Fuel subsidy: A hot potato for the next administration

As people continue to experience fuel scarcity, which adds to Nigeria’s cost of living crisis, one must remember the contribution of this administration in making it happen. Functioning refineries would have reduced the problem. Many attribute the scarcity to fuel subsidy issues, one of the biggest challenges to the country’s finances. According to Reuters, Nigeria’s […]

As people continue to experience fuel scarcity, which adds to Nigeria’s cost of living crisis, one must remember the contribution of this administration in making it happen. Functioning refineries would have reduced the problem. Many attribute the scarcity to fuel subsidy issues, one of the biggest challenges to the country’s finances.

According to Reuters, Nigeria’s NNPC spent N4.39 trillion ($9.7 billion) on petrol subsidy in 2022 and is expected to spend $7.5 billion by June 2023. The continuous increase in the figures since the inception of this administration is not only worrying for the country. There is also pressure from multilateral organisations, Nigeria’s biggest lenders, like the IMF, for the country to review its payment for fuel subsidy. Unsurprisingly, all the presidential candidates announced they would withdraw fuel subsidy if elected.

To keep the unhappy citizens on their side, the next government must remember why governments kept paying such unsustainable amounts. Fuel subsidy is an implicit compensation given to Nigerians to stop them from an unnecessary uprising.

The explanation behind paying for fuel subsidies is to keep the cost of fuel low for consumers, especially those with low or fixed incomes. It is done to ensure that basic necessities such as transportation and energy are affordable for everyone.

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Fuel subsidy can encourage economic growth by keeping the cost of production low for businesses and industries. It can make their operations more affordable and efficient, helping businesses expand, and creating more jobs, which can, in turn, boost the overall economy.

In some cases, fuel subsidies may also be used as a political tool to win the support of the population. Governments can maintain popularity and avoid public unrest by keeping fuel prices low. However, fuel subsidies can be expensive for governments to maintain and create inefficiencies by distorting market prices and encouraging wasteful energy consumption.

The removal of fuel subsidy in Nigeria has been a contentious issue for many years, with some arguing that it is necessary to reduce the government’s financial burden and others expressing concern about the impact on the population, especially people with low incomes.

While it is true that fuel subsidy place a significant financial burden on the government, there may be better solutions than the removal of the subsidy, especially in a country like Nigeria, where poverty rates are high, and the cost of living is rising. The removal of fuel subsidy could increase the cost of transportation and goods, exacerbating poverty and increasing unemployment.

Small and medium enterprises, which are essential to the growth of the Nigerian economy, are particularly vulnerable to the removal of fuel subsidies. These businesses often rely on cheap fuel for energy and transportation, and removing the subsidy could increase their operating costs, leading to reduced profitability and even closure. That means fuel subsidy removal could slow economic activities and potentially push the country into another economic crisis.

It is, therefore, important for the next government to reconsider the removal of fuel subsidy. It should explore the necessary steps before removing it. This means providing solutions that can address the financial burden on the government while also protecting the interests of the poor, and small and medium enterprises. 

A possible solution is to introduce a targeted subsidy programme that benefits the poor and vulnerable segments of the population while reducing the overall cost of the subsidy. The government once proposed to pay the poor N5,000 for one year to cushion the subsidy removal effect. The next government can do so to ensure that the subsidy is directed to those who need it the most.

Another solution is to encourage private sector participation in the downstream sector of the petroleum industry by promoting investment in refineries and other infrastructure that can reduce the country’s dependence on imported fuel.

Over the last eight years, petrol importation has increased by over 500 per cent under this administration. In 2015, Nigeria spent N831 billion to import petroleum, and by 2022 the country was spending N5.21 trillion to import the same product. To the next administration, as the saying goes, if you can’t beat them, join them. That is certainly true when it comes to the issue of privatising public refineries in Nigeria to compete with private refineries on the global stage.

As we all know, time is money, and the longer the next government waits to decide, the more the country stands to lose – as is evident by this government. Therefore, it should not delay privatising public refineries, as it would be a blessing in disguise. It would help us kill two birds with one stone and give us a leg up in the race to meet Nigeria’s increasing energy needs.

By privatising public refineries, we can turn the tide and level the playing field if the Dangote refinery ever begins production, as this will be a major source of competition. The increased number of functioning refineries would help Nigeria keep its head above water and remain competitive in the global market.

Privatising public refineries may be more complex than it sounds, but if successful, it can solve West Africa’s energy challenges.

Removing fuel subsidy in Nigeria may not be the best solution, given the current economic realities in the country. The next government must, therefore, adopt a more nuanced approach that balances the need to reduce the government’s financial burden with the need to protect the interests of the poor and small and medium enterprises. It must put its best foot forward and take the necessary steps to ensure it comes out on top.