Decrease of oil prices: An opportunity to end the smuggling of gas in Benin?

by Daniel Ndoye, Country Economist, Benin


Arriving in Benin, you will certainly notice all the cans and fuel bottles sold on every street corner. This fuel, 30% cheaper than its counterpart in official gas stations, represents more than 80% of the fuel market in the country. This smuggled gas called “kpayo” (literally “not original” in the local Goun language) is imported illegally from neighbouring Nigeria, where fuel is heavily subsidized.

The sale of kpayo represents a significant source of income for traders, mostly young people, while offering gasoline at a more affordable price. It is however illegal; and its adverse effects on health and the environment due to its unprotected handling and sale outdoors, in addition to the risk of explosion due to improper storage of the fuel, are widely acknowledged. Furthermore, the smuggling entails a significant loss of revenue to the State, since 80% of the market escapes fuel taxes, as well as other taxes that would have been collected from oil companies (such as sales or income taxes). The government is thus deprived of financing for road maintenance, since it cannot raise the the road maintenance fee  on petroleum products, as is the case in several countries of the Economic Community Of West African States (ECOWAS).

The Beninese Government has repeatedly tried to fight trafficking, but each time it faced resistance from vendors, as well as from the more influential major traders in this illegal trade. A common argument is that many families subsist on this smuggling; and that if the government wants to end it, it has to offer a well-paying alternative for people to move to.

The problem with this argument is that it reverse the natural order of things – you’d expect that people guilty of illegal activity would have to cease that behaviour before receiving government assistance to find alternative employment. And herein lies the dilemma; on the one hand, the state has an obligation to uphold the law and end the smuggling, and create the appropriate conditions for oil companies to work and thrive in the country, ensuring an adequate supply of petroleum products. On the other, the State also has a role in promoting employment, for young people and women in particular. And despite its negative impact, the trade of kpayo represents a source of income for a large number of young people who are escaping unemployment and poverty. The state should therefore attempt to integrate all those young people working illegally, without stigmatizing them; while at the same time maintain the quality of gas sold and uphold public health standards, and support the country’s petroleum industry.

But what if the sharp decline in international oil prices (a 40% decrease between June and December 2014) represented an opportunity? It very well could be, insofar as the possible negative impact of a decline in illegal trade of gasoline on inflation and on transportation costs would be offset by a lower prices at the pump in the stations (see chart below).

The push could also come from Nigeria, where the government announced a drop in fuel subsidies over 2015-2017 as a result of lower oil prices in international markets. The planned decrease in subsidies would reduce the price differentials between the two countries and thus make kpayo simply less attractive. This has already happened in 2012, when Nigeria had decided to remove the fuel subsidy; for a moment, Benin had abandoned kpayo in favour of gas stations – until the Nigerian Government partially restored subsidies.

The graph below shows that price differentials have narrowed in December 2014, and this is expected to continue in 2015 if the trend of oil prices decline continues.

With the upcoming elections in both Benin and Nigeria, there are concerns that governments would avoid taking measures that might generate social unrest. But unlike 2012, removing subsidies in Nigeria would have a lesser impact on the populations in Nigeria, thanks to the general decline of oil prices. Prices at the pump could even remain stable or decline in Nigeria (albeit less than in Benin), depending on the evolution of international oil prices. That is why the Nigerian Government could face less resistance than in 2012. As for the Beninese Government, this would be an exceptional opportunity to push ahead with the fight against the illegal sale of gasoline.

Benin’s government will have to be creative in resolving this issue, which affects youth employment, the environment and public health, and threatens the viability of the oil sector. The drop in oil prices and structural changes in the subsidy system in Nigeria opens a short window of favourable conditions; this should be a cue for the country to come up with new solutions, not simply fighting an illicit trade but rather introducing a comprehensive program of assistance to those young people, to ensure a supportive and inclusive solution for all parties concerned. The state might wish to consider lowering the tax on petroleum products; the loss of tax revenue could be offset by the growth in the demand on “legal” gasoline.

They could also learn from the experience of other countries, such as Colombia which is facing a similar situation with its neighbour Venezuela, and which has established a retraining program for smuggled gasoline vendors, while integrating informal vending networks into the legitimate distribution networks. And in Cambodia, the government chose to fight the sale of smuggled petrol on the street and in illegal gas stations by quality controls and their integration in the formal sector.