What’s next after removing fuel subsidy?

Fuel subsidy in Nigeria has remained a contentious and long-standing issue, disrupting the country’s economy and diverting significant…

Fuel subsidy in Nigeria has remained a contentious and long-standing issue, disrupting the country’s economy and diverting significant amounts of taxpayers’ money. This practice, aimed at maintaining affordable fuel prices for citizens, has faced extensive criticisms due to its financial implications, inefficiencies, and susceptibility to corruption.

Nigeria as one of Africa’s leading oil-producing nations has historically subsidised fuel prices to alleviate the burden on its citizens. The government believes that subsidising fuel helps maintain social stability, reduces inflationary pressures, and ensures access to affordable energy for the population. However, the implementation of fuel subsidies has proven to be highly problematic.

The financial burden of fuel subsidies in Nigeria has been substantial. Subsidies create significant fiscal deficits and divert funds that could be allocated to critical sectors such as healthcare, education, infrastructure, and social welfare. This strains the national budget, limiting the government’s ability to invest in crucial development initiatives and hindering economic growth.

Fuel subsidies in Nigeria have been plagued by inefficiencies and corruption, which further exacerbate the negative impact on taxpayers. Weak governance structures, lack of transparency, and widespread corruption have led to mismanagement and misallocation of funds intended for fuel subsidies. These inefficiencies contribute to artificial fuel scarcity, black market activities, and smuggling, ultimately benefiting a few individuals at the expense of the general population.

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The subsidies disrupt market dynamics and hinder the development of a competitive and sustainable energy sector. By artificially reducing fuel prices, subsidies discourage investments in domestic refining capacity; discourage efficiency improvements, and disincentives alternative energy sources. This reliance on subsidies perpetuates Nigeria’s vulnerability to international oil price fluctuations, making the economy susceptible to shocks and jeopardising long-term energy security.

Another challenge is the porous borders between Nigeria and neighbouring countries which has created an enterprise for smugglers who purchase large volumes of petrol at a subsidised rate in Nigeria and sell at market prices in neighbouring countries.

In June 2022, the managing director of the Nigerian National Petroleum Corporation (NNPC) Limited Mallam Mele Kyari indicated that daily consumption of petrol had increased to over 103 million litres per day, and that at least 58 million litres were being smuggled. This means smugglers and other West African countries benefited more from fuel subsidy than Nigerians.

A report also published by Chapel Hill Denham estimates that 15.64 million litres of petrol are smuggled out of Nigeria daily as the retail price of Nigerian petroleum products on average is 3.7 times cheaper than those of its neighbours, and this has given smugglers undue opportunities for arbitrage.

According to the World Bank, Nigeria’s total revenue in 2000 was $10.8bn. By 2010, this amount increased to $67.9bn, yet the Nigerian government has spent over $30bn on fuel subsidies over the past 18 years. This has had a significant impact on funds available for critical infrastructure and other essential sectors, such as education, health, and defence.

Also, according to the Debt Management Office, the country’s public debt stock is increasing as the government had to borrow $1trn to finance fuel subsidy in 2022.

This has informed the federal government’s removal of the said subsidy, leading to divergent positive and negative reactions from Nigerian due to increased pump price which has led to hike in prices of goods and services required for day-to-day activities.

To address the challenges associated with fuel subsidies, Nigeria needs comprehensive reforms focused on sustainable energy policies. Some alternatives to consider include:

Targeted Social Intervention: Shifting from blanket fuel subsidies to targeted social intervention programmes can ensure support reaches those most in need, effectively reducing the financial burden on the government.

Diversification and Energy Transition: Investing in renewable energy sources, such as solar, wind, and hydroelectric power, can help reduce dependence on fossil fuels. Encouraging private sector participation in renewable energy projects can lead to greater energy security and reduce the need for fuel subsidies in the long run.

Transparent Pricing Mechanisms: Implementing transparent pricing mechanisms based on market fundamentals can promote competition, attract investment and eliminate price distortions. This approach would help gradually reduce the need for subsidies while ensuring fair and reasonable fuel prices for consumers.

Application of the recommendations proffered above, along with those of economic experts, while reallocating the funds (hitherto meant for paying subsidy) to other sectors as intended, will go a long in ending the contention surrounding fuel subsidy.

Idris Umar Feta, Staff of PRNigeria, wrote from Abuja