Effects of Removal of Fuel Subsidy in Nigeria

The effects of the removal of fuel subsidy in Nigeria are numerous, comprising both positive and negative effects. Fuel subsidy removal has been a hotly debated topic for many years, with arguments both for and against the policy. On one hand, proponents argue that removing fuel subsidy will reduce government spending, promote economic growth, and improve the country’s infrastructure due to the increased revenues that will result from the nonpayment of subsidy.

On the other hand, opponents argue that the removal of fuel subsidy will lead to an increase in the cost of living, a decline in disposable income, and an increase in inflation. Due to these, it is important to examine the potential positive and negative effects of the removal of fuel subsidy in Nigeria and that shall be our focus in this article.

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Fuel subsidy and its removal simplified

The term fuel subsidy is one of the most common terms of discussion in Nigeria in recent months due to the government’s proposition to end fuel subsidy by June 2023. In light of this, let us understand what fuel subsidy and its removal connote.

What is fuel subsidy in Nigeria?

Fuel subsidy in Nigeria is a government policy that involves the payment of a subsidy to oil marketers and importers of petroleum products to offset the difference between the cost of importing and distributing fuel in the country and the price at which it is sold to consumers. This policy was introduced in the 1970s as a way to ensure that the prices of petroleum products, especially petrol (premium motor spirit PMS), remained affordable for the majority of Nigerians.

Under the fuel subsidy policy, the government sets a benchmark price for petroleum products, which is usually below the market price. Oil marketers and importers are then reimbursed by the government for the difference between the benchmark price and the market price, in order to encourage them to continue to import and distribute fuel in the country.

Effects of removal of fuel subsidy in Nigeria
Effects of removal of fuel subsidy in Nigeria

What is fuel subsidy removal?

The removal of fuel subsidy refers to the government’s decision to end the policy of paying a subsidy to oil marketers and importers of petroleum products. The decision to remove fuel subsidy has been motivated by the need to reduce government spending, promote economic growth, and curtail corruption in the oil and gas sector. The government has argued that the fuel subsidy policy is unsustainable, as it has become a drain on the country’s resources, leading to huge financial losses and widespread fraud.

Previous attempts by the Nigerian government to end fuel subsidy have achieved the removal of subsidy on diesel and kerosene in 2004 and 2016 respectively. However, the proposition for the removal of subsidy on petrol has been met with mixed reactions from Nigerians. While some welcome the policy change as a necessary step to reduce government spending and promote economic growth, others criticize it as a burden on the poor, who would be affected by the increase in fuel prices.

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Positive Effects of Fuel Subsidy Removal in Nigeria

  1. Increased government revenue
  2. Efficient use of resources
  3. Increased investment
  4. Improved infrastructure
  5. Reduction of corruption
  6. Economic diversification
  7. Fiscal sustainability

The positive effects of fuel subsidy removal in Nigeria have been listed above and will be discussed hereafter.

Increased government revenue

One of the most significant positive effects of fuel subsidy removal in Nigeria is increased government revenue as it can save a significant amount of money that was previously spent on fuel subsidies. In the past, the Nigerian government has spent a significant amount of money on fuel subsidies, which has put a strain on the government’s finances. This money could have been used for development projects and other social services that can benefit the citizens of Nigeria.

By removing fuel subsidies, the government can save this money, which can then be invested in other sectors of the economy such as supporting small businesses and entrepreneurs, which can help to promote economic growth and create more jobs. Moreover, increased government revenue can also help to reduce the budget deficit, which is the difference between the government’s expenditures and revenues. This can lead to a more stable economy and can also help to reduce inflation and other economic challenges.

Efficient use of resources

The removal of fuel subsidies can help to promote the efficient use of resources, as it discourages waste and encourages individuals and businesses to use fuel more responsibly. PMS prices have been kept artificially low for decades in Nigeria due to fuel subsidy, this has resulted in a culture of wasteful use and overconsumption of petrol. As a result of this, although Nigeria is a major supplier of crude oil, it has had to import petrol to meet its domestic demand which has been increasingly costly. By removing fuel subsidies, the true cost of petrol will be reflected in its market price, thereby encouraging individuals and businesses to use fuel more responsibly and efficiently.

