Nigeria is the biggest producer of crude oil in Africa; and despite this vast oil wealth, the country as of 2024 still imports about 70% of petrol as a result of most of its refineries barely functioning or have completely collapsed. The country is also experiencing economic dilemma because of the crises of subsidy removal. Many commentators link these crises to mismanagement in the oil sector and the effect of bad governance over the years. The country has been subsidizing petrol for several years to ensure Nigerians buy petroleum products at an affordable price. And like every government intervention, a petrol subsidy has its costs and benefits. What are these costs and benefits and how do they impact living standards in the country? These are some of the questions that we will try to answer in this article.
What is fuel subsidy?
Fuel subsidy is defined as financial assistance provided by the government to reduce the cost of fuel for consumers. It is done to keep fuel prices lower and make it more affordable for the general population.
Fuel subsidy can also be described as financial support provided by the government to reduce the cost of fuel for consumers. This subsidy brings lower fuel prices at the pump than the actual market price. This is because the government has absorbed a portion of the cost to maintain affordability for everyone.
A fuel subsidy is a government discount on the market price of fossil fuels to make consumers pay less than the prevailing market price of fuel. When subsidies are in place, consumers would pay below the market price per liter of the petroleum product.
Fuel subsidy removal
In simple language, fuel subsidy removal is the process of ending government financial assistance for fuel, causing prices to rise to market levels. This leads to increased fuel costs and can have economic and social impacts.
Fuel subsidy was introduced in Nigeria in the 1970s as a response to the oil price shock in 1973. The subsidy was meant to fix the price of petroleum or gasoline for the citizens below the international price, and it used government resources to pay for the difference to minimize the impact of rising global oil prices on its citizens.
The economy of Nigeria has always been highly dependent on crude oil. Moreover, the absence of a constant and stable electricity supply makes private households and small enterprises depend on generators, which consume so much petrol. The fuel subsidy policy in Nigeria was introduced as a means to stabilize the price of fuel until the local industries pass the rehabilitation process.
Removal of fuel subsidy in Nigeria
Nigerians have been experiencing the erratic rise of fuel costs for decades, from a mere 6 kobo in 1973 to a startling 617 naira per litre in 2023. The information below contains the numerous occasions when fuel subsidies are removed by different administrations in the country:
• The years 1973-1999
Gowon (1973-1976): Fuel prices increased from 6 kobo to 9 kobo due to post-oil crisis and global demand fluctuations;
Obasanjo (1978-1982): Economic difficulties caused a significant increase from 9 kobo to 20 kobo, which affected transportation expenses; Shagari’s era witnessed ongoing changes as a result of global oil market dynamics.
Babangida I & II (1986-1991): Economic reforms to conform to global trends led to a 97.5% increase, which affected the affordability of transportation (Shonekan & Abacha 1993-1999) (Dental & Dental, 2024).
Shonekan and Abacha (1993–1999): The transportation sector was affected by the introduction of subsidies, sudden changes, and price reductions in the 1990s. Shonekan’s economic instability resulted in a startling 614.29% increase during his brief 82-day tenure in office, while Abacha’s tenure was marked by ups and downs, including a promising decline in 1993 and a significant increase later that year that ended with a brief decline in 1994.
• Obasanjo’s Changes from 2000 to 2007
Obasanjo I (2000): 50% more subsidies were introduced, which had a positive effect on transportation costs; however, in 2003, the subsidies were removed, which led to fare increases to cover higher operating costs. Also in 2003, under the same administration, the removal of subsidies caused a steep 61.54% increase, which had a direct impact on transportation expenses.
Again Obasanjo, in 2004, restoring subsidies lessened the burden, but the 30% increase reflected the intricate balance between domestic demands and global economic changes, which affected transportation costs.
• The years 2007-2015
Yar’Adua (2007): A respectable 15.39% drop demonstrated efforts to stabilize prices, including beneficial effects on transportation costs. Yar’adua is notable for being the only president to keep fuel prices stable during his administration.
Jonathan I (2012): Transportation costs were greatly impacted by the dramatic 116.92% increase brought on by economic pressures and the removal of subsidies, which sparked the Occupy Nigeria protests.
Jonathan II (2012-2015): Political considerations and the reinstatement of subsidies caused fluctuations, with a 10.31% price drop by 2015, which helped to alleviate transportation costs.
• 2015–2023: Buhari’s Era
Buhari (2016): The 66.67% increase was a reaction to the dynamics of the world oil market, which affected transportation costs.
