Until January of 2012, it appeared as though many Nigerians hadn’t heard the word subsidy.
Subsidi, subsideen, susidee… all these and more were mispronunciations for the word – subsidy in 2012, a time when the word became very common in Nigeria. Even the average local trader had an idea of what this “big English word” meant.
In the early hours of January 1, 2012, Pres. Goodluck Jonathan announced the removal of subsidy from PMS, which sold for N65 a litre – with subsidy – would go for N141. The declaration was met with staunch opposition from aggrieved Nigerians who took to the streets, protesting. Under the banner of #OccupyNigeria, they protested against massive corruption, the protesters led by Civil society group, Enough is Enough Nigeria had one ask: What will be the fate of the average Nigerian if the pump price of fuel skyrocketed, and the corresponding cost of governance remained high with extreme corrupt practices. Eleven years and two presidents later, we are right back to the topic of subsidy removal.
Before we go on, let’s briefly explain how fuel subsidy works.
Although the largest oil producing nation in Africa, Nigeria still must import refined fuel from Europe. The landing cost of imported fuel includes the cost of purchasing the product, freight charges, insurance, and other associated expenses. The cost of PMS can fluctuate due to global oil prices, exchange rates, and shipping costs. Considering the heavy cost incurred on getting the product to Nigerians, the cost of PMS should sell at a price higher than the previous N187/litre. Without the subsidy, the cost of living would have been high – food, transport, housing and general cost of living would have been astronomical.
In a bid to lighten this burden, the federal government of Nigeria chose to bear the bulk of this financial burden by subsidizing the cost of fuel. This step was taken by the Olusegun Obasanjo tenure. However, years down the line, the fuel subsidy system in Nigeria has faced challenges such as corruption, mismanagement, and lack of transparency. These issues have resulted in controversies, calls for reforms, and debates about the sustainability of the subsidy program.
The Effects of the Fuel Subsidy Removal
President Bola Ahmed Tinubu, in his inaugural speech on May 29th, 2023, announced that his administration will no longer support the fuel subsidy regime. Although, this was supposed to take effect from July 1st, 2023, Nigerians rushed into a frenzy by the morning after, and were met with hike in cost of transportation, closed filling stations and longer queues at filling stations that chose to sell petrol.
Although, the immediate impact of the subsidy removal is already unfolding, this does not rule out the upside to the no-subsidy regime. We have highlighted both positive and negative impacts of the no-subsidy regime below.
Government Expenditure: According to experts, the Nigerian government spends more than ₦10billion on fuel subsidy on an annual basis for the last three years. In theory, the removal of the fuel subsidy implies that Nigeria now has savings of about ₦3trillion to reallocate same to social welfare programmes that will cushion the effects of the subsidy removal on the more vulnerable groups affected by the high inflation that can be attributed to the removal of the subsidy. However, the removal of the fuel subsidy will not lead to additional resources for other developmental activities. One of the reasons why it became imperative to remove the fuel subsidy was that Nigeria has gotten to such high level of debt that it is simply unsustainable.
Reduction of Corruption and Mismanagement: Fuel subsidies have been marred by corruption and mismanagement in Nigeria. The removal of subsidies can help mitigate these issues by reducing opportunities for corrupt practices and creating an environment of greater transparency. It can encourage reforms and better governance practices within the petroleum sector.
Investment in Domestic Refining Capacity: With subsidy removal, there is an incentive to invest in domestic refining capacity. Nigeria, as an oil-producing country, has traditionally relied on imported refined petroleum products due to insufficient refining capacity. Removing subsidies can encourage investments in refineries and the development of a robust domestic refining sector, leading to increased self-sufficiency in meeting the country’s fuel demand. With the newly commissioned Dangote refinery and other investments in the petroleum sector, the government can achieve this.