This can lead to a reduction in fuel consumption and a more sustainable use of resources. Additionally, the removal of fuel subsidy can also encourage the development and adoption of alternative energy sources, such as renewable energy, which can help to diversify Nigeria’s energy mix and reduce its dependence on petrol to power generators. This can have a positive environmental impact in the long run by reducing greenhouse gas emissions and air pollution resulting from the use of fossil fuels. Hence, the removal of fuel subsidy is beneficial as it encourages the efficient use of resources.

Increased investment

Another positive effect of fuel subsidy removal in Nigeria is increased investment in the energy sector, as it creates an environment that is more conducive to private investment. With the removal of fuel subsidy, the energy sector in Nigeria will become more attractive to private investors due to the potential for profitability, as they can compete with government-owned entities that were previously the only players in the energy sector. This increased competition can lead to greater efficiency in the energy sector, as private investors seek to reduce costs, improve service delivery, and increase their bottom line. This can lead to better access to electricity for households and businesses, which can help to spur economic growth and create jobs.

Furthermore, increased investment in the energy sector can lead to the development of new technologies and innovations that can improve the efficiency and sustainability of energy production and distribution. With increased production and distribution, more communities will benefit from the increased private sector involvement in the energy sector as companies will strive to power previously unreached terrains in a bid to gain a competitive advantage. This can lead to increased development of rural areas, reduced dependence on petrol, and a improved quality of rural life which are all positive effects of fuel subsidy removal in Nigeria.

Improved infrastructure

An additional positive effect of fuel subsidy removal in Nigeria is improved infrastructure. The removal of fuel subsidy can improve infrastructure because the government can redirect the funds previously allocated to fuel subsidies towards infrastructure development. This can include investments in roads, bridges, airports, seaports, and other critical infrastructure that is needed by citizens. Additionally, the expected increased efficiency in the energy sector due to the removal of fuel subsidy can indirectly improve infrastructure.

For example, if energy companies are able to reduce their costs and improve their service delivery, it can lead to greater access to electricity, which can promote economic growth and create jobs. This is because businesses that could not effectively operate due to the high costs of electricity will be able to function more effectively with the increased availability of power. This economic growth can also indirectly lead to the development of new infrastructure, such as commercial buildings, housing, and public facilities.

Reduction of corruption

One of the benefits of fuel subsidy removal in Nigeria is the potential reduction of corruption. Fuel subsidy has been historically marred with corruption and mismanagement, as some actors in the industry have taken advantage of the subsidy to enrich themselves through fraudulent claims and other means. There have been reports of subsidy funds being siphoned off by corrupt officials and businesses. This has led to a decline in public trust in government institutions and reduced the effectiveness of government policies.

The removal of fuel subsidy can eliminate these opportunities for corruption and fraud in the subsidy system leading to greater transparency and accountability in the energy sector. This can be achieved by increasing transparency and accountability in the fuel sector by implementing measures such as auditing and reporting requirements for energy companies, improving governance structures, creating a regulatory environment that promotes transparency and competition, and strengthening the capacity of law enforcement agencies to investigate and prosecute cases of corruption.

By reducing corruption in the energy sector, the removal of fuel subsidies can create a more stable business environment that is attractive to both local and foreign investors. This can lead to increased investment in the sector, as well as the development of more sustainable and efficient energy systems which will be beneficial to citizens, the environment, and the economy.

Economic diversification

One of the most important economic benefits resulting from the removal of fuel subsidy is economic diversification. Before the discovery of oil in commercial quantities in Nigeria, the country had a robust agricultural sector but the oil boom shifted focus to oil and the continuous subsidy has not helped matters either. Nigeria’s economy has been heavily dependent on crude oil exports and the importation of petroleum products, which has made the country vulnerable to fluctuations in global oil prices. By removing fuel subsidy, the government can invest the subsidy allocation in other sectors of the economy, such as agriculture, manufacturing, and tourism.

This can help to create jobs and reduce poverty, particularly in rural areas where these sectors are more prevalent. Moreover, the promotion of economic diversification can lead to greater resilience in the face of external economic shocks as revenue from the country’s exports will include diverse sectors. By having a more diversified economy, Nigeria can better withstand fluctuations in global oil prices and other external economic factors that affect the country.