Buhari’s term (2015–2023): As economic difficulties continued, subsequent years saw a 124% increase that affected the transportation sector.
• 2023: Tinubu’s Era
Tinubu (May 2023): Transport costs were greatly impacted by the immediate removal of subsidies, which caused prices to spike from N195 to N540 per litre in June and an all-time high of N617 per litre by July.
Fuel price summary
- 1973-1999: Formative Years
- The early years saw relatively modest increases:
- Gowon (1973): 6k to 8.45k (40.83%)
- Murtala (1976): 8.45k to 9k (6.5%)
- Obasanjo (1978): 9k to 15.3k (70%)
- Shagari (1982): 15.3k to 20k (30.72%)
- Babangida I (1986): 20k to 39.5k (97.5%)
- Babangida II (1988): 39.5k to 42k (6.33%)
- Babangida III (1989): 42k to 60k (42.86%)
- Babangida IV (1991): 60k to 70k (16.67%)
- 1993-2003: Turbulent Transitions
- Shonekan (1993): 70k to N5 (614.29%)
- Abacha I (1993): N5 to N3.25k (price dropped 35%)
- Abacha II (1994): N3.25k to N15 (361.54%)
- Abacha III (1994): N15 to N11 (price dropped 26.67%)
- Abubakar I (1998): N11 to N25 (127.27%)
- Abubakar II (1999): N25 to N20 (price dropped 25%)
- 2000-2007: Obasanjo’s Changes
- Obasanjo I (2000): N20 to N30 (50%)
- Obasanjo II (2000): N30 to N22 (price drops 26.67%)
- Obasanjo III (2002): N22 to N26 (18.18%)
- Obasanjo IV (2003): N26 to N42 (61.54%)
- Obasanjo V (2004): N42 to N50 (19.05%)
- Obasanjo VI (2004): N50 to N65 (30%)
- Obasanjo VII (2007): N65 to N75 (15.39%)
- 2007-2015: Fluctuations and Peaks
- Yar’ Adua (2007): Back to N65 (price drops 15.39%)
- Jonathan I (2012): N65 to N141 (116.92%)
- Jonathan II (2012): N141 to N97 (price drops 31.21%)
- Jonathan III (2015): N97 to N87 (price drops 10.31%)
- 2015-2023: Buhari’s Era and Contemporary Challenges
- Buhari (2016): N87 to N145 (66.67%)
- Buhari’s term (2015-2023): N87 to N195 per litre (124% increase)
- 2023: Tinubu’s Impact
- Tinubu (2023): N195 to N557
- Tinubu (2023): N557 to N617
Implications of fuel subsidy removal
The effect of fuel subsidies on the Nigerian economy can be seen from two sides, namely positive and negative implications.
Positive implications of fuel subsidy removal
Abuchi (2023) highlights some of the positive impacts of fuel subsidy on the Nigerian economy.
1. Improve public infrastructure
One positive economic implication of the removal of fuel subsidies in Nigeria is that the funds that would have been used for fuel subsidy payments could be channeled to the development of critical public infrastructure in Nigeria. There is a consensus among academic economists that the funds used for subsidy payments can be channeled to public infrastructure spending.
The lack of sufficient funds led the government to incur huge debts to finance the budget. However, with the removal of fuel subsidies in 2023, the government could use these funds and channel them appropriately for the purpose of developing critical public infrastructure in Nigeria.
2. Reduce budget deficit and generate budget surplus
Another positive economic implication of the removal of fuel subsidies is that the funds would be used to fund the current budget deficit. Harun, M., et al (2018). Existing findings show that fuel subsidies contribute to Nigeria’s rising fiscal deficit and call for the need to remove fuel subsidies. Historically, Nigeria has had a budget deficit in the last 10 years.
More recently, the petrol subsidy was billed to consume ₦4 trillion in 2022 and a whopping ₦17 trillion in 2023, meanwhile the approved 2023 budget was only ₦21.83 trillion. This implies that the fuel subsidy would consume about 77% of the budget, which already puts Nigeria in a chronic budget deficit and would drive Nigeria towards bankruptcy. In addition to that, 90% of Nigeria’s revenue is used to service its external debt, which further complicated Nigeria’s financial situation during the fuel subsidy regime. The recent removal of fuel subsidies is indeed a positive development for Nigeria’s finances because it would reduce Nigeria’s current budget deficit as the ₦17 trillion would be used to augment the national budget. And over time, Nigeria could have a budget surplus.
