies can take many forms. In the case of a consumer subsidy, a public agency can make direct payments to producers to compensate them for charging lower prices for their output. Alternatively, the government can directly provide goods and services free of charge or at below-market prices through a public distribution system. However, subsidy may also be implicit.Subsidies become implicit when they are not provided for in the governments budget, but can show up as (1) losses of the banking system (e.g., owing to below-market interest rates or directed credits) as the agricultural loan guarantee scheme of the Central Bank of Nigeria; (2) losses of state-owned enterprises, like the Nigerian Railway Corporation; (3) tax expenditures (e.g., tax exemptions, concessions and, duty waivers); (4) regulations that alter market prices or restrict market access (regulatory subsidies); and (5) distribution of donor-provided commodities at below-market prices. Of these, the first three are mostly employed in Nigeria.Whether explicit or implicit, subsidies burden the governments budget and can aggravate a countrys fiscal position. So, to that extent, there is a burden of subsidy borne by all of us and I believe most of us will want to put off that burden. For example, duty waivers given in Nigeria have never brought down the prices of the benefitting products below cost. They should be scrapped, as they effectively constitute additional taxes on Nigerians. That is to say, where importers of petroleum products have received duty waivers, such waivers should be withdrawn and the importer made to pay the applicable duties. It is therefore proper that government scraps this category of subsidy.In truth, subsidies are policy instruments employed by government to efficiently and equitably allocate and distribute resources. The goal is to keep prices below what they would otherwise be in a free market, or to keep alive businesses that would otherwise go under, or more generally to make activities happen that otherwise would not take place. This is why it is employed by governments all over the world in the management of their respective domestic economies. For example, government spending on subsidies averaged 1.6 per cent of GDP in a group of 65 advanced, developing, and transition economies. Such spending was relatively high in industrial countries (1.8 percent of GDP), especially in the European Union. On the other hand, in developing countries, spending on subsidies averaged 0.9 per cent of GDP, and in transition economies, 2.3 per cent of GDP. However, subsidies when not purposefully used tend to reduce allocative efficiency by distorting relative prices. Meaning the price of the commodity will not reflect its actual cost. In the event that such a situation arises, the national economy will be jeopardised, as it would lead to excessive consumption of the subsidised commodity and wastage, in addition to unhealthy practices such as illicit trade, cheating and smuggling.In the discussion of fuel price subsidies, I believe that the government has tended to use the implicit rather the explicit definition of subsidies. In determining the amount of subsidy in petroleum products the government uses the import parity pricing of petroleum products and not the unrecovered cost, which is the appropriate figure for calculating explicit subsidy. We have never been told the cost compared to the price we pay. In my observation, the volume of petroleum products purchased in this country is not because they are cheap but because of the inefficiency of public services. There are three major areas of petroleum products consumption; automobiles, electricity generation for domestic needs and electricity generation for commercial needs. The last two are largely because of the failure of the Power Holding Company of Nigeria to provide electricity. In simple terms, two-thirds of the petroleum products currently consumed in the country is due to governments inefficiency in electricity generation and such spendings are an indirect tax on the people of this country.Increasing the price of petroleum products is to further increase this tax. Another way to view this is say that, if we improve electricity supply, two-thirds of the subsidy will be saved, assuming of course that there is such an explicit subsidy. This (efficiency improvement) is certainly a better policy to pursue than subsidy withdrawal. When the Senate looked into the issue in October 2011, it found that the Nigerian National Petroleum Corporation had exceeded the budgetary provision for 2011 by over N1tn as at the end of September 2011. This is no subsidy that we should pay. This is unauthorised spending for which the responsible NNPCs officials should be sanctioned. Last year or so, the NNPC was found to have kept back some N450bn it should have remitted to the national treasury. As at the last time, the government converted this to a loan for NNPC. How will the NNPC pay back this loan' Every penny the NNPC collects is our money. The NNPC has no independent source of revenue from which they can pay this loan. Or, have they' What the government has inadvertently done is to authorise the NNPC to under-declare its revenue in one area to be able to pay the loan.In no sense does subsidy include waste on the part of government. If for instance the market price of a litre of petrol is N2 and for some reason the government goes to buy it for N5 and sell to its citizens at N3, that is inefficiency and not subsidy. Before we can talk about subsidy the government should first eliminate that waste and inefficiency that made it pay N5 for a N2 product and begin to buy at the market price of N2 to sell to us at less than N2. Also, subsidy is not foregone opportunities. That the government would have received N5 in a different market as against N2 in this market does not mean they are subsidising fuel by N3. So, for example, the government says if it sold all its oil on the international market they will get more money. Since they sell to NNPC for domestic consumption there is subsidy. No!This is called price discrimination, selling the same thing in different markets or to different buyers for different prices. That is why a dental refill in an Ikoyi dental clinic will cost many times more than what it will cost doing the same refill at an Oshodi dental clinic. It is only if the price for the domestic market is lower than cost that subsidy exists. We therefore have to have more details from the government to be able to determine whether there is subsidy on petroleum products. We need to also note that there are no absolutely market-determined prices. Since all prices are set within the context of economic and political boundaries, they are to a large extent the product of the economic policies of such economies. This is because taste and preferences are dependent on the environment. These are key elements of demand for a product that help establish the market clearing prices. Economists are beginning to talk more of market clearing price as against market determined price, the price that permits exchange to take place, as against the price that the exchange determine. Quite clearly these are two very different terms.Edeimu, a consultant, wrote in from O. E. & R. Consultancy, 18A Fola Osibo Street, Lekki 1, Lagos via edeimu@yahoo.com
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