By Wahab Shittu SAN
1.0 Introduction
Historical Background
Fuel subsidy, like any other subsidies, is a financial assistance (a sort of social security) designed to cut down the actual price of fuel(as is obtainable in the international market) to what the masses can afford, in order to reduce economic hardship attendant to high cost of fuel. In 1977, the military regime of Olusegun Obasanjo promulgated the Price Control Decree (later Act). The law makes it illegal for some products (including fuel) to sell beyond government’s set prices. The official price of fuel in Nigeria therefore became lower than the cost of importing the product. This translated into the government paying the importers the difference between importation costs and the government approved prices-subsidized.
Even though it has been argued in some quarters that Nigerians have rarely bought fuel at the approved prices for the product, the Nigerian government has subsidized fuel prices from as low as 5 kobo in the 1970s to N197 in May 2023. However, as of June 2023, petrol sold at between N550 and N600 across the country, against the approved price of N195.
Since 1980s, when Nigeria’s four refineries began to show symptoms of difficult breathing, and remains untreated till date, fuel importation has increased with each passing year. This has also increased the amounts budgeted for fuel subsidy as well as the approved prices of the product. It should be noted that even when government has not increased the prices, fuel importers always cite problems such as port freight prices, and high volatility in the international oil market; bad roads, floods, insecurity, festivals, sabotage/pipeline vandalism & outright political inefficiency in order to bring about seasonal scarcity.
For these reasons, almost every government since 1999 has witnessed unquantified and intermittent days of fuel shortages. Each case of fuel shortage causes an arbitrary price hike of over 150% relative to approved pump prices. Fuel subsidy as was introduced in Nigeria as a response to the global oil price hike of 1970s, in order to ameliorate the economic hardship occasioned by the increased fuel price, became a leech, sucking the financial blood of the Nigeria economy, and in the1980s, the government felt that the introduction and sustenance of fuel subsidy was a drain in the finances of the federation and as such, it proved unsustainable.
This suggested reform did not go down well with the masses. Stiff oppositions were mounted and that administration backed down. After that first unsuccessful attempt to remove fuel subsidy, there were other unfruitful attempts, even up to the immediate past administration of the ex-president Muhammad Buhari. It could therefore be safely said that until very recently, despite numerous attempts at reform, Nigeria has never successfully removed gasoline subsidies, in large part, due to strong popular opposition to such reform. It is believed that fuel subsidy comes at great cost, and thus, spending on other development objectives (health, security, agriculture, education, general infrastructure ‘etc.) is lower; the distribution of resources to the state governments and other necessary agencies of government is reduced; as chunk of the government revenue goes to subsidy.
THE EFFECTS OF SUBSIDY REMOVAL
On 29th May , 2023, president Bola Ahmed Tinubu , in his inaugural speech , announced the removal of fuel subsidy, which seed of the removal did not, as expected, fall on the loamy soil of the general economy of the already stressed, poor and starved masses; the decision led to instant astronomical rise in fuel prices and occasioned massive panic buying. The socioeconomic question therefore is: what are the impacts of the current subsidy reform?
The removal of fuel subsidy has both positive and negative impacts On the positive impacts, if the current subsidy reform is properly managed, the following advantages are derivable: It has the potential to incentivize the domestic refineries to produce more petroleum products. It will pass death sentence to the issue of fuel scarcity and long queue at fuel stations. Resources will be freed up for other sectors of the economy. Once the freed up resources are properly harnessed, it will boost up the country’s economy and create job opportunities. On the negative impacts, of course the negative effects of the subsidy reform are highly predictable, even with the assisted cost of fuel, how did Nigerians fare in terms accessing the product? Poorly! The negative effects of the reform include: The first tailing reality is the increase in the price of petroleum products . It impacts the cost of goods and services, and affects small businesses in a very dangerous scale of Economic instability. The reform has the proclivity to bring about social unrest and uncomfortable protest may erupt. To access the product at a low cost, it may give rise to bunkering and other illegal activities in the oil sector.
