Disadvantages of Fuel Subsidy Removal in Nigeria
What are the disadvantages of fuel subsidy removal in Nigeria? The debates about the implications of fuel subsidy removal in Nigeria have remained intense over the years. According to the International Monetary Fund and World Bank, the removal of fuel subsidies is one of the fiscal reforms that is needed urgently to lift Nigeria’s development outcomes.
However, economic and energy experts are of the opinion that this would bring hardship to Nigerians, especially as the government has done almost nothing to prepare Nigerian citizens for the new regime of subsidy removal. In this article, we will discuss the disadvantages of fuel subsidy removal in Nigeria and how it will affect the average Nigerian.
Related: Why is there fuel subsidy in Nigeria?
Fuel Subsidy in Nigeria
Fuel subsidy in Nigeria is a grant paid by the federal government to oil companies for the benefit of Nigerian citizens so that the price of fuel may be affordable. This is financial aid to Nigerians in order to enable the consumption of fuel at an affordable price and ensure stability in domestic fuel prices.
As of 2022, Nigeria remains the biggest producer of crude oil in Africa. However, it is sad that this country is the only member of the Organization of Petroleum Exporting Countries (OPEC) that imports 90-95% of refined petroleum products to meet its domestic consumption. The majority of other OPEC member countries depend on less than 20% of imported refined petroleum products for their domestic needs.
The majority of Nigeria’s domestic refineries are down and the existing ones barely function. Hence, the country doesn’t have the capacity to refine its crude oil or break it down to the petrol (also known as Premium Motor Spirit- PMS) that is used in vehicles, generators, etc. As a result, the country exports and sells the crude oil that it produces and then imports petrol into the country.
The landed cost of this imported petrol is way expensive for an average Nigerian to afford and so the federal government decided to pay a subsidy so that the price of fuel may be affordable to the average Nigerian. For instance, if the landed cost of PMS is roughly N315/litre, the federal government marks a price that is reasonable for an average Nigerian to afford, say N113/litre, and then pays the difference of N202 as a subsidy.
However, with the rise in the cost of fuel and increased fuel consumption due to Nigeria’s increasing population, the cost of fuel subsidies has continued to grow exponentially. Due to this, the government has to spend more on fuel subsidies in order to keep domestic prices low. In this regard, over recent years, the Nigerian government has made reforms concerning the removal of fuel subsidies in Nigeria. Unfortunately, this has never been welcomed by most Nigerians because of the tremendous effect it would leave on the masses.
Despite the glaring disadvantages of fuel subsidy removal in Nigeria, the Federal Government is of the opinion that the removal of the petrol subsidy will be saving the nation’s economy to an extent. Hence, there have been deliberations and attempts to remove fuel subsidies, especially as the nation is not generating enough revenue to afford the payment of fuel subsidies. According to the Nigerian National Petroleum Company Limited (NNPCL), Nigeria spends more than N400 billion each month on fuel subsidy (February 18, 2023).
On January 4, 2023, at a public presentation of details of the 2023 budget in Abuja, Mrs. Zainab Ahmed (Nigeria’s Minister of Finance, Budget, and National Planning) disclosed that the Federal Government has been funding fuel subsidies from borrowing and the payment of petrol subsidy will continue to mid-2023 based on the 18-month extension announced early 2022. In this regard, the provisions of N3.36 trillion naira have been made by the Nigerian government to cover fuel subsidy payments for the first six months of 2023 and fuel subsidy payment stops by June 2023.
Also, ahead of the Federal Government’s planned fuel subsidy removal in June 2023, Mrs. Zainab Ahmed had announced on Wed, 5th April 2023, that Nigeria secured an $800 million grant from the World Bank as part of its subsidy palliatives measures which would be targeting 50 million vulnerable Nigerians or 10 million households. Now, the question is, how feasible is this? Is this enough to cushion the disadvantages of fuel subsidy removal in Nigeria?
See also: What is Excess Crude Account (ECA)?
