Samuel Chinedu OMENKA [email protected]
+234-803-837-3456 and Professor A. ADENIKINJU
[email protected] +234-802-344-0018 FUEL SUBSIDY REMOVAL
IN NIGERIA: Alternative Options for Re-targeting the Budgetary
Gains A Paper Prepared for Presentation at the 6th Nigeria
Association of Energy Economics (NAEE) Annual International
Conference on Energy Resource Management in a Federal System:
Challenges, Constraints and Strategies Sheraton Hotel, Lagos,
Nigeria April 22 23, 2013.
Slide 2
Outline Introduction The literature Methodology and Data
Results and Discussions Conclusion
Slide 3
Introduction Higher energy prices! An important concern for
policy makers Rationale for existing energy subsidy Scheme? Shocks
to global fuel prices High Fiscal Deficits High Fiscal Deficits
Global Carbon Emission Increasing Poor People Global market
conditions and national fiscal state daunts fuel subsidy policy
Sustaining a high level of fuel subsidy: A huge fiscal burden,
despite oil wealth Sets back: poverty reduction investments
increases social inequality promotes smuggling, and inefficiency in
petroleum production, processing, and distribution
http://www.iea.org/weo/Files/ann_plans_phaseout
Slide 4
Introduction continued Year Poverty Level (%) Est. Total
Population (Million) Poverty Population (Million) 198027.26517.1
198546.37534.7 199242.791.539.2 199665.6102.367.1 200454.4126.368.7
201069.0163112.47 2011*71.5168120.12 Source: National Bureau of
Statistics, HNLSS (2010) *The 2011 figures are estimated
Policy-shift caused fiscal and social tension due to uncertainties
How about the potency of reallocation policy to mitigate the cost
of readjustment? What does theory says? Any Empirics? (Amegashie,
2006; Lipsey and Lancaster, 1956; Hope and Singh, 1995; Coady et
al., 2006) Uncertainty-driven research questions: what are the
macroeconomic and household impacts of fuel subsidy removal; which
households group benefits from the policy-shift; is a gradual
approach more rewarding than a one-shot shift?
Slide 5
The Literature Partial Equilibrium Models (DRI, 1994; Birol et
al., 1995; Hope and Singh, 1995; IEA, 1999) Considers only the
market directly impacted by the subsidy reform, and estimated
price, output and demand changes in that market Capable of
providing useful insights into the impacts of subsidy reform but
unable to address questions relating to inter- sectoral linkages as
well as macro questions relating to international competitiveness.
Partial Equilibrium Models (DRI, 1994; Birol et al., 1995; Hope and
Singh, 1995; IEA, 1999) Considers only the market directly impacted
by the subsidy reform, and estimated price, output and demand
changes in that market Capable of providing useful insights into
the impacts of subsidy reform but unable to address questions
relating to inter- sectoral linkages as well as macro questions
relating to international competitiveness. CGE models Multi-country
(Larsen and Shah, 1992; Burniaux et al., 1992; Steenblik and
Coroyannakis, 1995; OECD, 2000; Saunders and Schneider, 2000; and
Burniaux et al., 2009) Single-country (Clarke and Edwards 1997;
Jensen and Tarr, 2002; Clement et al., 2003; Nwafor et al., 2006;
Yusuf and Ramayandi, 2008; Dartanto, 2011; Breisinger et al., 2011)
CGE models Multi-country (Larsen and Shah, 1992; Burniaux et al.,
1992; Steenblik and Coroyannakis, 1995; OECD, 2000; Saunders and
Schneider, 2000; and Burniaux et al., 2009) Single-country (Clarke
and Edwards 1997; Jensen and Tarr, 2002; Clement et al., 2003;
Nwafor et al., 2006; Yusuf and Ramayandi, 2008; Dartanto, 2011;
Breisinger et al., 2011) CGE models Capable of capturing
distributional changes in employment, consumption patterns and real
incomes among different income groups in economy. Comparability of
results in relation to the size of the subsidies is very limited in
multi-region CGE models CGE models Capable of capturing
distributional changes in employment, consumption patterns and real
incomes among different income groups in economy. Comparability of
results in relation to the size of the subsidies is very limited in
multi-region CGE models
Slide 6
The Literature continued Economic Effects Burniaux et al.,
(1992), Larsen and Shah (1992), Clarke and Edwards (1997), IEA
(1999), Saunders and Schneider (2000), OECD (2000), Jensen and Tarr
(2002), Hartono and Resosudarmo (2006), Burniaux et al., (2009),
Breisinger et al., (2011) Economic effects (usually measured in
terms of changes in GDP) from subsidy reform are positive at an
aggregate level due to enhanced price incentives that leads to
better resource allocation. Some studies report net increases in
GDP or real income by the end of the model run, while some others
report (per annum increases in GDP or income over the course of the
simulation period. Economic Effects Burniaux et al., (1992), Larsen
and Shah (1992), Clarke and Edwards (1997), IEA (1999), Saunders
and Schneider (2000), OECD (2000), Jensen and Tarr (2002), Hartono
and Resosudarmo (2006), Burniaux et al., (2009), Breisinger et al.,
(2011) Economic effects (usually measured in terms of changes in
GDP) from subsidy reform are positive at an aggregate level due to
enhanced price incentives that leads to better resource allocation.
