Why is there fuel subsidy in Nigeria?
Why is there fuel subsidy in Nigeria? Fuel subsidy has been used to keep the price of petroleum products such as petrol (premium motor spirit PMS), kerosine (national household kerosine NHK), and diesel (automotive gas oil AGO) affordable in Nigeria since 1973, this is largely due to the fact that the country’s four refineries do not provide enough products to meet the needed demand. Hence, Nigeria imports a large percentage of these petroleum products that are used in the country. In this article, we shall discuss some reasons why there is fuel subsidy in Nigeria.
Related: Disadvantages of Fuel Subsidy Removal
What is fuel subsidy?
Although Nigeria has been the largest producer of crude oil in Africa and still maintains this position even in 2023, the combined production capacities of its refineries have been grossly inadequate to meet citizens’ demand, hence the need for imports of petroleum products. To cushion the effects of fluctuating and/or high international petroleum prices, discounts on the price of fuel for consumers have been made possible by the fuel subsidy which the government provides to oil companies. The pricing of petroleum products in Nigeria was overseen by the defunct Petroleum Products Pricing Regulatory Agency (PPPRA).
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Why is there fuel subsidy in Nigeria?
See also: Effects of Fuel Subsidy Removal
Reasons for fuel subsidy in Nigeria
- Promote economic development
- Promote political stability
- Provision of safety net for citizens
- Support industries
- Mitigate vandalization and smuggling of fuel
Promote economic development
One of the reasons why there is fuel subsidy in Nigeria is to promote economic development. Nigeria is heavily dependent on oil exports for its economy, and the government uses fuel subsidies to keep prices low, which reduces transportation costs for goods and services. This, in turn, stimulates economic growth and development. Transportation costs are a significant factor in the prices of goods and services, as they affect the cost of production, distribution, and delivery. When fuel prices are high, the cost of transportation increases, and this can lead to higher prices for goods and services. This can reduce demand for products and services, leading to slower economic growth.
By keeping fuel prices low through subsidies, the government can reduce transportation costs and make goods and services more affordable for consumers. This, in turn, can stimulate demand for goods and services, leading to increased economic activity and growth. Furthermore, lower transportation costs can also encourage investment and business expansion, as it becomes cheaper and more viable for businesses to transport goods and services across the country. This can lead to the creation of new jobs and opportunities, further contributing to economic development.
Promote political stability
Another reason for fuel subsidies in Nigeria is to promote political stability. In as much as other factors such as good governance, transparency, and the rule of law, are also critical for maintaining political stability. The government’s provision of fuel subsidies has also promoted political stability and security. Nigeria has a history of political instability and unrest, and fuel subsidies are seen as a means of preventing protests and social unrest that could arise from high fuel prices.
When fuel prices rise, the cost of transportation increases, and this can lead to higher prices for goods and services. This can lead to frustration and anger among the population, especially the poor, who may be unable to afford basic necessities.
This, in turn, can lead to protests and social unrest, which can threaten political stability and security. By keeping fuel prices low through subsidies, the government can prevent fuel price increases that could trigger social unrest.
This can help to maintain political stability, which is essential for economic growth and development. Moreover, political stability is crucial for foreign investment, as investors seek stable and secure environments to invest their resources. Political instability can lead to uncertainty and risk, which can discourage foreign investment, further hindering the growth and development of the country.
Provision of a safety net for citizens
An additional reason why there is fuel subsidy in Nigeria is to protect the welfare of low-income households. Fuel subsidies are seen as a means of ensuring that fuel prices remain affordable for low-income households, who may struggle to afford basic necessities such as food, healthcare, and education.
Without subsidies, fuel prices would be too high for many Nigerians to afford, which could exacerbate poverty and inequality. Low-income households may be particularly affected by increases in fuel prices, as they may spend a higher proportion of their income on transportation and fuel-related expenses.
By providing fuel subsidies, the government can help to alleviate the burden of high fuel prices on low-income households, making it easier for them to access essential goods and services. This can contribute to poverty reduction and promote greater social equity.
Moreover, low fuel prices can also benefit small businesses, particularly those in rural areas, which rely heavily on transportation for their operations. Low fuel prices can make it easier and more affordable for them to transport goods and services, contributing to the growth of small businesses and the development of rural economies.
Support industries
Another reason for fuel subsidies in Nigeria is to support the country’s industries especially those in the manufacturing sector. Nigeria has a developing manufacturing sector that relies heavily on imported raw materials and inputs.
Fuel subsidies are seen as a means of reducing the cost of transportation for raw materials and inputs, making it easier and more affordable for manufacturers to operate. Without subsidies, high fuel prices could increase the cost of transportation, which could lead to higher costs of production for manufacturers. This, in turn, could reduce their competitiveness in domestic and international markets, hindering the growth and development of the manufacturing sector.
By providing fuel subsidies, the government can help to reduce the cost of transportation for raw materials and inputs, making it easier and more affordable for manufacturers to operate. This can contribute to the growth and development of the manufacturing sector, which can create jobs and stimulate economic growth. Additionally, a strong manufacturing sector can also contribute to import substitution, reducing Nigeria’s dependence on imported goods and promoting self-sufficiency. This can lead to increased economic resilience and stability, reducing the country’s vulnerability to external shocks such as changes in global oil prices.
Mitigate vandalization and smuggling of fuel
The mitigation of vandalization of oil pipelines and smuggling of fuel is another reason why there is subsidy in Nigeria. Without fuel subsidy, the price of petroleum products will be high, affecting transportation costs, consequently affecting the prices of goods and services and increasing the cost of living. When this occurs, in order to protect themselves from the higher cost of living and as means of having cheaper access to fuel, citizens may turn to vandalization and fuel smuggling.
Vandalization and smuggling will further impact the production, distribution, and availability of fuel thereby creating more dangerous ripple effects in the country. Hence, fuel subsidy ensures that the price of fuel is affordable and the product is also readily available so as to mitigate the vandalization and smuggling of fuel.
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What is the purpose of fuel subsidy?
Fuel subsidy is also seen as a means of promoting economic growth by making fuel cheaper for businesses, particularly those in the transportation and manufacturing sectors, which depend heavily on fuel to operate. However, fuel subsidy has also been controversial in Nigeria, as it has been criticized for being expensive, prone to corruption, and unsustainable, with the cost of subsidy increasing as the price of crude oil rises, making it unsustainable to the government; hence, the Nigerian intends removing fuel subsidy.
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Conclusion
Fuel subsidy is a policy that allows the government to sell petroleum products such as gasoline, diesel, and kerosene at prices lower than the market price. The Nigerian government has been providing fuel subsidies for decades. The subsidy is intended to keep the prices of petroleum products affordable for Nigerian citizens, as well as to stimulate economic growth by reducing the cost of transportation.
However, fuel subsidies in Nigeria have been plagued by numerous problems such as corruption, budget deficits, inflation, and environmental degradation. There have been reports of subsidy funds being siphoned off by corrupt officials and fuel marketers.
Additionally, the cost of subsidies has become increasingly unsustainable, with the government spending billions of dollars annually to maintain the subsidy regime.
In recent years, there have been calls for the government to phase out fuel subsidies and channel the funds into other social programs. Proponents of subsidy removal argue that it would free up resources for investments in infrastructure, healthcare, education, and other social services, and reduce the risk of corruption associated with subsidy administration.