INCREASED FUEL PRICES:
When subsidies are removed, fuel prices increase because the government no longer provides financial assistance to keep prices lower. High fuel prices can have a negative impact on the economy. It can lead to increase in transportation costs and higher production expenses for business. This can result to higher prices of goods and services which can reduce consumer purchasing power, increase general standards of living and potentially slow down economic growth. These effects can be significant and should be considered when discussing consequences of subsidy removal.
On the other hand, subsidy removal can also lead to budgetary savings for the government. These savings can be redirected towards other sectors or used to reduce fiscal deficits. It is important to note that subsidy removal will often yield social and political implication, as it may disproportionately impact low-income individuals who heavily rely on subsidized goods. This can lead to public unrest or protests. Overall, the effects of subsidy removal in the economy are multiphase and should be carefully considered.
MARKET FORCES:
Removing subsidies can allow market forces to determine the true price of goods and services, promoting efficiency and competition in the economy.
INVESTMENT & INNOVATION:
Higher fuel prices resulting from subsidy removal can incentivize investment in alternative energy sources and technologies, fostering innovation and sustainability.
ENVIRONMENT IMPACT:
Subsidy removal can encourage and adoption of cleaner and more environmentally friendly energy options, reducing carbon emissions and promoting environmental conservation.
INCOME REDISTRIBUTION:
While subsidy may impact low income individuals, the reallocation of funds can be used to implement targeted social safety nets or income redistribution measures to mitigate the effects on vulnerable populations.
PUBLIC PERCEPTION & CONFIDENCE: The removal of subsidies can demonstrate the government commitment to fiscal responsibility and economic reforms, potentially boosting public confidence in the economy.
REDIRECTING FUNDS FROM SUBSIDIES: The funds can enable government to prioritize spending on social welfare programs, infrastructure development, education, health care or other areas that benefit the population.
It is important to note the positive and negative effect in the impact of the economy.
Background to the Lecture
Nigeria is Africa’s biggest and most diverse economy. Even while been shaped by high unemployment and poverty rates, huge infrastructural challenges, and security concerns, the Nigerian economy never sleeps. Nigerian economy can be rightly characterized notably by small and medium scale enterprises which run 24 hours a day, and 7 days a week, and all year to serve Nigerians and her visitors.
2.1 With a population estimated to be about 200 million people, from big industries, to petty traders, road transport users, farmers, schools and religious houses, Nigerians all rely on Premium Motor Spirit (PMS) for their daily activities, more popularly and informally known simply as “fuel”. The two major usage of fuel are for transportation and for electrical power.
In 2012 former President Goodluck Jonathan, sought to remove the subsidy on Premium Motor Spirit (PMS). The subsidy was costing the government over NGN 1 trillion annually, and its removal aimed to redirect funds toward economic stability and infrastructure development. However, this decision ignited widespread protests, strikes, and public unrest. Eventually, the government yielded to public pressure and partially restored the subsidy.
2.3 In 2015, faced with declining oil prices and limited financial reserves, President Muhammadu Buhari’s administration announced a gradual phasing out of fuel subsidies over the course of 2016. Extensive consultations were held with stakeholders, including political leaders, oil sector investors, and civil society organisations. However, before a consensus was reached, a new regime was introduced allowing independent importers and marketers to access foreign currency for fuel imports, capped at N145.6 per litre.
2.4 The journey of fuel subsidies in Nigeria highlights the delicate balance between economic reforms and social impact. Attempts at removal have been met with public backlash due to concerns about increased living costs. The compromises made by successive administrations reflect the challenges in finding sustainable solutions that address fiscal pressures and social welfare simultaneously.
2.5 President Bola Ahmed Tinubu, GCFR, during his Inauguration Speech on May 29th, 2023, made a significant announcement that “the Fuel Subsidy is gone!”, declaring the end of the fuel subsidy on Premium Motor Spirit (PMS) in Nigeria. This momentous decision sent shockwaves across the nation and reverberated globally. The immediate consequence of this announcement was the swift adjustment of PMS prices throughout the country. In response to the President’s pronouncement, the Nigerian National Petroleum Company (NNPC) Limited, on May 31st, 2023, implemented changes to the retail prices of PMS. These adjustments resulted in varying prices nationwide, with Lagos State experiencing PMS prices of around N488 per litre, while in Maiduguri, Borno State, the prices reached approximately N555 per litre.