Some studies report net increases in GDP or real income by the end
of the model run, while some others report (per annum increases in
GDP or income over the course of the simulation period. Household
Effects Most studies find evidence that fuel subsidy reforms have
negative household effects: Freund and Wallich (2000) for Poland;
Clements et al., (2003) for Indonesia; Coady et al., (2006) for
Mali and Ghana. Other include Oktaviani et al., (2005), Yusuf and
Ramayandi (2008) Household Effects Most studies find evidence that
fuel subsidy reforms have negative household effects: Freund and
Wallich (2000) for Poland; Clements et al., (2003) for Indonesia;
Coady et al., (2006) for Mali and Ghana. Other include Oktaviani et
al., (2005), Yusuf and Ramayandi (2008) Re-targeting of Budgetary
Surplus Targeting option matters! Targeted direct transfer of saved
money increases poorest households welfare in rural areas more than
urban areas (Jensen and Tarr, 2002; Coady et al., 2006; Hartono and
Resosudarmo, 2006) Impact of the transfer depends on service
delivery (Breisinger et al., 2011) Direct transfers plus investment
in infrastructure or human capital (Dantarto, 2011) Use savings to
finance government deficit or reduce the rate of indirect tax
(Yusuf and Ramayandi, 2008) Re-targeting of Budgetary Surplus
Targeting option matters! Targeted direct transfer of saved money
increases poorest households welfare in rural areas more than urban
areas (Jensen and Tarr, 2002; Coady et al., 2006; Hartono and
Resosudarmo, 2006) Impact of the transfer depends on service
delivery (Breisinger et al., 2011) Direct transfers plus investment
in infrastructure or human capital (Dantarto, 2011) Use savings to
finance government deficit or reduce the rate of indirect tax
(Yusuf and Ramayandi, 2008)
Slide 7
Methodology and Data Theoretical structure based on the
neoclassical theory of general equilibrium Leon Walras (Arrow and
Debreu, 1954, and McKenzie, 1959; 1981) + structuralist features
(Dorosh, 1996, Nwafor, 2007) The standard model: a recursive
dynamic CGE model (Decaluwe et al., 2010) The SAM Nigerias 2006 SAM
(Nwafor et al., 2010):11 sectors, 3 factors, 3 tax accounts, 4
household categories, a firm, government, S-I, and ROW accounts.
Innovation!
