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Advantages of Fuel Subsidy Removal in Nigeria

What are the advantages of fuel subsidy removal in Nigeria? Fuel subsidy removal has been a hard one to sell because many Nigerians are finding it hard to welcome the idea of ending subsidized fuel in Nigeria. The convenience that comes with subsidized fuel and the fear of the hardship that citizens will have to face when fuel subsidy is removed have made many clueless about some of the advantages of fuel subsidy removal in Nigeria.

There is no doubt that fuel subsidy in Nigeria has been beneficial to the masses over the years. However, on the other hand, there have also been some negative effects of this subsidized fuel in Nigeria that the nation’s economy has had to battle with for years. The fact is, if properly done, fuel subsidy removal in Nigeria has inexhaustible benefits, plus, the country is in dire need of this reform due to certain reasons which will be discussed in this article. This article will cover some of the reasons why fuel subsidy should be removed and some advantages of fuel subsidy removal in Nigeria.

Advantages of fuel subsidy removal in Nigeria
Advantages of fuel subsidy removal in Nigeria

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Fuel Subsidy in Nigeria Explained

Fuel subsidy in Nigeria is a financial aid granted by the federal government to Nigerians wherein the federal government pays a certain fraction of the cost of fuel to oil importers in order to make fuel affordable to the average Nigerian and also ensure stability in domestic fuel prices. Subsidizing fuel in Nigeria was first introduced in 1973, following the oil crisis. This was an intervention from the government to cushion the landed cost of petroleum products imported into the country.

Nigeria is the largest producer of crude oil in Africa but unfortunately, in order to meet its domestic consumption, the country imports 90-95% of refined petroleum products. It is the only member of the Organization of Petroleum Exporting Countries (OPEC) with such a high percentage of imported refined petroleum products as most of the other OPEC member countries depend on just less than 20% for their domestic needs. This is the case for Nigeria because its domestic refineries are down and the existing ones barely function.

Due to this, the country does not have the capacity to refine its crude oil. Hence, crude oil is exported and sold and refined petroleum products are imported into the country. What fuel subsidy does is that it reduces the prices of petrol (also known as fuel or Premium Motor Spirit- PMS) for an average Nigerian. That is, instead of the average Nigerian buying fuel at the international price, the federal government pays a subsidy to petroleum importers and marketers so that the price of fuel can be kept artificially low.

Fuel subsidy is, therefore, the difference between the market price (called the Expected Open
Market Price- EOMP) and the government-approved retail price for petrol which is paid to petroleum importers and marketers. The EOMP includes the sum of landed costs (all costs incurred up
until product purchase, including shipping, production in foreign refineries, and port charges), the
cost of distribution in Nigeria, taxes, and the various actors’ profit margins.

For example, if the landed cost of fuel is roughly N315 per liter, the Nigerian government marks N113 per liter as the regulated fuel price and then pays the difference of N202 as the fuel subsidy. However, regardless of how beneficial the subsidy regime has been to the masses, the advantages of fuel subsidy removal in Nigeria match up or probably supersede whatever benefits the masses might have gained since the arrival of fuel subsidy in Nigeria. Hence, the recent reforms for fuel subsidy removal in Nigeria.

Fuel subsidy removal in Nigeria

Over the years, the issue of fuel subsidy has become a contended issue in Nigeria. Due to the rise in the cost of fuel and the increase in fuel consumption in Nigeria (as a result of population increase), the amount of money that Nigeria pays for fuel subsidies has continued to grow exponentially. In recent years, the Nigerian government has had to spend more funds just to keep domestic fuel prices low which has become no longer sustainable.

In as much as fuel subsidy has been easing the burden of high fuel prices on the masses, the sad reality now is that the country cannot afford it anymore. As a result, the Nigerian government has made and are making attempts to remove fuel subsidy in Nigeria. In November 2021, the federal government made its plan known for the removal of the fuel subsidy, which is to be replaced with a monthly N5,000 transport grant for poor Nigerians. But after the Trade Union Congress (TUC) and Nigeria Labour Congress (NLC) threatened to go on mass protests, the Nigerian government suspended the plan.

