How removal of fuel subsidy will affect Nigerians

Fuel subsidy is one of the most topical issues in Nigeria and other countries worldwide. Its relevance and practicality have been questioned over the years, with issues concerning this economic utility becoming more complicated since the pandemic’s start because of the dwindling oil price in the international oil market.

Fuel subsidy and the debate over its removal are not a new phenomenon in Nigeria. However, when the subject matter is tabled for discussion, it always takes a dynamic nature as various individuals, organisations, and the government all present varied views, to the extent that it causes pandemonium and the status quo is ultimately maintained.

Nigeria is blessed with a substantial reservoir of crude oil. The country is the second-largest producer of crude oil in Africa and is the 14th largest oil producer in the world, yet it is a net importer of refined fuel. With the lingering queues for fuel across filling stations in the country currently – the second scarcity period in 2022 – and the warning issued by petrol marketers about the sustainability of this scheme, we ask: what are the reasons for fuel subsidy, how has it been implemented thus far and how would its removal affect the ordinary Nigerian?

Table of Content hide 1Meaning of subsidy and fuel subsidy 2Types of subsidies 2.1Direct subsidy 2.2Indirect subsidy 3Reasons for subsidies 3.1To tackle poverty alleviation/mitigate the cost of essential items for citizens 3.2To control inflation 3.3Encourage growth of local industries 3.4Moderate demand and supply 3.5Reduction of unemployment 4History of fuel subsidy in Nigeria 5Fuel subsidy budget 6Fuel subsidy removal in Nigeria 7Effects of fuel subsidy removal 7.1Negative effects of removal 7.2Positive effects of removal

Meaning of subsidy and fuel subsidy

The meaning of fuel subsidy will be provided in a jiffy, but it is important to understand what subsidy as a concept means to have a broader understanding of the subject matter.

Subsidies can be considered as adjustment measures often applied by the government to ameliorate the harsh economic situations faced by citizens of a country in purchasing certain economic utilities. Britannica defines a subsidy as a “direct or indirect payment, economic concession, or privilege granted by a government to private firms, households, or other governmental units to promote a public objective.”

From the above, it is clear that subsidy is aimed at lessening the burden or cost of certain products and an attempt at financial support by the government.

Therefore, what is a fuel subsidy? Fuel subsidy is a scheme in which the government takes action to lower the cost of fuel energy production, raise the price received by energy producers, or lower the price paid by energy consumers. For this scheme, governments or other organisations pay for a portion of the price of fuel or other petroleum products for the benefit of the customers.

This means that the real market price of petroleum products meant to be paid by the consumers has been slashed by the government to ease the price burden for the former. It entails a contribution by the government to keep the price of fuel low and make it easily affordable for its citizens.

Fuel subsidies tend to be politically popular, especially when the market price of fuel increases beyond the average citizen’s reach. Numerous countries, whether designated either as developed or developing economies, actively implement the subsidy regime for their citizens, particularly fuel subsidies.

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Types of subsidies

There are two main types of subsidies, namely:

Direct subsidy

As the name implies, a direct subsidy is a form of direct cash payment toward a particular individual, group, or industry. It entails payment by the government to both private businesses as well as low-income households. Examples of direct subsidies are housing benefits, food vouchers to low-income households, or ‘cash in the bank’ payments to private firms.

Indirect subsidy

Indirect subsidy focuses more on the government’s provision of goods and services at prices below the normal market price or purchasing goods and services above the market price. In essence, this form of subsidy includes activities such as price reductions for required goods or services that are government-supported. This allows the needed goods and services to be bought below the current market rate, helping people save cash. Examples of such subsidies include tax breaks and concessions, low-interest loans, and, yes, fuel subsidies.

Reasons for subsidies

Over the years, governments across the world have advocated for the retention of subsidies due to the following reasons:

To tackle poverty alleviation/mitigate the cost of essential items for citizens

One of, if not the most important reasons why subsidies are implemented is that governments want to remove some burden off their citizens in the public interest. For example, the price of Brent Crude, the oil that is subsequently refined and consumed in Nigeria, is $112.24 per barrel as of the time this piece was written. When further broken down, the cost of the average price of refined fuel in the world in naira evaluation is about N610 per litre.

Considering that the National Bureau of Statistics (NBS) said in 2020 that 82.9 million Nigerians live on less than $1 a day, representing 40 per cent of the population, the aforementioned prices are beyond the reach of the majority of Nigerians.

This is why the downstream sector of the Nigerian oil industry is being subsidised to help reduce the financial constraints because, without any sort of assistance from the government, it would be very expensive for citizens to purchase fuel with their purchasing power. This is why the total amount paid by a student going to a federal-owned university is different from that of those who cannot afford the costly fees of private universities.