Public Backlash and Protests: Historically, the removal of fuel subsidies in Nigeria has been met with public resistance, as seen in the protests that followed the attempted removal in 2012. The removal of subsidies can be seen as a burden on the population, particularly if alternative measures are not implemented to mitigate the impact on vulnerable groups.
Increased Fuel Prices: The immediate impact of subsidy removal is a significant increase in fuel prices. Without the government subsidizing the cost, the retail price of fuel would likely rise to reflect the actual market price. This increase can lead to higher transportation costs, which is already the case in the past days. This will have a cascading effect on the prices of goods and services across various sectors.
Inflationary Pressure: As fuel prices rise, transportation costs increase, impacting the overall cost of production and distribution. This can lead to inflationary pressure in the economy, causing the prices of goods and services to rise. Inflation can erode purchasing power and affect the living standards of the general population.
Impact on Cost of Living: Higher fuel prices can directly affect the cost of living for individuals and households. Transportation costs, including commuting expenses and the prices of goods that require transportation, are likely to increase. This can disproportionately impact lower-income households who spend a larger portion of their income on basic necessities.
What Should Government Do?
Over 60 million litres of fuel are consumed daily by Nigerians. What this means is that there are businesses and livelihoods tied to the usage of fuel and if not properly managed, this single decision to remove subsidy could be chaotic for Nigeria in the short term. To minimize the potential negative impact of the fuel subsidy removal on its citizens, the Nigerian government can take the following measures:
Arguably, the worst hit stakeholders here are Nigerians – their businesses and day-to-day life. It is important that government engage in effective communication with the public, clearly explaining the reasons behind subsidy removal and the steps being taken to mitigate its impact. This can help manage expectations, build trust, and foster understanding among the populace.
Also, government should increase investment in public transportation infrastructure and services to provide affordable and efficient alternatives to private vehicles. This can be in form of alternative transport services – railways, waterways etc., without having to overly rely on motor vehicles and current road networks. This will help reduce congestion on roads, mitigate the impact of higher fuel prices on transportation costs and reduce congestion on roads, and manage inflationary pressure on cost of goods.
Furthermore, government should consider a gradual phasing-out approach for subsidy removal rather than an abrupt removal. This allows for a smoother transition, giving individuals time to adjust to the new pricing structure and explore alternative energy options.
Government can provide targeted support programs and incentives for small and medium-sized businesses that may be disproportionately affected by the removal of fuel subsidy. This can include access to affordable credit, tax incentives, and capacity-building programs to enhance their competitiveness and resilience.
Second is that government should promote energy efficiency practices among businesses to manage fuel consumption and lower operational costs. Additionally, government can also incentivize the adoption of renewable energy sources by providing financial support, tax breaks, or favourable policies for businesses investing in renewable energy technologies.
Also, government should identify sectors that are particularly vulnerable to the removal of fuel subsidy and design targeted support measures for them. This can include industries heavily reliant on transportation, such as logistics, agriculture, manufacturing, and retail. Support may involve tax incentives, grants, or sector-specific subsidies to help businesses cope with increased operating costs.
Finally, consultation and stakeholder engagement. It is important for government to engage in a consultative process with business associations, chambers of commerce, and industry representatives to understand the specific challenges and concerns of businesses. This collaboration can inform policy decisions, ensure effective implementation, and foster a supportive business environment.
These are steps that can be adopted by the Nigerian government to ensure a smooth transitioning and an engaging populace.
The jury is still out on the matter – Is the fuel subsidy removal indeed renewed hope for Nigerians? Time will tell.
One thing we’re sure of is that the removal of fuel subsidy is indeed an important move that the Nigerian government has taken first, to tackle the corrupt practices associated with the subsidy regime and second, to make the best use of its budget. The second will give room for government to channel the money that would have been spent on fuel subsidy to other key areas such as healthcare, agriculture, transportation, etc. However, to mitigate against potential negative impacts and ensure a smoother transition, the government should consider careful planning, effective communication, and targeted interventions.