- At his inauguration, Nigeria’s new president, Bola Ahmed Tinubu, announced that his administration would do away with the fuel subsidy.
- Nigeria’s fuel subsidy has remained in place since the 1070s, introduced by the government to cushion against high global fuel prices.
- Experts agree that the fuel subsidy has become a significant financial constraint considering Nigeria’s economic struggles.
At his inauguration, Nigeria’s new president, Bola Ahmed Tinubu, announced that his administration would do away with the fuel subsidy. The announcement resulted in a spark in prices and long queues in Nigeria as people rushed to buy fuel before the price increase when the policy took effect on July 1.
When the policy to remove Nigeria’s fuel subsidy takes effect, fuel prices in Nigeria are expected to jump from the official pump price of $0.4 to between $0.76 and $1.18. According to the United Nations, Nigeria’s rise in fuel prices will have widespread economic ramifications for over 133 million citizens plagued by multidimensional poverty.
Understanding the subsidy concept
A subsidy is a form of financial government support to lessen the burden or cost of certain commodities. Many people consider subsidies to be in the overall public interest of the public and given to promote a social good or specific economic policy.
Subsidies are classified as direct (such as cash payments) and indirect (includes tax breaks). A direct subsidy involves substantial funds transfer to a particular individual, group or sector. Contrastively, indirect subsidies do not hold a predetermined monetary value or involve actual cash outlays. It includes activities such as price reductions for certain goods that the government can support.
An indirect subsidy allows consumers to access or purchase products below the standard market rates, resulting in savings for the target recipient. Regarding the fuel subsidy, the government fixes fuel prices below the international rate and pays the deficit.
Subsidies exist in mixed economies. Supporters argue that subsidies to particular industries support businesses and the jobs that they create. Moreover, proponents argue that subsidies remain to provide goods and services at a socially optimal level, which leads to economic efficiency.
Technically, free market economies remain free of subsidies. Opponents argue that free market forces should dictate the survival of businesses. If a business fails, the resources go to more profitable and efficient use. According to opponents, subsidies can unnecessarily distort markets. Market distortion prevents efficient outcomes by diverting resources from productive to unproductive use.
The History of Nigeria’s fuel subsidy
An estimated 200 million Nigerians consume about 70 million litres of fuel daily. Nigeria does not refine its crude oil and depends on imports to meet fuel demand resulting in high costs. The Nigerian government bears these costs through a fuel subsidy to reduce consumer prices.
Nigeria’s fuel subsidy has remained in place since the 1070s, introduced by the government to cushion against high global fuel prices. The Olusegun Obasanjo government formalized the subsidies in 1977 by enacting the Price Control Act to regulate the price of commodities, including fuel.
Successive regimes have tried to scrap Nigeria’s fuel subsidy but failed due to its popularity among citizens, most of whom consider it their only significant benefit from the government. The subsidy has gradually burdened the government as maintenance costs rise annually.
The fuel subsidy became a catchphrase in January 2012 when former president Goodluck Jonathan announced its removal. Fuel prices in Nigeria rose from $0.14 to $0.30 per litre. The subsidy removal sparked nationwide protests for two weeks, led by civil society, labour unions and the opposition, including the current president. The protests coerced the government to reintroduce the subsidy, reducing fuel prices in Nigeria to $.20.
A lack of fiscal transparency and corruption have thwarted the subsidy payments. In 2012, a parliamentary inquiry released a 200-page report that exposed a $6 billion fraud that indicted officials at the state-run Nigeria National Petroleum Company (NNPC), now a limited company. Since then, governors and legislators have consistently asked for an investigation into the NNPC and a review of subsidy payments to oil marketers.
In 2015, the immediate former federal government leader Muhammadu Buhari referred to Nigeria’s fuel subsidy as fraud and non-existent. However, President Buhari’s administration retained the subsidy, spending $26 billion from 2016 to 2023.
The aftermath of the subsidy removal
Before the February 2023 election, the three leading presidential candidates promised to scrap Nigeria’s fuel subsidy in their manifestos. This signified a consensus on the political class’s need for reforms in Nigeria’s oil sector. Various experts agree that the fuel subsidy has become a significant financial constraint considering Nigeria’s economic struggles.