To control inflation

According to the National Bureau of Statistics (NBS), the Consumer Price Index (CPI) – the index used to measure inflation – of Nigeria increased to 17.71 per cent on a year-on-year basis in May 2022. What this figure translates to is a costly increase in the price of nearly every product or service. Inflation causes a decline in purchasing power of a given currency utilised by citizens of a country over a period. As a result of the increase in prices, the unit of money used to purchase goods and services effectively buys less than it did in previous periods.

With soaring inflation, governments implement subsidies to offset production price fluctuations and ensure prices remain low and affordable for consumers. A rise in the price of fuel will lead to an astronomical increase in the prices of transportation, food, medication, and raw materials. So, fuel costs are subsidized to keep prices from skyrocketing.

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Encourage growth of local industries

Entrepreneurs, manufacturers, and small and medium-scale enterprises (SMEs) are the heartbeats of any economy worldwide. They have and continue to play crucial roles in the development of economies. Therefore, the retention of subsidies helps to reduce the cost incurred by businesses during the production process.

For example, entrepreneurs and industries that manufacture and sell goods calculate the amount spent on the purchase and movement of raw materials, the amount of power utilised, logistics such as packaging, and the transportation of the finished products to retail outlets when considering the unit price of such product. If the subsidy on fuel is maintained, for example, it helps many industries that produce or distribute essential goods to remain alive and functional.

Moderate demand and supply

The implementation of subsidies helps to stimulate the growth of industries and the economy, in general, by increasing long-term aggregate supply. Since energy cost accounts for a high cost of production, especially in the manufacturing and industrial sectors, a significant increase in the price of petroleum products will lead to an escalation of the prices of commodities in the economy, which would lead to a reduction in local demands.

Therefore, subsidies can increase the supply of goods in an economy because they reduce the costs businesses spend on producing and transporting them.

Reduction of unemployment

The argument for subsidies to be retained is because of the need to prevent massive lay-off of workers. With one of the major functions of government being the provision of social amenities such as employment, there must be a strong labour force to prevent social unrest.

The retention of subsidies means that organisations may not be too affected by inflation and have the means to cope with the financial demands of employees, and workers can remain in their jobs and earn money to take care of their needs.

History of fuel subsidy in Nigeria

Following the oil price shock of 1973, there was a rise in oil prices globally. Nigeria was just recovering from the Civil War (1967-1970), and asking her citizens to pay the international fuel price would have complicated matters, as they would have had to dry their pockets to purchase fuel.

Considering this, the Federal Military Government under the regime of General Olusegun Obasanjo promulgated the Price Control Decree (later turned into an Act) in 1977. The law made it illegal for some products (including petrol) to be sold above the regulated price.

The subsidy regime has since been in place in Nigeria, gulping up trillions of Nigeria for over four decades. Despite attempts by several governments to either partially or remove it, fuel subsidies still exist to date.

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Fuel subsidy budget

The statistics detailing the amount spent by successive federal governments from the 1970s up to the start of the 21st century have remained shrouded in secrecy.

But according to the Nigerian National Petroleum Corporation (NNPC), Nigeria spent N261.1 billion ($2.03 billion) on fuel subsidy in 2006, N278.9 billion ($2.3 billion) in 2007, and tripled to N632.2 billion ($5.37 billion) in 2008. When summed up, the amount paid in the name of subsidy to oil marketers by the government was $9.7 billion.

The defunct Petroleum Products Pricing Regulatory Agency (PPPRA) stated that the Federal Government paid a total of N1,437.84 trillion in 2010, N2,105.92 trillion in 2011, and N1.35 trillion in 2012. At the end of the 2013 fiscal year, N1,316 trillion was paid as subsidy, N1,217 trillion in 2014, and N653.51 billion in 2015.

According to Lai Mohammed, Minister of Information and Culture, the government spent a total of N10.413 trillion on fuel subsidies between 2006 and 2019, while Data from the NNPC revealed that subsidy payments grew by 349.42 per cent from N350 billion in 2019 to N1.573 trillion in 2021.

The National Assembly approved the sum of N4 trillion to be expended on petrol subsidies in 2022, in what would be the highest amount ever spent on fuel subsidies in a single year. Official NNPC data already shows that the total cost of subsidy in January and February 2022 alone was N396.72 billion.

The reasons for these high costs over the years include the rising price of crude oil in the international market, which is now further fuelled by the Ukraine-Russia war; the consistent falling value of the Naira, and, more importantly, the non-functionality of the three government-owned refineries situated in Port Harcourt (Rivers State), Warri (Delta State) and Kaduna (Kaduna State).

Fuel subsidy removal in Nigeria

Ironically, it was General Obasanjo who, in 1978, had introduced fuel subsidies that reviewed the pump price of petrol upward from 8.4 kobo to 15.37 kobo per litre in 1979. According to the regime, the increment was to ensure that enough money was generated to enable the conduct of the 1979 general elections and the provision of enough funds to cater to other important needs of Nigerians.