Fiscal sustainability

One of the biggest positive effects of fuel subsidy removal in Nigeria is the promotion of fiscal sustainability. Fuel subsidies have been a major burden on the government budget, as they have consumed a significant portion of government revenue. By removing fuel subsidies, the government can reduce its spending and redirect those resources to other important areas, such as health, education, and infrastructure. With increased government revenue from the removal of fuel subsidies, the government can also reduce its reliance on borrowing to fund its budget deficits.

This can help to improve the country’s creditworthiness, reduce borrowing, and reduce the monies spent on interest payments on loans thereby creating a more favorable business environment that can attract more investment. Additionally, the promotion of fiscal sustainability can lead to greater macroeconomic stability, as it can help to reduce inflation, strengthen the exchange rate, and improve the country’s debt profile.

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Negative effects of removal of fuel subsidy in Nigeria

  1. Increase in the cost of living
  2. Inflationary pressure
  3. Social unrest
  4. Increase in production costs
  5. Reduction in disposable income
  6. Rise in transportation costs

Although the removal of fuel subsidy in Nigeria will bring about certain benefits as discussed earlier, there are also negative effects that will arise as listed above.

Increase in the cost of living

One negative effect of the removal of fuel subsidy in Nigeria is the increase in the cost of living. The removal of fuel subsidy can lead to an increase in the price of fuel and transportation costs, which can have a ripple effect on the cost of goods and services. As a result, Nigerians may have to pay more for basic necessities such as food and housing, which can be particularly challenging for those who are already living in poverty or on low incomes. The increase in the cost of living can lead to a decrease in the standard of living for many Nigerians.

It can also result in a decline in consumer spending, as people may be forced to prioritize spending on essential items such as food and shelter, leaving less money for discretionary spending. This can have a negative impact on businesses, particularly those in the retail and hospitality sectors, as they may experience a decrease in demand for their products and services. Moreover, the increase in the cost of living can disproportionately affect vulnerable groups such as women, children, and the elderly, who may not have access to sufficient resources to cope with the rising costs. This can result in a widening income inequality gap and social exclusion.

Ultimately, the increase in the cost of living resulting from the removal of fuel subsidy in Nigeria can have a negative impact on the welfare of Nigerians, particularly those who are already struggling to make ends meet. It is therefore important for the government to implement measures to mitigate the negative effects and ensure that the benefits of fuel subsidy removal are maximized while minimizing the negative impact on vulnerable groups.

Inflationary pressure

Another negative effect of the removal of fuel subsidy in Nigeria is the inflationary pressure it can create. When the cost of fuel increases, it can have a ripple effect on the cost of goods and services, as businesses pass on their increased costs to consumers. This can lead to an overall increase in the general price level of goods and services in the economy, which is known as inflation. Inflation can have a negative impact on the economy and the welfare of Nigerians. It can reduce the purchasing power of individuals and lead to a decrease in consumer spending, which can harm businesses and slow down economic growth.

Inflation can also lead to a decrease in investment as investors may be hesitant to invest in an economy with high inflation rates. Furthermore, inflation can have a particularly negative impact on low-income households, who may not have the resources to cope with rising prices. This can lead to a decrease in their standard of living and social exclusion. Thus, fuel subsidy removal in Nigeria can create inflationary pressure, which can have a negative impact on the economy and the welfare of Nigerians. To mitigate this negatve effect, the government can implement measures such as price controls and monetary policy tools to stabilize prices and manage inflation.

Social unrest

The increase in the cost of living resulting from the removal of fuel subsidy can have a significant impact on Nigerians, particularly those who are already struggling to make ends meet. This can lead to protests, strikes, and other forms of social unrest, as people demand that the government take action to alleviate their economic difficulties. This is one of the negative effects of the removal of fuel subsidies in Nigeria. Social unrest can lead to a breakdown in law and order, which can harm businesses and slow down economic growth. It can also lead to a loss of life and property damage, which can have a lasting impact on the affected communities.