However, the threats from TUC and NLC didn’t cut it, as reforms for the removal of fuel subsidies have resurfaced again in recent times. The Nigerian government has announced that the funding of fuel subsidy stops by June 2023. On January 4, 2023, Mrs. Zainab Ahmed (Nigeria’s Minister of Finance, Budget, and National Planning) disclosed at a public presentation of the 2023 budget in Abuja that the Federal Government made provisions of only N3.36 trillion to fund fuel subsidy for just the first six months of 2023. That is, by the end of June 2023, the Federal Government will stop the payment of fuel subsidies.

The fact is, there is no easy way out of the subsidy conundrum for Nigeria, because the country will experience extreme set back if fuel subsidy is removed, and will also experience the same gravity of setback if fuel subsidy is not removed. The elimination of subsidy removal would definitely cause an immediate hike in prices of goods and services which would aggravate the suffering of the masses and could put the people and the labor unions against the government.

However, on the other hand, the advantages of fuel subsidy removal in Nigeria are worth the risk. The removal of fuel subsidy in Nigeria could also lead to major development gains as the money used for subsidizing petrol can be used for other sectors of the economy. Removing fuel subsidies can be the economic necessity that the country needs at the moment, especially as the government has gotten to the stage where it takes loans to sustain the payment of fuel subsidies.

See also: Developing Countries Characteristics

Why fuel subsidy should be removed in Nigeria

  1. Fuel subsidy in Nigeria is more beneficial to the rich
  2. It has become a financial burden on Nigeria’s economy
  3. It causes a huge budget deficit
  4. Fuel subsidy gives room for corrupt practices and other costly leakages
  5. It indirectly contributes to environmental pollution

There are insightful reasons for the removal of fuel subsidy in Nigeria that must not be ignored such as:

Fuel subsidy in Nigeria is more beneficial to the rich

One of the reasons why fuel subsidy should be removed in Nigeria is that it is more beneficial to the rich, contrary to popular belief. It is necessary to understand who actually benefits the most from the subsidy regime when debating the effects of fuel subsidy in Nigeria. Contrary to what many believe, it is not the poor that benefit the most from fuel subsidy, rather it is the rich.

As the government pays for fuel subsidy to keep domestic fuel prices artificially low, it is those who consume the most that actually benefits more from the subsidy. The poor populace in Nigeria relies primarily on public transportation. Hence, their per capita fuel consumption is significantly less compared to that of the rich in the country, who generally use private vehicles.

This means fuel subsidy could be seen as inequitable because it actually transfers the national wealth to those who own several cars and adds little or no value to the national economy. Instead of subsidizing fuel, the government can increase the transport allowances of public-sector workers and invest massively in public transportation.

It has become a financial burden on Nigeria’s economy

One of the major reasons why fuel subsidy should be removed in Nigeria is that sustaining the payments of subsidized fuel has become a financial burden on the country’s economy. The annual payment of fuel subsidy ties down a large amount of government spending, especially when the difference between the price of petrol at the international market and the subsidized domestic retail price of petrol is huge.

Things worsened over the years because Nigeria is no longer generating enough revenue to afford the payment of fuel subsidies. Hence, this has caused a huge financial burden on the economy. According to statistics, Nigeria’s revenue is low compared to other countries. The World Bank’s World Economic Outlook for 2020 showed that Nigeria with a revenue-to-GDP ratio of 6.3% ranked 194 out of the 196 countries covered. According to the World Bank, Nigeria’s revenue-to-GDP ratio of 7% of GDP in 2021 was among the five lowest in the world.