3.0 Perspectives to the removal of fuel subsidy
The removal of the fuel subsidy can be addressed from two major angles:
- The Sociopolitical Impact; and
- The Socioeconomic Impact.
3.1 It may be too restrictive to make a total separation of these two perspectives, as one may overlap the other. For instance, the sociopolitical impact looks to examine what this removal means from the standpoint of governance, fiscal planning and policy, international trade and global economic positioning, and/or the Nigerian polity as a whole. Whereas, the socioeconomic impact examines the reaction of citizens and market forces to the removal, which in itself is an effect of the Governance of today. As such, it may be foolhardy to ignore that both perspectives overlap and are so affected by one another. However, this paper identifies the two perspectives to conveniently drive home this critique conveniently, instead of making a distinction between them.
3.2 The Sociopolitical Impact
3.2.1 Renewable Energy Opportunities
Renewable Energy was once an untold story in mainstream Petroleum discourse in Nigeria. However, in recent times, several narratives have grown, particularly in light of its positive impact on the environment. Understandably, for several decades PMS has served as a major income source for the Nigerian government. It is noteworthy that totally reliance on has been more negative than positive to the Country. For instance, whilst the export of the crude version has made a lot of money for the country, the Country has suffered a fair consequence for its lack of refineries or general technological growth. It is true that the country shall need technological growth to employ the use of Renewable Energy; it is generally not as expensive. Creating policies in light of this opens Nigeria numerous forms of investments from investors who put this concern at the forefront of their interests, and aid environmental health and hygiene.
3.2.2 Fiscal Sustainability
3.2.3 Fuel subsidies have imposed a substantial financial burden on the Nigerian government, diverting resources that could be allocated to other critical sectors such as healthcare, education, and infrastructure. The removal of the subsidy would allow the government to redirect these funds toward essential services and development projects, potentially improving the overall economic outlook. More so, fuel subsidies often lead to budgetary uncertainties, as fluctuations in global oil prices impact subsidy costs. By eliminating the subsidy, the Nigerian government will have better control over its budget and reduce fiscal deficits, promoting economic stability and investor confidence.
3.2.4 Fuel subsidies distort market forces and discourage private sector participation in the petroleum industry. Removing subsidies can foster competition, encourage investment, and promote efficiency in the downstream oil sector, leading to improved productivity and long-term economic growth.
3.2.5 GDP and Economic Growth
3.2.6 The removal of the subsidy is expected to provide the government with more funds to invest in other sectors of the economy, potentially leading to economic growth. However, it is important to note that economic growth is not solely dependent on fund availability; the quality of expenditure and corresponding policies play a crucial role. Nonetheless, the removal of fuel subsidy is widely seen as a step in the right direction. It is speculated that it could provide the government with at least an additional NGN 4 trillion to allocate to other sectors of the economy.
3.2.7 Governance and Accountability
3.2.8 Fuel subsidy has long been associated with a lack of transparency in its payment and the actual quantity of fuel being paid for. With the removal, there is an opportunity to improve transparency in accurately tracking the consumption of fuel. The absence of subsidies provides less incentive for data falsification, leading to increased accuracy. Additionally, this removal can foster greater transparency in the trading of fuel by the NNPC. These improvements in governance and accountability are positive outcomes of the fuel subsidy removal.
3.2.9 The current administration’s decision to remove the fuel subsidy may reflect its commitment to addressing barriers to economic development and tackling corruption. This move has generated goodwill among the educated elite, and some areas of the general populace, making them more receptive to the future policies of this administration. Depending on how it is approached, the removal can leave a positive political legacy by signaling a bold and proactive approach to economic challenges.
3.2.10Addressing issues of governance, transparency, public perception, and stability, the removal of fuel subsidy can have several positive political implications for the country’s development.
3.3 Privatisation
3.4 The underutilization of Nigeria’s refineries not only impedes the country’s economic potential but also hinders job opportunities and local value creation. It is currently on record that the Nigerian government has spent over NGN 11 billion on renovating refineries. Yet, there are almost no evidence of a working refinery in Nigeria, particularly when weighed against the population and usage. Privatization creates an avenue for Nigeria to finally build refinery capacity and thereby increase its potential revenue from the oil sector.
