Fuel Subsidy and Nigeria
Fuel subsidy has long been a contentious topic in Nigeria, profoundly impacting the nation’s economy and social fabric. At its core, a subsidy is a financial assistance program provided by the government to support the production, consumption, or distribution of certain goods or services. In the context of fuel subsidies, it refers to the practice of the government reducing the cost of petroleum products to make them more affordable for consumers. This article delves into the complexities and consequences of fuel subsidies in Nigeria, exploring their origins, effects, and the ongoing debates surrounding their implementation. By examining the intricate dynamics of fuel subsidies, we can gain a deeper understanding of their impact on the Nigerian economy and the challenges they present to policymakers and citizens alike.
What is fuel subsidy in Nigeria?
Fuel subsidy was first introduced in Nigeria in 1973 during the oil boom era. Following the global oil price shock caused by the Organization of Petroleum Exporting Countries (OPEC) oil embargo, Nigeria experienced a significant increase in oil revenue. The government, led by General Yakubu Gowon, saw an opportunity to use some of the newfound wealth to provide affordable fuel for its citizens. This made fuel subsidy in Nigeria a government program that provides a fixed, lower price for premium motor spirit PMS (petrol) and other refined petroleum products such as kerosene, diesel, and aviation fuel. The subsidy program was initiated as a temporary way to cushion the impact of high fuel prices on the country’s citizens, especially the poor, who heavily rely on these products for transportation, cooking, and other basic needs. This was meant to last for only 6 months but has now been in existence for 50 years.
Under the subsidy program, the Nigerian government sets a maximum price for PMS and other petroleum products, which is typically lower than the market price, and compensates oil marketers for the difference between the market price and the government-set price. The subsidy paid on petroleum products is the difference between the expected open market price (EOMP) and the retail price. The expected market price is the sum of the cost of the imported product, freight costs, and distributor margins. The determinants of how much Nigeria spends on subsidy daily are the global prices of these petroleum products as well as the naira to dollar exchange rate.
The subsidy expenses continued to rise, straining public finances and diverting resources from critical sectors such as education, healthcare, and infrastructure development over the years. The fuel subsidy program has undergone various reforms and policy adjustments. There have been attempts by successive Nigerian governments to partially or fully deregulate the downstream sector, allowing market forces to determine fuel prices. However, these efforts have often faced resistance and social unrest, as the removal of subsidies resulted in immediate price increases, impacting the cost of living for many Nigerians.
Regulations of fuel Subsidy in Nigeria
In 2003, the Petroleum Products Pricing Regulatory Agency (PPPRA) was established under the PPPRA Act. The agency’s primary mandate was to regulate the pricing of petroleum products, including the management of fuel subsidies. The PPPRA was tasked with developing pricing templates, monitoring market trends, and ensuring that subsidy payments were made to oil marketers in a timely and transparent manner to solve the challenges of subsidy
In addition to the establishment of the Petroleum Products Pricing Regulatory Agency (PPPRA), the Nigerian government has implemented several regulations and policy measures to manage the challenges associated with fuel subsidies. These regulations aim to improve transparency, efficiency, and fiscal sustainability. Some key regulations include:
Partial Subsidy Removal:
In 2012, the Nigerian government took a significant step towards subsidy reform by partially removing fuel subsidies. This move aimed to reduce the fiscal burden associated with the subsidy program and encourage market-driven pricing. However, the policy faced widespread public protests and was eventually reversed due to concerns over the immediate impact on fuel prices and the cost of living for Nigerians.
How much has Subsidy cost Nigeria?
The amount Nigeria spends on fuel subsidies has changed considerably since the country started subsidizing fuel in 1973. This is because the major contributors to the amount spent on subsidy which are the global prices of these petroleum products and the naira to dollar exchange rate are not static but keep changing from time to time. Currently, in 2023, Nigeria spends over N400 billion monthly on fuel subsidies. Based on available data over N20 trillion has been spent by Nigeria on fuel subsidy between 1973 to 2023.
The amount Nigeria spends on fuel subsidies depends on the global price of petroleum products and the naira-to-dollar exchange rate which keeps changing yearly. In 2023, N400 billion is spent monthly. Although the subsidy for diesel and kerosine has been removed, in 2004 and 2016 respectively, a large amount is still spent on subsidies yearly because petrol accounts for more than 75% of petroleum products consumed in the country.