Since Nigeria is not generating enough revenue, sustaining fuel subsidy have caused a drag on the country’s economic growth because the payment of the subsidy is oftentimes financed by some combination of higher public debt, higher tax burdens, and crowding out of potentially productive public spending. Putting a stop to such a financial burden is definitely one of the advantages of fuel subsidy removal in Nigeria because it is bad economics to fund consumption by borrowing.

Fuel subsidy at the moment is putting Nigeria in a very serious, dire financial situation. From 2005 to 2020, N13.7 trillion was spent by Nigeria on fuel subsidies (according to the Nigeria Extractive Industries Transparency Initiative- NEITI). In 2021, N1.43 trillion was spent on fuel subsidy while the sum of N4.39 trillion was spent in 2022.

Now, if the N3.36 trillion proposed for the first six months of 2023 is added to these provided figures, it means Nigeria spends a sum total of N22.88 trillion on fuel subsidy in 18 and a half years. With the way the fuel subsidy figures keep going up and there is not enough revenue generated in the country, it is evident that the payment of subsidized fuel is no longer sustainable and needs to stop.

It causes a huge budget deficit

One of the major negative effects of fuel subsidy in Nigeria is that it has been a significant drain on the government’s finances. Hence, it contributes to budget deficits and increases the country’s debt burden. The country’s debt profile has been spiraling; its debt has risen from N12.118 trillion in May 2015 to over N66.9 trillion with borrowings from the CBN standing at N22 trillion.

Therefore, one of the advantages of fuel subsidy removal in Nigeria is that the removal will save the economy from huge budget deficits. Year in and year out, the Nigerian government runs huge budget deficits because the funds spent on fuel subsidies exceed the revenues that the government generates.

A huge budget deficit is inevitable in the current situation of Nigeria because huge amounts of money are used to finance non-durable consumption items like fuel instead of using the money to invest in activities that raise the productive capacities of the economy (such as entrepreneurship, health, infrastructure, and education). This is one of the core reasons why fuel subsidy should be removed in Nigeria.

Fuel subsidy gives room for corrupt practices and other costly leakages

Fuel subsidy should be removed in Nigeria because it leaves the country’s economy porous to corruption and other costly leakages. The subsidy regime has been flawed by allegations of corruption, wherein some individuals and companies take advantage of the subsidized price of petrol to enrich themselves at the expense of the government and the people.

Due to the fuel subsidy in Nigeria, a liter of petrol is cheaper in the country compared to some neighboring countries like Benin Republic and Togo. This has given room for corrupt practices whereby money-sniffing capitalists take advantage of the price differential and smuggle the fuel to neighboring countries for sale to make more profit. In such instances, the Nigerian government is not only subsidizing fuel for Nigerians but is doing the same for those in these neighboring countries. Hence, one of the advantages of the removal of fuel subsidy in Nigeria is that it will put an end to such corrupt practices.

Also, the subsidy regime has been plagued by inefficiencies, lack of transparency, and inadequate monitoring, which has given room to fraud, costly leakages, and the diversion of funds. The funds that are used to service the payment of fuel subsidies are sometimes mismanaged or unaccounted for. This can be attributed to the inefficiencies and inadequate monitoring of the program such as the inaccuracies in the record of the barrels of refined petroleum products imported into the country and the inexplicable record of the volume of fuel consumed by Nigerians.

It indirectly contributes to environmental pollution

One of the crucial reasons why fuel subsidy should be removed in Nigeria is that it indirectly damages the environment through air pollution. Subsidizing petrol encourages the overconsumption of petrol which is detrimental and unfriendly to the atmosphere. Petrol is known for its Carbon dioxide (Co2) emissions and these particular emissions increase atmospheric greenhouse gas concentrations and are the main contributors to climate change.

There is a global focus around the world to decarbonize energy systems by transiting to renewables and other environment-friendly energy sources. The fact is, Nigeria still funding fuel subsidies at this time and age gives an impression to the rest of the world that the country is not making enough efforts to reduce GHG emissions and mitigate global warming and climate change. This sends the wrong message to potential investors that are keen on clean energy sources. Hence, one advantage of fuel subsidy removal in Nigeria is that it will help curb the local air pollution caused by the overconsumption of petrol.