3. Boost development of other sectors
The savings from fuel subsidy removal could be channeled for the development of other sectors of the economy. In addition to developing Nigeria’s critical public infrastructure, the removal of fuel subsidies can free up financial resources for the development of other sectors that require significant government intervention and funding. The funds that would have been used for fuel subsidy payments could be put to sectors such as agriculture, healthcare, tourism, education, and to fund the implementation of the Student Loan Act.
4. Employment opportunities
Another positive implication of the fuel subsidy removal is that it would create jobs. The total deregulation of the downstream sector will allow more companies to import fuel at competitive rates. These companies will hire workers, thereby creating jobs. Also, the reinvigoration of domestic refineries in Nigeria will lead to job creation. Furthermore, when the Dangote refinery starts producing, it could create more than 10,000 direct jobs in Lagos alone and over 30,000 indirect jobs across Nigeria, thereby increasing the level of employment.
5. Reduced government borrowing
Since the start of the fuel subsidy regime, the Nigerian government has been borrowing, and the borrowing worsened during the 2016 recession and the 2020 COVID-19 pandemic. Recently, in 2022, the government constantly borrowed from the Central Bank of Nigeria (CBN) through the ways and means provision for debt repayment and subsidy payment. The government had no choice but to increase borrowing from the central bank. The government owed the Central Bank $22.7 trillion, which was recently securitized by the federal government with the approval of the national assembly in 2023. The recent removal of fuel subsidies implies that government borrowing from the Central Bank would stop, as the saved funds from fuel subsidy removal will become available for the government to use to meet its public expenditures.
6. Reduce pressure on the exchange rate
As a result of the removal of fuel subsidies, the government should allow domestic refineries to produce more crude oil and other petroleum products. This will reduce the importation of petroleum products and increase the exportation of locally produced petroleum products. This, in turn, will conserve foreign exchange from imported gasoline and increase foreign exchange accretion from exported gasoline. The foreign exchange accretion will boost foreign exchange supply in the foreign exchange market and strengthen the naira against the U.S. dollar. This, in turn, will lead to the appreciation of the naira and an improved exchange rate. For instance, the Dangote Refinery, which has a refining capacity of 650,000 barrels per day, can meet Nigeria’s domestic demand for refined petroleum products, reduce petrol importation, and generate a surplus for export. As a result, the government could save billions of dollars spent on petroleum imports, and such savings could be used to ease the pressure on the exchange rate and improve trade balances.
7. Reduce dependence on imported petrol
If the removal of fuel subsidies is followed by the reinvigoration of Nigeria’s domestic refineries, it could incentivize domestic refineries to produce more petroleum products and reduce Nigeria’s dependence on imported fuel. Consider the newly created Dangote Refinery. It has a massive refining capacity of 650,000 barrels per day, which is sufficient to meet Nigeria’s domestic demand for refined petroleum products, generate a surplus for export, and reduce petrol importation significantly. In addition to the Dangote Refinery, other local refineries with their differing refining capacity levels will further enhance Nigeria’s refining capabilities and Nigeria’s dependence on imported petrol.
8. Low carbon emissions
The presence of fuel subsidies in the last decade encouraged fossil fuel-based economic activities that increase air pollution and carbon emissions in Nigeria. The CO2 damage in Nigeria, which is partly attributed to fuel subsidies, rose from US$1.5bn in 1998 to US$5.23bn in 2021. The removal of fuel subsidies in Nigeria would support ongoing climate change mitigation efforts and reduce Nigeria’s contribution to global greenhouse gas emissions by 2030. Fuel subsidy removal in Nigeria would also decrease both the demand and supply of fossil fuels, thereby reducing carbon emissions in Nigeria.
9. Curb systematic corruption
Another positive economic implication of the removal of fuel subsidies is that it could bring an end to corruption in fuel subsidy payments (Itumo & Onyejiuba (2019). There is the perception that the fuel subsidy is a ploy to continue to siphon Nigeria’s hard-earned foreign exchange into private accounts abroad. Recent data show that the international price of oil crude has not gone up substantially, but Nigeria’s crude oil output has risen and generated around two million barrels per day. Yet, Nigeria’s external reserves have continuously been reported declining. What could have been responsible for this? It is plain corruption. For example, an oil marketer imports only fifteen metric tons of petrol and will go to the Petroleum Products Pricing Regulatory Agency (PPPRA) in Abuja to report that he imported seventy-five metric tons of petrol. The importers will collude with some officials of the PPPRA so that they will get their own share of the inflated sixty metric tons. This has been the major corruption that has been taking place during the fuel subsidy regime. But with the removal of fuel subsidies, this type of corruption will stop completely. Now, the importers will only get paid for the actual petrol they import into the country.
