THOUGHTS ON FUEL SUBSIDY
Iyanujesu (IJ) Oguntunji
Energy, Finance & Infrastructure Lawyer | ESG & Climate
The Federal Government ("FG") announced the suspension of the fuel subsidy reduction on Monday, January 24, 2022. Zainab Ahmed, the Minister of Finance, Budget, and National Planning, indicated that removing the subsidy at this time would be problematic and would exacerbate Nigerians' hardship. Prior to Monday's announcement, the federal government had considered removing the subsidy, which would take effect in July 2022, considering the amount of money spent on the subsidy and its financial implications. Nigerians, particularly labor and trade unions, reacted as expected by rallying against such a move.
Given the adverse effect that the subsidy removal will have on citizens, particularly the lower and middle classes, it is fair to call the subsidy removal a bad decision at this time. The removal of the subsidy will drive up the price of Premium Motor Spirit (PMS), resulting in higher transportation fares, an increased inflation rate, reduced buying power, and a surge in poverty. Nigerians' hardships will inevitably intensify due to this, especially given the current level of inflation.
The main motive for the introduction of fuel subsidies in the 1970s was to alleviate citizens' economic hardship. In comparison to other developmental programs, the FG spends a lot of money on subsidies. The government spends roughly 120 billion naira every month on fuel subsidies, according to Mele Kyari, the NNPC's GMD. In 2018, the government spent $2.4 billion on fuel subsidies, which was less than the $1.5 billion it spent on the health sector in the same year. If the government persists in removing the fuel subsidy, it is only prudent to invest the funds appropriately in infrastructure, health, and transportation (an alternative mode of transportation that does not rely on fuel).
It's worth noting that Section 53(7) of the PIA prohibits the federal government from interfering in the business of NNPC Limited (the new entity that replaced the previous entity). The NNPC's operations will be conducted entirely on a commercial basis, without recourse to government funds. For the government to successfully remove the subsidy without provoking severe reactions from residents, it must earn the citizens' social trust that the funds to be used for the subsidy will be judiciously deployed to productive sectors and that the proceeds of the funds will be accountable. There should be assurance that these funds will be used appropriately for the benefit of the citizens.
Nigeria is one of the world's major oil producers, with an estimated 37.2 billion barrels of proved oil reserves, but it is also one of the world's largest consumers of refined goods, accounting for more than 7% of Africa's refined product consumption (ironic!). This necessitates the rehabilitation of the country's refineries to produce oil products locally. When shipping and transportation costs are excluded, as well as the foreign currency rate, this will result in a lower price for oil products, including petrol. As a result, when the government decides to remove the fuel subsidies, the price will not be as high since the economic cost of supply is lower, and the government will not be required to pay the deficit or subsidy. Also, the FG might want to consider enhancing the electric power sector because if electricity is stable and consistent, there will be less reliance on fuel for generators and the use of electric vehicles will be encouraged even more.
Given the high rate of inflation and the poverty line, the planned distribution of 5,000 naira (N5,000) to 40 million Nigerians cannot be a long-term solution.
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Do you believe the suspension of subsidies is purely political or in the best interests of citizens? Do you think that, in the long run, fuel subsidies should be phased out due to the huge amounts of money spent on subsidies that could be better invested in other productive sectors? I'm happy to hear your thoughts in the comment section.
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Manager, People and Change (Strategic HR Advisory and Implementation)
3 年The subsidy scheme currently places a huge burden on the nation, as the Government has had to continually fund the difference between the actual landing cost and the regulated pump price. Opponents of the subsidy scheme however, view it as a corrupt scheme that enriches oil marketers and believe the scheme has little or no impact on the welfare of the masses, as was originally intended. Given the issues noted above, and the unsustainable nature of the subsidy scheme, in the light of economic growth, I support the numerous calls for the complete deregulation of the sector. Deregulation pre-supposes market forces as the determinant of prices rather than an arbitrary manner of fixing pump prices by the government through a fiat. However, will subsidy removal not mean more money for our politicians to take to Switzerland, instead of investing it in human capital, infrastructure, education, technology, power, production & export etc to grow & develop our economy, which will ultimately reduce our inflation rate which remains structurally high at a full-year average of?13.6%. Once Dangote refinery begins its operations, subsidy removal can be considered, but the removal should be phased, so the impact on the masses is also phased.
International Development and Trade Law | IHL | Construction | Compliance | Real Estate
3 年Thank you so much for your article ma'am. Subsidies are delicate issues. Policymakers, Multinational Finance Institutions and Economists generally advice against them. But they are equally a populist arrangement. Listening to experts and cutting back on subsidies would be great for the economy. But the majority of people who would bear the brunt of this decision do not trust government institutions enough to believe that funds would be invested in other sectors that would improve the standard of living. In Nigeria's case, we may have to put up with subsidies until Dangote Refinery and Petrochemicals ltd starts business. Nonetheless this saving grace should not blind us to the truth that subsidy regimes are unsustainable. Brazil and Venezuela are unfortunate examples of choosing populist ideas rather than sound economic advice
Law Grad|Energy Law, Infrastructure and Finance enthusiast||Sustainable Finance||
3 年It is indeed apparent that subsidy needs to be removed at the long run, the government can't continue to committ outrageous sum of money to subsidize PMS. The long term solution is definitely to remove the subsidy, however, the removal would subject the citizens to grave economic hardship, it would also be accompanied with a multiplier effect in form of numerous economic implications. Infrastructural development is the only hedge against the economic impact of subsidy, the government needs to ensure that we have functional refineries with high production capacities, with the presence of these infrastructures there wouldn't be any need to import refined petroleum products with astronomical landing costs. Therefore, while the government needs to eliminate subsidy it also must of necessity put certain structures in place to mitigate the economic effect of such action on the populace.
Energy and Finance enthusiast
3 年It's true that subsidy needs to be removed. Subsidy erodes oil gains. It's also true that increase in fuel price will inflict hardship which N5000 monthly stipend can't assuage. Therefore, it is only reasonable, as a first step, for the government to solve the problems necessitating subsidies by: streamlining refineries, mitigating supply chain issues in the downstream sector and improving Nigerians' standard of living. From a global pov, fuel at N300 will still place Nigeria among the cheapest countries to buy fuel. But it's bad for Nigerians because of the prevailing high cost of living.
Legal Researcher| Corporate, Business and Transactional Lawyer| Real Estates
3 年I agree with you Iyanujesu, that Nigerians' hardship will intensify due to this removal of fuel subsidy. The subsidy has been a measure that has really helped Nigerians', as it served as a form of succour in its own little way for Nigerians amidst other economic hardships. Now that the subsidy has been removed, I fear it would leave the state of living for most Nigerians, impoverished. I'm therefore strongly against it. It is my hope that the government's decision be revisited. However, if it is not and the removal of the fuel subsidy subsists, then I trust that the strong-willed, hardworking and high spirited Nigerians would surely conquer this, survive and overcome ultimately, just like they have always done with other forms of hardships in the country.