Nigeria is faced with a catch 22 - to increase, reduce or abolish fuel subsidy. Whichever bait wins the country will face repercussions of decades of subsidy. This issue-brief looks at what subsidy removal or retention could mean for Nigeria.
The word subsidy is not abstract or unheard of in many economies, especially within developing nations. A sizable number of producers across sectors from farming, healthcare, and energy products received subsidies or some form of government financial support like guaranteed minimum pricing.
Energy subsidies are widely adopted, and, for some nations, they act to ameliorate the socioeconomic shock from oil prices. And while others' subsidies through conscientious policymaking have been successful in between public welfare and economic fiasco.
In 2020, globally positioned as the 10th country with proven crude oil reserves - Nigeria accounted for 3.8% of the exported crude according to OPEC. That percentage was worth $25.2bn and then, in the same year, Nigeria spent $43.46bn on the importation of petroleum products. Nigeria imports close to 90% of its locally consumed petroleum products and worse still these prices are reflective of international crude prices (taking into consideration foreign exchange, devaluation, and inflation).
The nations’ boost for refineries (to refine the crude reserves the nation possesses to refined petroleum products) utilizes less than 30% of its installed capacity. Billionaire Dangote is taking up the challenge to build an $18bn refinery in the Lekki Free Zone near Lagos employing over 57,000 people and expects the world's biggest single-train facility as it progresses.
This effort alone will not completely meet the expected daily consumption demand, so the wheel restarts - Nigeria will import petroleum products in the years to come unless more refineries come up.
"... Subsidy is not free money either - for the billions spent on servicing subsidies, other segments of the economy are severely malnourished with underdevelopment. Something has got to give for the cost of imported fuel."
When fuel subsidies were first introduced in the 1970s - the sole purpose was to leverage the economics of subsidy towards cushioning the hardship faced by Nigerians. This price manipulation whereby the pump price of fuel for sale is fixed and the government provides the retailer with the difference between the actual market price (import, storage, and transportation) and the Expected Open Market Price (EOMP). Subsidies are not cheap.
The price tag of fuel subsidy comes with an approximate cost of ₦250bn a month (for context, in 2020 capital spending allocation was ₦46bn and in the first 9 months of 2021, ₦864bn was spent on fuel subsidy). Subsidy is not free money either - for the billions spent on servicing subsidies, other segments of the economy are severely malnourished with underdevelopment. Something has got to give for the cost of imported fuel.
At what seemed like an expensive political risk, President Goodluck Jonathan's administration canvassed and lobbied for the removal of the subsidy, with Nigeria set to finally remove the subsidy in January 2012. This came with backlash and council strikes and the subsidy reversed. Since then, the price of fuel has been adjusted to inflation rates over the decade, with sublime movements for fuel subsidies across the nation.
In 2022, a year before a presidential election; Nigerians seem threatened with removal of the subsidy soon or with the next administration.
Decisions towards subsidies used to ‘cushion’ economic shocks could be very sensitive to address but one that economists, as well as international organizations like World Bank, advise “aggressive reform effort” needed to end fuel subsidy.
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If fuel subsidy is not removed… |
If fuel subsidy is removed… |
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The rising interest rate and the currency devaluation will eventually mean the country pay more for imported refined crude |
The government is proposing a 'subsidy with subsidy' approach where the poorest people will be provided with a transport allowance of ₦5,000 |
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Capital spending allocated to other developments healthcare, education e.t.c is infringed. |
Price hike pressure national investment in intra-state transport infrastructure which reduces emission, noise/air pollution and congestion |
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Increase in corruption from buffering up the daily consumption through subsidy scams |
Clarity towards indicating how much fuel Nigeria consumes, promoting transparency and oil nationalism |
Whichever decision is taken, by 2023, Nigerians would face a more difficult time with The International Monetary Fund estimates that over 90% of the nations’ 2022 revenue will be spent on debt servicing. Subsidy removal or retaining will bring tough decisions that would have to be made in the interest of the country.
Issue brief by; Oghosa Erhahon | contact
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