“There is no doubt that fuel subsidy has adversely impacted Nigeria’s finances, and keeping the same would have been fiscally irresponsible,” observes Ayodele Oni, energy partner at Lagos-based Bloomfield Law Practice.
Buhari’s administration has left a $167 billion debt to foreign and local creditors. The government already required 96 per cent of its revenue for debt servicing with fears of a cash crunch exacerbated by the costly fuel subsidy. With government reserves depleted, the previous administration serviced the subsidy through debt, according to the former finance minister.
Following Tinubu’s announcement, NNPC Limited welcomed the fuel subsidy removal. The company’s boss pointed out that the government owes NNPC $6 billion for the unpaid petrol subsidy. Labour unions have protested against this statement, citing a history of corruption, a lack of transparency, and government spending.
Nigeria commissioned the Dangote oil refinery, the largest in Africa and the world’s biggest single-train. The refinery will boost local oil production and lessen Nigeria’s import dependence. However, this development might not influence fuel prices in Nigeria in the short term. Therefore, it will not alleviate the effects of President Bola Tinubu’s decision to remove the fuel subsidy.
A boost for sovereign wealth fund
The Nigeria Sovereign Investment Authority (NSIA) expects between $100 million to $200 million in 2023 from Nigeria’s government. According to NSIA’s chief investment officer, Kola Owodunni, removing Nigeria’s fuel subsidy will boost the available cash.
Owodunni, addressing a panel at the Sovereign Wealth Fund Institute conference in London, said that the subsidy removal would bolster NSIA finances since more oil revenue to reach the government. He said subsidies consumed the excess revenue that would have gone to NSIA in recent years. NSIA’s boss observes that the entity received an estimated $50 million in 2022 after receiving virtually nothing in 2021.
Over the past eight years, Africa’s most populous nation and biggest crude oil reserve has faced many financial challenges. These challenges included years of low crude oil prices, costly subsidies, and recently the vandalism and theft that has limited Nigeria’s oil supply.
However, Owodunni noted they received money reserved for projects in the presidential infrastructure fund every year. He added that President Bola Tinubu, perceived as more business-friendly than his ‘socialist’ predecessor, would improve Nigeria’s investment climate.
Moreover, Owodunni observed that the oil reform regulation signed by President Buhari in 2021 altered the formula of the funds that NSIA received. Consequently, the law reform reserved a certain proportion of production and prices.
Owodunni observes that the new formula will take effect progressively as companies with production-sharing contracts with the government adopt the new law as their previous agreements expire. Once the new law covers all oil contracts, the NSIA’s funds allocation will rise sharply.
The need to cushion the citizens from poverty
Responding to Nigeria’s imminent fuel supply crisis caused by the removal of Nigeria’s fuel subsidy, Isa Sanusi, Acting Director for Amnesty International Nigeria, said:
“President Bola Tinubu’s decision to remove the fuel subsidy has left millions of Nigerians terrified about the knock-on effects that it will have on their daily lives. Many are concerned that they will be unable to meet the costs of education, food and healthcare. The government is yet to suggest any ways to mitigate the impact of this decision for people on low incomes.”
“While all countries are required to eventually remove all fossil fuel subsidies to meet their human rights obligations in the context of the climate crisis, they should not do so in a way that undermines the ability of people on low incomes to secure their right to an adequate standard of living. It is, therefore, vital that social cushioning and protection measures accompany the subsidy removal.”
“Nigerians should not have to pay the price of decades of political and economic mismanagement of the subsidy scheme. The authorities must finally respond to longstanding demands by civil society and parliamentarians to investigate the fuel market chain and hold accountable all those involved in smuggling, hoarding and ‘subsidy scams’ — regardless of rank or status.”
“The Nigerian authorities must urgently put in place measures to protect the rights of people most affected by the removal of the fuel subsidies and prioritize addressing widespread hunger, higher unemployment and the rapidly falling standard of living.”