3.5 Some refineries already possess licenses. None of them is willing to commence operations under the (subsidy) regulated fuel pricing. They feel secure when they can sell at the market rate and recover their investments and make reasonable profits. Subsidy removal presents an attractive opportunity for investors in the oil and gas sector. Dangote refinery was commissioned recently. When the 650,000 barrels per day refinery commences full operations, it is expected to meet 100% of Nigeria’s refined petroleum product demands; Nigeria’s domestic fuel consumption of about 450,000 barrels per day and excess for export.
3.6 Need to cut down on cost high of governance
Nigerian masses have always paid the price for any government policy. From arbitrary tax increase to high cost of transportation and everything indicated by market forces. The people often bear the brunt.
3.7 Whether we like it or not, the fuel subsidy removal policy has come to stay. Whether the government ploughs the proceeds back to infrastructural development for the betterment of the citizens is a different ball-game entirely or whether there is policy summersault is also a story for another day. No previous government has ever had the courage and political will to reduce the huge baggage of expenditure from the bourgeois size of official portfolios leaving the economic implications on the door steps of Nigerian tax payers.
3.8 Consequently, the recurrent expenditure of the federal government currently stands at over N8 trillion, according to details of the 2023 budget resulting in over 400 per cent increase in nine years.
3.9 In the budget, the National Assembly got an allocation of N168 billion. Available data shows that the cost of running the government will take a large chunk of the N10.4 trillion revenue of the federal government for the year 2023.
3.10 Little wonder, Dr. Akinwumi Adesina, president of the African Development Bank (AFDB), in his speech at the inauguration lecture, implored the Tinubu administration to look critically at the cost of governance, saying “it is way too high and should be drastically reduced to free up more resources for development. Nigeria is spending very little on development.”
3.11 The Socioeconomic Impact
3.12 It can be easily deduced from the rationale behind the subsidy removal, that it is a great step towards the right direction. However, it will not be unfounded to consider, that there are genuine concerns on the socioeconomic impact of this removal upon its inhabitants. The average Nigerian today, is in thorough economic hardship. Nigeria has been regarded by several International bodies and Think-Tank as being multi-dimensionally poor. This coupled with the high level of insecurity, and low trust in government, it should not be surprising that Nigerians are typically zealously suspicious about the actions of the same government which they believe has no regard for them. The increase in fuel prices to over 300 percent the former price, and the terrible difficulties which it presents, highlights most of the socioeconomic impact of the decision of removal.
3.13 These are certainly tough times for the entire citizenry. Prices of foodstuff, services, and toiletries are going out of the hands of the ordinary Nigerian. Cost of living has hit the rooftop. The country has recorded the highest inflation rates. Small businesses are the backbone of the Nigerian economy, providing employment and income for millions of people. However, they also face many challenges, such as poor infrastructure, high taxes, insecurity and corruption.
3.14 The removal of fuel subsidies adds another burden to the already strained operations of small businesses. Fuel is a major input for many small businesses, such as transporters, generators, farmers, and traders. With the removal of fuel subsidies, the cost of fuel has increased by more than 300% per litre. This means that small businesses have to spend more money on fuel, which reduces their profit margins and affects their competitiveness. Some small businesses may have to reduce their output, lay off workers or even close if they cannot cope with the increased cost of fuel.
3.15 While these harsh economic realities will, no doubt, become part of people’s lives, the key words on the lips of many Nigerians are survival and adaptation. Their elasticity and resilience have further been stretched. As Nigerians battle to adapt to the new found realities, these challenging times have been viewed as a reenactment of the 2020 COVID-19 period.
- The following issues shall be outlined to highlight the impact of the subsidy removal in segments of the society:
- Public Transportation Costs
4.2 With the removal of fuel subsidies, the cost of diesel and petrol used in public vehicles is expected to rise. As a result, transportation companies, including buses, taxis, and motorcycles, are likely to increase their fares to offset the higher fuel costs. This will directly impact commuters, who will have to bear the burden of increased transportation expenses. Speculatively, Lagos state has seen a decrease in road transport commute to as low as 50 percent, if not lesser. This certainly will take a major toll on the economy, as it has with the purchasing power of individuals within the State, so making the economy regress.