Read also: Advantages of free market economy

Advantages of fuel subsidy removal in Nigeria

  1. Private sector participation in the importation of petroleum products
  2. Fuel subsidy removal will encourage investments in domestic refining and petrochemicals
  3. It will create employment opportunities in the long run
  4. The government will be able to fund other key sectors of the economy
  5. The removal of fuel subsidy will help curb air pollution in Nigeria

The removal of fuel subsidy will definitely cause further movement of inflation in the short term, but it is arguably one of the best economic decisions to help Nigeria reduce the widespread corruption in the oil sector and unsustainable debts. To many Nigerians, the effects of the removal of fuel subsidy may seem more detrimental than beneficial. This may not actually be the case as there are some advantages of fuel subsidy removal in Nigeria such as:

Private sector participation in the importation of petroleum products

One of the advantages of fuel subsidy removal in Nigeria is that it will encourage private sector participation in the importation of petroleum products. This will free up the market, create competition and empower many Nigerians. Fuel subsidy removal will immediately destroy natural monopoly (by the NNPC) which will give room for private companies to participate in the importation of refined oil, promote market efficiency and also create competition.

Over the years, the fuel subsidy has been a major disincentive to private investment in the oil sector because it distorts the market by keeping the prices of fuel artificially low. The subsidy regime has discouraged competition and private-sector investment, causing inefficiencies in the country’s oil sector. When fuel subsidy is removed, the price of fuel may go as high as N750 per liter, but when competition comes in, the price will drop. Removing fuel subsidies will allow the prices of fuel to be determined by market forces which would encourage market efficiency and competition.

Since October 2015, oil marketers were forced to stop the importation of refined petroleum products due to new foreign exchange policies. This has over time imposed over 90% supply on Nigerian National Petroleum Company (NNPC) contrary to previous times, which has caused long months of fuel scarcity in the country. The removal of fuel subsidies, however, would help to curb this issue of fuel scarcity that has plagued the country for years. With more private sector investment in the downstream oil sector, the availability and distribution of fuel will definitely improve.

Fuel subsidy removal will encourage investments in domestic refining and petrochemicals

Over the years, the federal government has kept the domestic oil price low with fuel subsidy which has discouraged additional investment in Nigeria’s oil sector. Nigeria, since 2000, has issued at least 20 refinery licenses to private companies. Unfortunately, not one refinery is functioning efficiently today because investors could not recover their investments as a result of the artificially low fuel price structure.

One of the major advantages of fuel subsidy removal in Nigeria is that it will create room for the nation to develop refinery capacity. It will encourage investments in domestic refining and petrochemicals which will increase the nation’s potential revenue from the oil market, and create more job opportunities.

It will create employment opportunities in the long run

A major disadvantage of fuel subsidy removal in Nigeria is that it will cause an increase in the cost of production and business operations. This reform will definitely affect factories and industries that depend on subsidized petroleum products which may lead to the retrenchment of employees in an effort to cut costs.

However, the upside to the removal of fuel subsidy is that it will immediately destroy natural monopoly (by the NNPC) which will give room for many private companies to participate in the importation of refined oil, promote market efficiency and also create competition. As more private companies begin to invest in the oil sector, more job opportunities will be created. This means that, regardless of the inevitable retrenchment that comes with the removal of fuel subsidies, in the long run, employment opportunities will be nearly unlimited, as it happened with the telecommunication sector in Nigeria.

When the telecommunications sector was deregulated in Nigeria, for instance, many staff of NITEL (Nigerian Telecommunications Limited) lost their jobs. But when the Nigerian government enacted the Nigerian Communications Commission Act, which allowed new entrants into the telecommunications sector, jobs were everywhere in no time. People got jobs in organizations like GLO, MTN, ZAIN, ETISALAT, VISAFONE, etc. This can also be the case for the downstream oil sector.

