The false economics of fuel subsidy

In faraway Beijing, China, last Friday, President Bola Ahmed Tinubu removed any doubts that he fully endorsed the latest hike in petrol prices by defending it, yet again, as a part of his “bold” and “necessary” policy decisions for the longer-term good of the country, even when the overwhelming majority of Nigerians experience the impacts […]

In faraway Beijing, China, last Friday, President Bola Ahmed Tinubu removed any doubts that he fully endorsed the latest hike in petrol prices by defending it, yet again, as a part of his “bold” and “necessary” policy decisions for the longer-term good of the country, even when the overwhelming majority of Nigerians experience the impacts of those policy decisions very differently.

But what are the facts in support of the president’s repeated claims of “bold” decisions? Indeed, what is the president’s “long-term”? And what are the specific benefits of this “painful” but “necessary” policy? Will it lead to higher incomes or more jobs, better overall productivity, greater infrastructure development or more efficient social services?

Tinubu’s brand of subsidy removal has been in effect for 16 months now. The signs that the future gains will outweigh current pains should at least be evident by now. After all, any serious economic policy should be predictive in a specific way. It is not enough for the president to repeatedly tell Nigerians that his policy actions are bold and necessary for a better future. The president needs to also show what that future will look like in concrete and specific terms, and how we are to arrive there from the current state of affairs through his government’s policies. Otherwise, his claims of boldness in policy making becomes empty rhetoric, or worse, insensitive.

The truth is that there is scarcely any scientific basis that the government’s subsidy removal, as currently being implemented, will lead to any promised land for Nigerians because the policy suffers from three serious contradictions that no one in government has dared to explain, or even try. The first is that the government’s subsidy removal has merely pushed the costs of corruption perpetrated by a handful of people in the oil sector on everybody else, without changing any other thing.

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One of the major arguments in support of subsidy removal is that it will end corruption in oil subsidy payments and check the smuggling of refined petroleum products from Nigeria to its neighbouring countries. The past 16 months of “subsidy removal” have dug a gaping hole to that argument now. Smuggling has not abated, at least, according to reports. And we still do not know precisely how much petrol Nigeria consumes daily or how much precisely is saved from subsidy “removal”.

The Nigeria National Petroleum Company Limited (NNPCL), essentially a middleman which styles itself as a “private company wholly owned by government”, whatever that means, still retains monopoly over both imports of petroleum products and subsidy payments, and without public and verifiable records of either.

Moreover, the government has said the NNCPL will retain monopoly of product supply and discretion over prices from Dangote’s private refinery. But that is the standard definition of corruption itself: monopoly plus discretion minus transparency simply equals corruption. By retaining monopoly over crude oil sales, monopoly over imports of refined products and supply from a domestic refinery, and monopoly over prices and subsidy payments, Tinubu’s so-called bold decision of “subsidy removal” is simply giving corruption a free reign in the sector.

This in effect means that the policy has only succeeded in pushing the cost of corruption perpetrated by a few on everybody else. If subsidy has been “removed” from the sector, then the NNPCL should enjoy no monopoly whatsoever in imports, domestic supply, or prices. Indeed, it should not even enjoy monopoly over crude oil sales, after all, that is what a true free market means. Anyone can explore, extract and sell crude, and then pay taxes and royalties to the government.

A second major argument in support of subsidy removal is that it will not adversely affect the poor, and that the marginal negative effects on the poor can be offset by a programme of palliatives. After all, as the argument goes, poorer Nigerians do not have vehicles and generating sets to power with cheap subsidized fuel. How Nigerian officials bought into such a toxic idea is truly astonishing and worthy of study in its own right because, the past 16 months under this government have clearly exposed the lie in that argument. It is poor Nigerians who have suffered the most, and who remain the most vulnerable from the government’s subsidy removal policy.

One of the clearest revelations from last month’s protests over hunger and hardship is the wide gap between what we might call “vernacular” economics lived by ordinary people and the official economics of government and its associated foreign and local advisers. As one of the protesters put it in one of the most definitive videos of the protest, “Common garri, you cannot drink with N1,000 now. Before, with just N100, you will drink garri and go and do wetin you wan do”.

In other words, the government’s subsidy removal policy has directly worsened the food security situation in the country because the food items that the poorest Nigerians eat daily have now gone beyond their reach, leaving more than 26.5 million in acute hunger this year, according to Food and Agricultural Organisation (FAO). In fact, the same FAO predicts that on current trends, between 80 million to 82 million Nigerians will face “severe food insecurity” by 2030, the very future that President Tinubu says his “bold” decisions will make better. How does it make sense?

But it gets worse: fuel subsidy removal introduced a dangerous volatility in petrol prices, and with it, a spiralling and uncontrollable inflation into the economy, and with them all the attendant consequences for food, livelihoods, and political stability. In the three-year period from September 2020 to September 2022, for example, the average price of petrol per litre in Nigeria ranged from N161 to N191, according to the online database, Statista. That is an increase of just N30 throughout the 36 months period. By contrast, the average price of petrol per litre in September 2023 was N626; today, it is N900, or a difference of nearly N300 per litre in just 12 months.

For me, this is the clearest danger yet of the president’s so-called “bold” subsidy policy. How much will a litre of petrol cost 12 months from now in September 2025? Or conversely, how much will a measure of garri cost in September 2025? Or how much will it cost a company to hire one more unit of needed labour or to buy one more unit of needed equipment in 12 months’ time?

Fuel subsidy was expensive for Nigeria, no doubt, but it helped to keep prices relatively stable over reasonable periods, an important metric for any economy, let alone, a developing one with poor levels of incomes and jobs like ours. Tinubu’s policy has removed that stability and exposed households and firms to increasing volatility, a recipe for economic and political disaster. I will like to see how anyone in government argues against this with hard facts, rather than empty rhetoric or simplistic mantra.

Finally, and perhaps most importantly, the argument that fuel subsidy removal will free up funds for government to spend on infrastructure and public services has also fallen flat on its face. The government’s spendings on security, infrastructure, education, health, or other services have not increased in any significant way, nor has the effectiveness or efficiency of service delivery improved by any measure. If anything, the cost of governance and spending on the comforts of those in government, as well as on white elephant projects have ballooned skywards across all levels of government, and perhaps with less transparency and accountability.

Meanwhile, the volatility set in by subsidy removal means subsidy payments—and the corruption associated with it—may never actually go away. Subsidy has simply refused to be removed. The government reportedly paid more in subsidy in the past year than it did in the year before. Where and when will it end?

The truth is that all government policies depend on other factors for their effectiveness in achieving the desired outcomes. For subsidy removal, success will depend on an end to importation, full domestic supply, a solid mass transit scheme, and some other things besides. Perhaps, the government should come clean with Nigerians: this is a failed policy.