Slide 8
Methodology and Data continued % Share of income for each
household category
Slide 9
Methodology and Data continued Consumption Share by Household
Category
Slide 10
Methodology and Data continued Eight blocks : Production,
Income and Savings, Demand, Producers supplies of product and
International trade, Prices, Equilibrium, Gross domestic product,
and Dynamic equations blocks Production: Multi-level cascading
specification: CI + VA --- Leontief production function; VA: labour
and composite capital --- CES; MPL and MPK = their price; land is
fixed throughout; capital is fixed in the first year; labour is
free to migrate across sectors Income and Savings: Households (4),
assumed to have Stone-Geary type of preferences, earn income from
L, K, and TR. Savings is linear function of income; Govt revenue is
made up of direct and indirect taxes, as well as transfer income
from ROW Demand: Specified as Stone Geary LES (offers some degree
of flexilibility w.r.t substitution possilibilities ) International
Trade: ROW and domestic economy relationship based on Armington
assumption of imperfect substitution (minor exception refined oil);
producer decides how much to export and sell domestically based on
CET function Dynamics: between-period relationship driven by
population growth and capital accumulation. Nigeria and the Small
Country Hypothesis + Departure from the pure hypothesis
(PE.FOB)
Slide 11
Methodology and Data continued Model Closure neoclassical
closure : labour supply is held fixed and assumed to be mobile
across sectors wage is allowed to adjust to clear the market.
capital is also kept fixed but immobile only in the first period
return to capital is determined endogenously in the model to clear
the market for capital supply Numeraire: nominal exchange rate
(exogenous, thus) C.A Bal: Current account is held fixed while
foreign savings is allowed to adjust endogenously to ensure
external balance Government Bal: G.E is fixed in real terms as well
as all tax rates. Its budget adjusts to ensure P.E equal R. S-I
closure: savings-driven (savings rates of domestic institutions are
fixed so investment passively adjusts to ensure equilibrium
Simulation Scenario SIM1com SIM2grad SIM1gov SIM2ind
Slide 12
Results and Discussions macroeconomic effects Increase in
several macroeconomic aggregates Less pronounced with a gradual
removal of fuel subsidy Interestingly, one-shot subsidy removal
makes more macroeconomic sense!
Slide 13
Results and Discussions Sectoral Effects Total Aggregate Output
Price of local product (Domestic Market) Increase in aggregate
output except transport output DP rises? VA rises but DIT falls
Changes in relative prices of factors Declines more in SIM1com
Price of basic domestic commodities increase Food price
declined
Slide 14
Results and Discussions Sectoral Effects Labour Demand Effect
Demand for capital General increase in demand of capital Labour is
affected more in sector that depend more on petroleum products as
intermediate input Changes in relative prices of factors
Slide 15
Results and Discussions Household Effects Households income
effect The worst hit: Poor households (esp. HRP) HUNP least
affected One-shot approach to the policy shift appears favourable
Result is plausible given fall is income sources returns Households
consumption effect One-shot approach to the policy shift appears
favourable It is distributionally progressive Rural households
benefits more from the reform
Slide 16
Results and Discussions Macroeconomic Effects Increase in
several macroeconomic aggregates However, increasing investment is
specific sectors generates more growth SG; IT; AGGYH
GDPYGSGITAGGEXAGGIMAGGYHINFL
SIM1com0.881.3114.9527.941.420.990.650.58
SIM2grad0.620.9811.9022.061.030.730.440.45
Slide 17
Results and Discussions Sectoral Effects Total Aggregate Output
Price of local product (Domestic Market) FOODMANTRANSSER SIM1com
0.442.15-3.921.20 FOODMANTRANSSER SIM1com -0.050.863.671.54
Slide 18
Results and Discussions Sectoral Effects Labour Market Effects
Demand for capital FOODMANTRANSSER SIM1com -0.612.06-6.811.02
FOODMANTRANSSER SIM1com 2.072.250.812.11
Slide 19
Results and Discussions Household Effects Household Income
Effects Household Consumption Effect HRPHRNPHUPHUNP
SIM1com0.510.630.560.76 HRPHRNPHUPHUNP
SIM1com0.300.150.03-0.17
Slide 20
Conclusion This paper analyzed the general equilibrium effects
of petroleum subsidy removal using a recursive-dynamic CGE
framework. Increase in several macroeconomic aggregates; however,
increasing government expenditure reduces the macroeconomic gain
Growth-effects are more when gains are invested in agriculture and
manufacturing sector Interplay in sectoral activities also
determine household effects Increases in households income (NP
benefits more) Rural households gain more in terms of consumption
One-shot approach to the policy shift appears favourable CAVEATS!!!
The political economy perspective Shocks to international price of
oil not considered