It is important to acknowledge that while the intention behind fuel subsidies is to foster economic development, political stability, and social welfare, the subsidy program has proven to be financially burdensome and unsustainable for the government. The direct expenses incurred by fuel subsidies involve the allocation of funds to bridge the gap between the international market price of fuel and the subsidized domestic price. Consequently, these financial resources could have been directed towards vital sectors such as healthcare, education, and infrastructure development. Additionally, the opportunity cost associated with fuel subsidies is significant. The funds utilized for subsidizing fuel could have been invested in alternative energy sources, renewable technologies, and sustainable infrastructure projects, thereby promoting economic diversification and reducing the nation’s reliance on fossil fuels. By forgoing these opportunities, Nigeria faces the risk of falling behind in the global shift towards cleaner energy and sustainable development.
Understanding Fuel Subsidy Removal
Fuel subsidy removal has been a complex and contentious issue in Nigeria, with notable attempts made in the past to address the challenges associated with the subsidy program. One such significant attempt was made by former President Goodluck Ebele Jonathan in 2012, when there was an ambitious plan to eliminate fuel subsidies. Additionally, partial removal of subsidies on certain petroleum products, such as diesel, has been implemented at various points. These policy interventions aimed to address fiscal concerns, promote market-driven pricing, and foster economic reforms. This introduction provides an overview of the attempts to remove fuel subsidies in Nigeria, exploring their motivations, impacts, and the challenges encountered along the way.
In 2012, under the administration of President Goodluck Jonathan, Nigeria witnessed a major push for the removal of fuel subsidies. The government argued that the removal was necessary to tackle the fiscal burden posed by the subsidy program, which had been plagued by inefficiencies, corruption, and unsustainable financial implications. The plan aimed to transition to a full market-driven pricing system, where fuel prices would be determined by supply and demand dynamics.
However, the attempt to remove fuel subsidies in 2012 sparked nationwide protests and civil unrest. Nigerians voiced their concerns over the potential consequences, particularly the immediate and significant increase in fuel prices, which could have had adverse effects on the cost of living and the overall welfare of the population. The protests ultimately led to a partial reversal of the subsidy removal policy.
Another significant attempt to remove fuel subsidies occurred in May 2016, during the administration of President Muhammadu Buhari. The government announced a partial removal and introduced a flexible pricing mechanism that allowed fuel prices to be adjusted in response to international oil market dynamics. This move aimed to gradually phase out subsidies and allow market forces to determine fuel prices. However, this partial removal also led to public outcry and protests, highlighting the challenges associated with subsidy removal and the immediate impact on citizens.
Since then, there have been discussions and intermittent adjustments to fuel prices in Nigeria. However, complete removal of fuel subsidies has not been achieved, primarily due to concerns about the potential socioeconomic implications and the lack of robust social safety nets to protect vulnerable populations.
“The fuel subsidy is gone,” On Monday, May 29th, 2023 President Bola Ahmed Tinubu declared in his inaugural speech at the Eagle Square on Monday after he was sworn in as Nigeria’s 16th President that “The fuel subsidy is gone,”. President Bola Ahmed Tinubu said his government shall instead channel funds into infrastructure and other areas to strengthen the economy, adding that a “unified exchange rate” is guaranteed under his administration. This declaration was followed by a serious of debates and controversies around the positive and negative effects of the removal of fuel subsidy for the country as a whole and for the average Nigerian.
What are the effects of fuel subsidy removal in Nigeria?
Negative Effects:
Increase in Fuel Prices:
Inflation: Removal of fuel subsidy is a direct increase in fuel price because it will be subject to market forces i.e demand, supply and cost of production hence fluctuations in the price could be a norm if not well regulated. An increase in price of fuel will lead to increasing inflation due to the impact and importance of fuel in the Nigerian economy and how it is directly chained to all other sectors. Considering the history of fuel consumption in Nigeria, road transportation is responsible for 60% to 70% of the consumption of fuel within Nigeria, this provides the basis for an increase in cost of transportation and increase in prices of goods and services as the burden of additional cost is shifted to the final consumers due to increase in cost of production. This could lead to an increase in price of the most granular household item, food, professional services and several others hereby increasing inflation in the near term.
Nigeria inflation rate from April 2022 -April 2023
Further worsen Nigeria’s unemployment numbers in the near term: inflation remains an unavoidable effect of removal of subsidy in the short term until appropriate measures are taken to cushion its impact on the economy. In the short term, the increase in the cost of production for companies could lead to a trimming down of the labour cost to maintain profitability or survival of the company. KPMG reports a 41% unemployment rate for Nigeria in first quarter 2023, this is projected to slightly go higher in the near term until appropriate measures are taken to balance the effects of the subsidy removal on the economy else more people are expected to be out of jobs be underpaid.
Decline in economic growth and national output: Food and fuel are big drivers of the Nigerian economy and have a close relationship. An increase in fuel prices will directly impact the cost of production of crops which has the highest contribution to the GDP in Q1 2023, increase in the cost of production of crops and other food items could deepen the GDP contribution of food or slow down the growth.
