The provision of fuel subsidies by governments has been a major issue in many countries due to its significant economic and political implications. The intention of such subsidies is to alleviate the burden of high fuel prices on citizens and businesses. However, the provision of subsidies involves the government’s decision to provide financial assistance to the oil industry in order to keep fuel prices lower for consumers.
Fuel subsidies have long been a contentious issue in Nigeria, as they are costly for the government and have been plagued by corruption and inefficiency. In recent years, there have been calls for the government to reform or even eliminate fuel subsidies, as they consume a significant portion of the country’s budget and are seen as a drain on resources that could be better used to fund critical infrastructure and social programs.
The first major subsidy removal in Nigeria occurred on January 1, 2012, by the federal government. The decision was controversial and led to widespread protests across the country. The government argued that the removal of subsidies was necessary to reduce government spending and encourage investment in local refineries, but many Nigerians felt that the move would lead to increased hardship for ordinary citizens, who rely heavily on fuel for transportation and electricity generation.
In Nigeria’s 2023 budget, the federal government (FG) allocated ₦3.6 trillion to pay for fuel subsidies for the first half of 2023. This figure shows a huge gap compared to the ₦443 billion in subsidy payments allocated from January to June 2022. This amount sparked a lot of discussions on whether it is wise to spend such a huge amount, considering it would increase the government’s budget deficit.
Buhari’s Promise To Remove Fuel Subsidy
There have been controversies surrounding the Nigerian government’s commitment to removing fuel subsidies, as promised. Despite the government’s recognition of the need to remove fuel subsidies due to their high cost and corruption, there has been a lack of concrete action in implementing the necessary reforms.
During the campaign of President Muhammadu Buhari, he made promises to end fuel subsidies but has yet to do so. He promised to end Nigeria’s fuel curse, but seven years into his eight-year term, fuel scarcity continues, especially in Abuja and Lagos, indicating that little has been done to solve the fuel problem. Refineries in Nigeria have not worked for seven years, despite spending billions of naira annually on their servicing and maintenance.
Instead, his government has implemented a bungled subsidy policy that has led to shortages and price increases. Many Nigerians have criticized Buhari’s handling of the issue and accused him of failing to fulfill his promises. According to this report, the Minister of Finance, Budget, and National Planning, Mrs. Zainab Ahmed, suggested that it would be safer for the current administration (President Muhammadu Buhari) to start gradually removing the fuel subsidy at the beginning of the second quarter instead of waiting to remove it all at once.
The minister mentioned that the Nigerian government intends to allocate N3.35 trillion towards petrol subsidies between January and June 2023, thereby increasing the government’s budget deficit, which will have to be financed through borrowing, adding more to the country’s already high public debt of N44.06 trillion as of September 2022.
Tinubu To Decide Subsidy Removal
The All Progressives Congress Presidential Campaign Council has said the incoming administration of Bola Tinubu will decide the date the fuel subsidy will be removed.
Just like Buhari, the newly elected president, Bola Tinubu, has been firm on his plans to remove fuel subsidies, as this formed a major part of his campaign, although this is not the first time Tinubu will be calling for the removal of fuel subsidies. In 2015, he urged the federal government to immediately remove fuel subsidies.
Tinubu, who tagged the fuel subsidy as anti-poor before his victory at the poll, assured Nigerians that the fuel subsidy would be removed.
Neighboring Countries Remove First Fuel Subsidy
Neighboring countries like Ghana recently removed fuel subsidies and deregulated their markets. In a report, Ghana’s National Petroleum Authority’s (NPA) Abdul Hamid stated that industries were shutting down because the government was finding it hard to find the money to provide subsidies. According to him, due to the subsidy removal, the industry is being powered by investments in the private sector, and there are no complaints about supply.
Ending Subsidy But No Refineries
Nigeria relies heavily on imported fuel, which is then subsidized by the government to keep prices low for consumers. This system is inefficient and costly, as it depends on international market prices and can lead to corruption and waste. However, simply ending subsidies without addressing the underlying issues of refineries would not be a sustainable solution.
By developing refineries within the country, Nigeria could reduce its reliance on imported fuel and create new jobs in the process. However, this system would require significant investment in infrastructure and regulatory reforms to attract private investment. Also, the development of refineries could take years, making it a long-term solution rather than an immediate fix.
Fuel Subsidy Has Enormous Benefits
Dr. Muda Yussuf, Chief Executive Officer at the Center for the Promotion of Private Enterprise (CPPE), gave instances where fuel subsidy removal has enormous potential benefits, which he refers to one as the revenue effect. According to him, the removal would unlock about N7 trillion into the federation account, reduce the fiscal deficit, and ultimately ease the burden of mounting debt.
He referred to the second as the investment effect. “Currently, it is extremely difficult to attract private investment into our petroleum downstream sector because of the unsustainable subsidy regime and the stifling regulatory environment. The subsidy removal will eliminate the distortions and stimulate investment.
“We would see more private investments in petroleum refineries, petrochemicals, and fertilizer plants. Post subsidy regime would also unlock investments in pipelines, storage facilities, transportation, and retail outlets. We would see the export of refined petroleum products, petrochemicals, and fertilizers as private capital comes into the space. Quality jobs will be created.”
He continued, with the third being the foreign exchange effect. “This would result from the import substitution as petroleum products importation continues to decline. This would conserve foreign exchange and boost our external reserves. An increase in investment would translate into more jobs in the petroleum downstream sector. Smuggling of petroleum products across the border will come to an end with market pricing of refined products.”
Dr. Yussuf argued that palliatives should be segmented into immediate, short term and medium-term deliverables.
“Immediate and short-term options include wage review in public service, electronic cash transfers to the vulnerable groups in our society, the designation of a few retail outlets [maybe 10% of the outlets] as subsidy stations while all others will sell at deregulated prices for a transition period of one year, the introduction of subsidized public transportation schemes across the country, and a reduction in import duties on intermediate products for food-related production to moderate food inflation”.
He further mentioned that in the medium to long term, there should be accelerated efforts to upscale domestic refining capacity, driven by private investments, and accelerated investments in rail transportation by the government to ease the logistics of fuel distribution across the country as well as domestic freight costs.