By January 1982, the administration of Shehu Shagari also raised the pump price to 20 kobo per litre. However, the money realised from the savings was allegedly squandered by members of the government in purchasing lavish properties in choice locations around the world. This was one of the reasons the military administration gave, which overthrew the civilian government in 1983.

Seven months after assuming office, the regime of General Ibrahim Babangida, on 31 March 1986, increased the pump price to 39.50 kobo per litre. Following the implementation of the Structural Adjustment Programme (SAP) by the regime in July 1986, the regime increased the pump price of petrol two years later to 42 kobo per litre and then again to 60 kobo per litre for private cars in January 1989. Two years later, the regime implemented another increase as the price was jacked up to 70 kobo per litre.

The nation was subjected to another round of fuel price increase on 8 November 1993 as the interim government of Ernest Shonekan increased the price of fuel from 70k to N5 per litre. This increment was, however, confronted by mass protests across the country, and the price was subsequently reduced to N3.25 per litre on 22 November 1993 by the regime of General Sani Abacha. Precisely on 2 October 1994, the Abacha regime increased the price to N15 per litre but reduced it two days later to N11 per litre after protests by Nigerians.

The brief transitional reign of General Abdulsalam Abubakar also did not spare Nigerians the pains of fuel price increase, as the regime increased the pump price to N25 per litre on 20 December 1998, but after sustained protests, the regime reduced the price to N20 per litre on 6 January 1999.

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Returning this time as the head of a civilian government, President Obasanjo’s administration witnessed several rounds of increases in the pump price of fuel. On 1 June 2000, the price was raised to N30 per litre but was reduced to N25 per litre after protests by organised labour and civil society organisations.

On 13 June, the price was further reviewed downward to N22 per litre. On 1 January 2002, the Obasanjo administration increased, once again, the pump price of fuel to N26 per litre and further more to N40 per litre on 23 June 2003. The government planned to further raise it to N70 in May 2009, but the new government of Umaru Musa Yar’adua reviewed it downward to N65 upon assumption of office.

In January 2012, President Goodluck Jonathan announced that his administration was embarking on the total deregulation of the oil industry’s downstream sector. This announcement led to an increase in fuel prices from N65 per litre to N141 per litre. But after a full week of protests led by the organised labour and a coalition of civil society organisations, the government was forced to reduce it to N97 per litre. In a rare instance, the Jonathan administration slashed the fuel pump price to N87 per litre in January 2015, following the fall in crude oil price in the international market.

Just days short of a year after he assumed office, President Muhammadu Buhari, on 11 May 2016, announced that the Federal Government would no longer be paying any subsidy on oil, and this led to the price of fuel becoming N145 per litre. According to the government, the country was broke, and it needed to shore up its revenue base. After complaints and protests, the price was reduced to N123 per litre.

Following the COVID-19 pandemic and the price of fuel in the international market, the pump price was increased about four times in 2020 by the Buhari administration. It rose from N123 per litre to N143.8 per litre in July, N151.56 per litre in August, N162 litre in September, and N170 litre in November. However, the N170 per litre price was later not implemented following complaints by Nigerians over the cost.

On 23 November 2021, Mele Kyari, Group Managing Director and Chief Executive Officer of NNPC, announced that the price of fuel would be increased to N340 per litre in July 2022, reflecting the total removal of subsidy payment. This, however, did not sit well with Nigerians, and in January 2022, the Buhari administration rescinded its decision. According to Zainab Ahmed, Minister of Finance, Budget, and National Planning, the timing of its planned removal of petrol subsidy is “problematic,” adding that the plight of Nigerians will be worsened.

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Effects of fuel subsidy removal

Since governments are the primary provider of subsidies, it is expedient that, as policymakers, they should be well-equipped to decide whether or not to implement subsidies.

Though subsidies can be a powerful tool that can be used to achieve social objectives, they may also be an artificial tool to skew the markets and lead to distortions. There have been numerous attempts to remove subsidies in Nigeria, but they have not been successful. This may be largely due to the consideration of the effects of fuel subsidy removal, which are both positive and negative.

Negative effects of removal

• Inflation/high cost of fuel and other essential items such as transportation and food
• Social unrest/massive protests and political instability
• Unemployment
• Entrenchment of poverty
• Potential demand and supply problems and production shortages
• Political corruption: Government officials may not reinvest the money saved as promised; instead, using the funds to enrich themselves, as it was in the Second Republic.

Positive effects of removal

• Effective distribution/reallocation of resources to other sectors of the economy
• Deregulation of the downstream oil subsector: allowing the forces of demand and supply to truly determine oil prices
• Curbing corruption and leakages
• Halting distortion of the markets and streamlining successful industries and organisations
• Halting the wealthy and elite from purchasing fuel at subsidised rates when they possess the purchasing power to buy the commodity at the real market rate

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