The government will be able to fund other key sectors of the economy

Sustaining the payments of subsidized fuel has become a financial burden on the country’s economy. This has caused the country to invest less in other key sectors of the economy that can raise the productive capacities of the economy (such as entrepreneurship, health, infrastructure, and education). Huge amounts of money that exceed the amount of revenues that the government generates have been used for years to finance non-durable consumption items like fuel. This has caused a huge budget deficit, thus, causing other sectors of the economy to suffer.

This means that one crucial advantage of fuel subsidy removal in Nigeria is that it will allow the government to focus on and fund other key sectors of the economy. The huge amount of money the government spends on fuel subsidies would be channeled into social development like free and quality health care and education for all and other key sectors of the economy like agriculture.

Looking at Nigeria 2023’s budget, education, health, and infrastructure is about N2 trillion, N1.5 trillion, and N1 trillion, respectively. That is, these 3 critical development areas are receiving N4.5 trillion, meanwhile, fuel subsidy alone is N3.6 trillion for half a year which will be about N7 trillion in a full year. This doesn’t make sense; it is bad economics for a country to invest more in fuel subsidies than education, health, and infrastructure.

As a matter of fact, the per capita fuel consumption of the poor populace in Nigeria is significantly less than the elites, who generally use private vehicles. Since it is the rich that benefit the most from fuel subsidies, in lieu of fuel subsidies, the government can increase the transport allowances of public-sector workers and invest massively in public transportation.

In a statement titled ‘Tweaking the 2023 Finance Bill and Options for Unlocking Revenues in 2023‘, the director of CPPE (Centre for the Promotion of Private Enterprise), Muda Yusuf, said that the removal of fuel subsidies would improve the Nigerian government’s revenue by at least N6 trillion annually. This means that if appropriate reforms are implemented, such an amount can be used to invest in other critical sectors of Nigeria’s economy. Hence, this is one of the major advantages of fuel subsidy removal in Nigeria because the savings from the subsidy removal can be used to reduce the nation’s debt burden, improve social services and invest in critical infrastructure.

The removal of fuel subsidy will help curb air pollution in Nigeria

One of the advantages of fuel subsidy removal is that it will help curb air pollution. The Nigerian oil sector loses 40% of its oil production annually to the mismanaging hands of flaring. The extraction of crude oil from onshore and offshore oil wells comes with components of natural gas in them which are either used at the source or transported elsewhere. However, when neither of these is possible, the gas is flared as a waste product which has been condemned by environmental activists.

Flaring causes local air pollution which subsequently depletes the ozone layer. The carbon dioxide, soot, and methane that are released as a result of gas flaring can cause health issues such as bronchitis, cancer, pneumonia, lung damage, deformities in children, asthma, and neurological and reproductive problems. It also causes environmental issues that stall agricultural productivity and endanger wildlife and aquatic life.

However, if the oil sector is deregulated and the removal of fuel subsidy is implemented, flaring will drop drastically because no company will want to lose much of its oil production to flaring. Also, fuel subsidy makes fuel affordable to a large percentage of Nigerians to use in their generator, vehicles, etc, thus increasing air pollution. The removal of fuel subsidies will definitely help to address this environmental issue, which will in turn, save lives and improve the quality of health of the general public.

When fuel subsidy is removed and the price of fuel skyrockets, many Nigerians will look for other alternative sources of energy. This will encourage the use of environmentally friendly energy sources and help clean energy like hydroelectric energy, solar energy, wind energy, geothermal energy, nuclear energy, and biomass energy to thrive better in the country. It can also help the coal industry find its foot in the Nigerian market. In conclusion, curbing air pollution is one of the advantages of fuel subsidy removal in Nigeria that will be beneficial to every Nigerian citizen, regardless of social class.