Disadvantages of fuel subsidy removal in Nigeria
- A sudden surge of inflation in the economy
- Increase in cost of transportation
- Increase in cost of production and business services
- Abuse of consumers
Petrol is no doubt a commodity that is important to Nigerians regardless of their social status. The price of petrol definitely has an effect on the prices of goods, transportation fares, and other services in Nigeria. Hence, whatever happens to the price of petrol determines what is achievable with people’s income.
From commercial and private transportation to powering generators at home or business premises, and more, all depend on the availability, stability, and affordability of petrol, for survival. Hence, the removal of fuel subsidy in Nigeria has the following disadvantages:
A sudden surge of inflation in the economy
One of the major disadvantages of fuel subsidy removal in Nigeria is that it will cause an increase in the country’s inflation rate. The overall and progressive increase in prices for goods and services is known as inflation. Once the fuel subsidy is removed, the price of Premium Motor Spirit (PMS) will definitely increase which will lead to a sudden surge of inflation in the economy.
According to the latest Consumer Price Index (CPI) report released by the National Bureau of Statistics (NBS), the rate of change in prices of goods and services rose from 21.91% (in February 2023) to 22.04% in March 2023. This increased rate will definitely shoot up when fuel subsidy is removed because there will be a sudden increase in the prices of goods and services due to the increase in the price of PMS. According to marketers and other groups in the downstream sector of the Nigerian petroleum industry, fuel prices may go as high as N750 per litre when the fuel subsidy is removed.
With such an increase, Nigerian citizens will definitely experience an increased cost of living. The increase in prices of things definitely reduces the purchasing power of consumers because a fixed amount of money will only be able to afford fewer goods causing depreciation in the value of the Nigerian currency.
Increase in cost of transportation
Transportation is very essential in modern societies as the ability to transport people and goods safely and efficiently across distances is essential to economic life. The increase in the cost of transportation is definitely one of the disadvantages of fuel subsidy removal in Nigeria. Following the removal of fuel subsidy, the price of fuel will definitely increase which will cause an increase in the cost of transportation.
This will affect personal car owners, passengers, the profitability of transport companies, and even the availability or price of consumer goods. Since the N165/litre increase (2021), the cost of transportation has gone up and has caused hardship for a lot of Nigerian citizens. This increase has also caused a ripple effect on other sectors of the country’s economy that revolve around transportation. Nonetheless, whatever hardship Nigerians are facing currently due to the increase in transportation is nothing compared to what citizens will have to face following the removal of fuel subsidies.
Furthermore, transportation is an integral part of distribution because a product that has been produced at one point has little value unless it has been moved to a location where it is needed or demanded. An increase in the cost of transportation definitely affects the cost of large-scale production and distribution of consumer goods. Hence, consumers are left with no choice but to buy available goods at high prices.
Increase in cost of production and business services
An increase in the cost of production and business services is a major disadvantage of fuel subsidy removal in Nigeria. Due to the unreliability of the public electricity supply from PHCN, a lot of factories and businesses depend on subsidized fuel to run their operations. Hence, the removal of fuel subsidy will affect factories and industries that depend on petroleum products and goods transportation.
In other to meet market demand, such businesses will experience some difficulties and an increase in the cost of production. Due to the increase in the cost of operations or production, some businesses may have no option but to lay off some employees in an effort to cut costs. This will lead to some citizens losing their jobs which in turn would increase the rate of unemployment and crime in Nigeria.
Abuse of consumers
Since October 2015, marketers were forced to stop product importation due to new foreign exchange policies, and as a result impose 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 subsidy can therefore cause a monopoly in the free market. This can lead to customer rip-off wherein a customer pays too much for a product.
Monopolists are price setters, and as such consumers are usually at their mercy. In this case, fuel subsidy removal can lead to unfair consumer practices as marketers can choose to create fuel prices at will. Hence, the federal government has to empower regulatory bodies in order to control such consumer abuses and protect the interest of its citizens.