Also, the removal of fuel subsidy will greatly impact the MSMEs in Nigeria as this leads to greater operating cost for them. According to PWC report in 2020 on a survey conducted on MEMEs in Nigeria, the highest operating cost element for MSMEs is electricity/power, due to poor electrical infrastructure most parts of the country, MSMEs augment the generation of power for their businesses by running on generators and other sources of electrical energy. The MSMEs contributed 48% of the GDP in the first quarter of 2023. The ripple effect of the removal of fuel subsidy could kill some of the MSMEs due to increase in operating cost and cost of production wish directly negatively affects the total GDP.
Social Economic impact: The removal of fuel subsidies in Nigeria is anticipated to have significant socio-economic consequences. One of the expected outcomes is an inflationary impact on goods and services. The increased cost of fuel, resulting from the absence of subsidies, is likely to lead to higher prices for essential commodities. This could reduce the purchasing power of Nigerians, exacerbating poverty levels and widening the wealth gap.
Moreover, the removal of fuel subsidies is also expected to trigger protests, higher crime rates, and worsened conditions for minimum wage earners, ultimately impacting the overall misery index. Trade unions and civil society organizations may mobilize demonstrations and strikes to express their discontent. The rising cost of living may push individuals towards illegal activities as they struggle to cope. These combined factors are likely to exacerbate poverty, inequality, and social distress, as reflected in the misery index.
The misery index is a measure of economic distress felt by everyday people, due to the risk of (or actual) joblessness combined with an increasing cost of living. A recent 2022 World Happiness Report showed that Nigeria recorded the worst performance since 2012 as it ranked 118th out of 150 countries. With the removal of subsidy and increasing inflation, this ranking is projected to get worse in the short run. Also in a recent report, the World bank noted that the country’s surging inflation rate had pushed more people into poverty. According to the bank, before inflation started rising steadily, there were 82.9 million poor Nigerians, but the number has risen to 90.1 million in 2021 and is projected to hit 95.1 million in 2022. All these indexes are projected to get worse with the removal of subsidy a great contributing factor.
Positive Effects:
Revitalization of the oil sector:
The removal of subsidies in the petroleum sector ignites a thrilling journey of transformation, brimming with boundless possibilities that have the potential to revolutionize the industry in extraordinary ways. As the government relinquishes direct control and embraces privatization, a captivating landscape of competition and efficiency emerges. Private entities, infused with fresh capital, unparalleled expertise, and unbridled innovation, are poised to make their indelible mark. The advent of illustrious players such as the monumental Dangote Refinery, destined to be the largest in all of Africa, casts an enchanting spell on the future. This state-of-the-art refinery promises to unleash a profound surge in domestic refining capacity, drastically reducing the nation’s reliance on imports. In this shimmering vista, Nigeria’s petroleum sector blossoms into a resplendent tapestry of heightened production, impeccable infrastructure, and fortified energy security, captivating the imagination of industry stakeholders and international observers alike. All of these are expected to revitalize the petroleum sector and be a blessing to country
Fiscal Savings: The removal of fuel subsidies would result in substantial fiscal savings for the government. With the significant amount spent on subsidies, the saved funds could be redirected towards critical sectors such as healthcare, education, infrastructure development, and social welfare programs. The improved fiscal position would create opportunities for increased investment and development in priority areas, ultimately benefiting the overall economy.
Economic Diversification: The fiscal savings resulting from subsidy removal could be channeled into sectors beyond petroleum, such as agriculture, manufacturing, and renewable energy. This would help reduce Nigeria’s dependence on oil revenue, promote economic diversification, and contribute to long-term sustainable development. Diversifying the economy would make it more resilient to fluctuations in global oil prices and create opportunities for employment and income generation in non-oil sectors.
Conclusion
The recent removal of fuel subsidies in Nigeria represents a significant step towards addressing fiscal challenges and fostering economic reforms. While the removal of subsidies is expected to have both positive and negative impacts, the long-term outcomes will hinge on effective policy implementation and the government’s commitment to sustainable development.
The removal of fuel subsidies presents an opportunity for fiscal savings and redirection of resources towards critical sectors. This can promote economic diversification, infrastructure development, and social welfare programs. However, the immediate effects, such as higher fuel prices, may pose challenges for the population, especially vulnerable groups. To mitigate these challenges, robust social safety nets and targeted support programs must be implemented, alongside transparent communication and stakeholder engagement.
Looking ahead, the successful implementation of subsidy removal requires a coordinated and holistic approach. It is crucial to monitor and evaluate its impact, making necessary adjustments to ensure sustainable and inclusive economic growth. By leveraging lessons from other countries, addressing challenges proactively, and prioritizing the welfare of its citizens, Nigeria can navigate the post-subsidy era and pave the way for a resilient and prosperous future.