In furtherance, social unrest can lead to a decline in investor confidence, which can make it more difficult for Nigeria to attract investment and create jobs. This can have a negative impact on the country’s economic development and its ability to provide opportunities for its citizens. Therefore, it is important for the government to carefully consider the potential for social unrest resulting from the removal of fuel subsidy and implement measures to address the concerns of Nigerians. This can include providing targeted assistance to vulnerable groups, implementing policies to reduce the cost of living, and engaging with civil society organizations to ensure that the voices of Nigerians are heard and their concerns are addressed.

Increase in production costs

The removal of fuel subsidy in Nigeria can lead to an increase in production costs for businesses. Fuel is a key input in many industries, including manufacturing, agriculture, and transportation. Any increase in the price of fuel can lead to an increase in the cost of production for businesses, which can then be passed on to consumers through higher prices. In addition, businesses that rely on diesel generators to generate electricity may also face higher costs, as diesel prices are likely to increase in tandem with the removal of fuel subsidy. This can lead to a decrease in competitiveness for Nigerian businesses, as they face higher production costs compared to their counterparts in other countries.

The increase in production costs can further lead to a decline in economic activity, as businesses may reduce production or cut back on investment due to the higher costs. This can lead to a slowdown in economic growth and a decline in job opportunities. Furthermore, the increase in production costs can also lead to a decline in exports, as Nigerian goods become less competitive in international markets due to the higher production costs. This can have a negative impact on the country’s balance of trade and its ability to earn foreign exchange.

Therefore, it is important to mitigate this possibility by providing targeted assistance to vulnerable industries, implementing policies to reduce the cost of production, and promoting investment in alternative energy sources that can reduce production costs and by extension, the price of goods and services

Reduction in disposable income

The increase in the cost of living can also lead to a reduction in disposable income for Nigerians, as they have to spend more on basic necessities like food and transportation. This can lead to a decrease in consumer spending, which can further harm the economy.

The removal of fuel subsidy in Nigeria can lead to a reduction in disposable income for many households. Fuel is a key input in transportation, and any increase in fuel prices can lead to an increase in transportation costs for individuals, which can then reduce their disposable income. As transportation costs increase, households may have to spend more on commuting to work, school, or other activities, leaving them with less money to spend on other goods and services. This can lead to a decline in consumer spending, which can have negative consequences for businesses and the broader economy.

In addition, the increase in fuel prices can also lead to an increase in the prices of other goods and services which can further reduce the purchasing power of households and lead to a decline in disposable income. Low-income households will be most affected by these changes, leading to an increase in poverty and inequality, which can have long-term negative impacts on citizens.

Rise in transportation costs

One of the most common negative effects of the removal of fuel subsidy in Nigeria is the potential for a rise in transportation costs. The cost of fuel is a significant component of transportation costs, and any increase in the price of fuel usually results in an increase in transportation costs for individuals and businesses. This can lead to a decrease in mobility, particularly for low-income households, who may not be able to afford the increased costs. The rise in transportation costs can also lead to a decrease in economic activity, as businesses may face higher costs for transporting goods and services, which can be passed on to consumers through higher prices for products and services.

Therefore, it is important for the government to implement measures to mitigate the potential increase in transportation costs resulting from fuel subsidy removal. This can include investing in public transportation infrastructure and providing incentives for the use of more fuel-efficient vehicles or electric and solar-powered vehicles.

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Conclusion

Fuel subsidy has been a contentious issue in Nigeria for many years, as it has been plagued by corruption, inefficiency, and a lack of transparency. The government has been accused of mismanaging the subsidy program, leading to huge financial losses and widespread fraud. In recent years, there have been calls to remove the fuel subsidy in order to reduce government spending, promote economic growth, and improve infrastructure in the country.

Although the removal of fuel subsidy in Nigeria will bring certain benefits such as increased government revenue, improved infrastructure, and economic diversification amongst others, there are potential negative effects too which include an increase in the cost of living, inflationary pressure, social unrest, and rise in transportation costs.

Based on these positive and negative effects of the removal of fuel subsidy in Nigeria, the government and citizens have to engage in discussion to promote the benefits and mitigate the challenges that may arise when fuel subsidy is finally removed.

Last Updated on November 2, 2023 by Nansel Nanzip Bongdap