4.3 All over the nation, people are adjusting to a new lifestyle. Lagos residents have been quick to cut down the excesses of luxury movements from one point to the other. Priority is now given to only things that are very important. You can only go to places that are really important, too. People trek long distances to cut down the expenses of commuting to and from work and from different destinations every day, while others have resorted to working from home having realized that it is more productive to work from home.
4.4 Alternative modes of transportation have become a common sight on the roads as people ride bicycles, motorcycles and tricycles. It is a trend now for car owners to manage to drive their vehicles to a safe neighborhood, park the car and commute in public transport to their place of work or business.
- Food Prices
4.6 Distribution Costs: The higher cost of transportation due to the removal of fuel subsidies affects the distribution of food products. Transporting goods from farms to markets and from wholesalers to retailers will become more expensive. These increased transportation costs are being passed on to consumers, leading to higher food prices.
4.7 Agricultural Production Costs: Farmers heavily rely on fuel for various agricultural activities, including irrigation, machinery operation, and transportation of produce. The removal of fuel subsidies increases their production costs, which can indirectly lead to higher prices for agricultural products, including grains, fruits, and vegetables.
4.8 Imported Goods: Imported goods are transported from seaports and airports to their respective destinations within the country. The removal of fuel subsidies will increase transportation costs, as fuel prices directly impact shipping and logistics expenses. As a result, the prices of imported goods, including electronics, machinery, and consumer products, are likely to rise.
4.9 Exchange Rates: Fuel subsidy removal can also impact exchange rates. If the increased fuel costs lead to a rise in inflation and put pressure on the country’s foreign exchange reserves, it can result in a devaluation of the local currency. A weaker currency would make imported goods more expensive, further contributing to inflationary pressures.
- Manufacturing Costs
- The manufacturing sector relies on fuel for various processes, such as powering machinery and transportation. The removal of fuel subsidies will increase manufacturing costs, potentially leading to higher prices for locally produced goods.
- Employees
- Employees are also affected by the removal of the fuel subsidy, as they have to pay more for transportation to and from work. Many employees rely on public transport, such as buses, taxis and motorcycles, which have also increased their fares due to the higher cost of fuel.
- Some employees now have to spend more than half of their salaries on transportation alone, leaving little for other expenses such as food, rent and health care. Some employees may have to look for alternative sources of income or seek employment closer to their homes to reduce their transportation costs. Some employees may also face the risk of losing their jobs if their employers cannot afford to pay them or sustain their businesses.
- Students
- Students are another group that is affected by the removal of the fuel subsidy, as they must pay more for transportation to and from school. Many students depend on public transport or private vehicles to get to school, which have become more expensive due to the higher cost of fuel.
- Some students may have to drop out of school or defer their studies if they cannot afford the transportation costs. Some students may also have to cope with poor learning conditions, such as inadequate facilities, overcrowded classrooms and frequent power outages, as schools struggle to provide quality education with limited resources.
- Welfare
- While the removal of fuel subsidy is a welcome development, it significantly affects the lower economic class citizens, who form a major part of the country’s economic strata. The current minimum wage of N30, 000 can only purchase 60 litres of fuel at an average pump price of N500 per litre. This amount is insufficient for a country that heavily relies on fuel for electricity generation. The increased fuel pump price has diminished the economic power of citizens, particularly those in the lower economic class. If the government fails to implement an appropriate response, the middle economic class citizens may also be pushed into the lower economic class. This shift would result in a drop in the country’s GDP and economic stagnation. Unfortunately, the government has not introduced any policies or schemes to aid the economic recovery of the lower economic class citizens.
4.22 These economic implications are interconnected and require careful consideration. While fuel subsidy removal is not the sole factor influencing these outcomes, it plays a significant role. The government’s response to these observations is crucial to mitigating negative consequences and ensuring sustainable growth and development.
5.0 Recommendations
The following recommendations should hereby be considered:
- The federal government should set down policies to fulfill the rationale behind the subsidy removal as identified. This includes more transparency in governance, less government spending, and the building of more social welfare programs and infrastructure.
State government must also key into strategies to give assistance to their own indigenes.
- Citizens must also play their part in holding their legislators responsible; to check the latter’s excesses, as well as the excesses of the executive.
5.1 It is noteworthy that state governments like Edo and Kwara States have perfected strategies and initiatives to ameliorate the effect of the current hardships and the high energy cost implications faced by their citizens in the wake of the fuel subsidy removal. In Edo State official working days for civil servants have now been reduced from five to three days a week. Workers will now work from home two days every week.
5.3 In the same vein, civil servants in Kwara Statehave adopted the same pattern to adjust to the current realities. In addition, Governor AbdulRazaq of Kwara state, has also approved the deployment of government buses to support movement of students and workers in public tertiary institutions within the Ilorin metropolis and its environs.
The government promised that it will continue to offer immediate support for the people of Kwara State in the face of Nigeria’s transition to the post-fuel subsidy regime, exploring more avenues to ease the people while growing the economy in a sustainable way.
5.4 Malam Dauda Lawal of the State Universal Basic Education Board and Ramat Ajia of the Ministry of Education thanked the Governor for his thoughtfulness in reducing the number of working days. They described the measure as helpful, humane and a welcome development. The state chairman of the Nigeria Labour Congress, NLC, Comrade Murtala Olayinka noted that reduction in working days to just three days is a welcome development as it would reduce cost of transport for civil servants. Corroborating Khan’s view, the IPMAN President, who spoke at a stakeholders’ workshop last week urged the government to channel expected savings from subsidy removal to the provision of palliatives for the masses. He advised the government to be alert and sensitive to resentment from Nigerians.
5.5 While the government claims that the policy will save money, reduce corruption and encourage investment in the oil sector, many Nigerians are skeptical about the benefits and worried about the negative impacts on their lives.
5.6 The policy affects different segments of society differently, but small businesses, employees and students are among the most vulnerable and hardest hit by the increased cost of fuel.
5.7 The government is advised to consider the plight of these groups and provide adequate support and compensation to cushion the effects of the policy.
5.8 Conclusion
5.9 Nearly all the presidential candidates in the buildup to the 2023 general elections campaigned on the removal of fuel subsidy as a necessary imperative if Nigeria is to get out of the present economic crisis. All also agreed that fuel subsidy has dangerously encouraged corruption in the way and manner the policy was implemented thereby enriching very few at the expense of the majority of Nigerians. Rather than subsidize fuel for the benefit of majority of Nigerians, a few elements cornered the resources that ought to constitute our commonwealth while in actual fact, the masses suffer. The question therefore is not whether fuel subsidy was not expedient, but actually the scheme was a conduit pipe for corrupt enrichment by very few.
5.10 I think the challenge is not just the option of removal of fuel subsidy but one of practical implementation in a manner that will impact positively on the general welfare of the people and the element of good governance. Consequently, most people who disagree with the removal of subsidy contend that the timing was inauspicious and that sufficient measures are not put in place to reduce the effect of the removal on the populace.
5.11 Government in answer to these criticisms has assured that so called palliatives will be put in place to cushion the effect of the removal. The fear is, how realistic are these palliative measures or whether it will not be a further avenue to re-loot our common wealth.
5.12 My final take on the matter is that the palliatives should be well thought out and designed to benefit the masses. I understand that a whopping 1.23 billion dollars have been saved in just over two months by scrapping a popular but costly subsidy on petrol. We will expect that these savings ought to be ploughed back to service critical infrastructure like education, healthcare, transport, social welfare in ways impactful and beneficial to the health and general wellbeing of the populace.
If the current subsidy reform is make any meaningful in the economy of the country and on Nigerians, who are currently bearing the blunt of the policy, fuel subsidy removal should be matched up with a corresponding improvement on the social welfare protection. Government at all levels and its officials should cut their expenditure.
Nigerians do not have to die before reaping the benefit of the so called removal of subsidy. As they say ‘Only the living can shout halleluyah’.
Being paper presented by Mr Shittu at the Mohammed Fawehinmi 2nd Annual Lecture & 1st Scholarship Award, titled “The removal of subsidy and its impact on Nigerian Masses” on Friday August 11, 2023 in Lagos.
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