Negative implications of fuel subsidy removal
Naidoo (2023) identifies some of the negative effects of oil subsidy removal on the Nigerian economy.
1. Rise in the prices of petroleum products
The removal of fuel subsidies has led to a rise in the prices of petroleum products. This has led to low demand for gasoline and a reduction in the quantity of gasoline purchased. The declining demand will narrow the profit of small businesses that rely on petrol. Everyone will feel the effect, but as always, the poor will suffer the most. Although there is the argument that the fuel subsidy removal in 2023 will bring competition among petrol marketers and the competition would drive prices downwards, this expectation is purely academic and is unlikely to occur in the near future because the price of crude oil in the international market will largely determine the prices of petroleum products in Nigeria. The implication is that the current soaring prices of petroleum will remain this way for a long time.
2. Slow in economic growth
Another negative economic implication of the removal of fuel subsidies is that the rate of economic growth could decrease. The fuel subsidy removal would lead to an increase in the price of essential goods and services. As a result, there would be fewer disposable income in the hands of individuals and small businesses due to rising prices, stagnant wages, and a fixed national minimum wage. This will lead to a reduction in consumption expenditure and would act as a drag on aggregate demand. The reduction in consumption would translate to weak consumer demand for the goods and services produced by firms. This, in turn, could decrease economic output and gross domestic product and slow the rate of economic growth.
3. More poverty and vulnerability
The removal of fuel subsidies will increase poverty in the short term. It will lead to immediate pain and hunger for families. At the individual level, the removal of fuel subsidies, without any palliatives, could lead to fewer disposable incomes, fewer food in the land, fewer medicines for sick people, and the inability to afford basic education in several parts of the country, especially in the northern region of Nigeria. More families will go hungry, more children will cry in hunger, and more parents will cry at their children’s despair. The poor and middle-class consumers will witness a fall in their purchasing power, and small businesses will find their profit margins squeezed because they will face higher costs and reduced sales volumes. And if they attempt to pass on the cost to consumers, consumers might refuse to buy or they will reduce the quantity purchased, thereby leading to low business patronage. Furthermore, the fuel subsidy removal could affect poor, vulnerable groups disproportionately if there are no economic safety nets or social assistance programs that can alleviate the economic hardship caused by the fuel subsidy removal.
4. Social unrest and protest
Another negative impact of the removal of fuel subsidies is that it could lead to protests and social unrest. The rise in the price of petroleum products could trigger protests. If the prices continue to go up, poor households will be pushed to the wall and will be left with no option but to engage in protest and social unrest to get the government to reverse the fuel subsidy removal.
5. High inflation
The removal of fuel subsidies led to a rise in the price of petrol from a subsidized price of ₦190 in May 2023 to an unsubsidized price of ₦537 in June 2023 and ₦617 in July 2023 in Abuja. Meanwhile, the price of petrol could rise above ₦600 in the far north, such as in Borno State, due to high transportation costs. The implication is that the price of most consumer and industrial goods, which are produced or transported with gasoline, will increase sharply. The cost of bread will increase, and the cost of local transportation will also increase, making it expensive for poor individuals and low-income earners. The effect will also be felt by both the rich and the poor, but as always, the poor will suffer the most through a significant reduction in their purchasing power.
6. Fuel smuggling
Another negative economic implication of the removal of fuel subsidies is the potential for fuel smuggling. The increase in the price of petrol following the removal of fuel subsidies may increase the smuggling of cheaper fuel into Nigeria from neighboring countries, as opposed to the case when people smuggled Nigeria’s cheap fuel to the Niger Republic when the fuel subsidy was still in place. With the removal of fuel subsidies, there is likely to be an increase in the smuggling of cheaper fuel to the rural areas of Nigeria, as many people in the rural areas cannot afford to buy fuel at the cost of ₦537.
7. Loss of jobs
The removal of fuel subsidies will lead to job losses in the informal sector, which relies mostly on PMS or petrol. The formal sector uses mostly diesel for their activities, while the informal sector relies mostly on petrol. The rise in petrol prices would lead to the shutdown of small businesses that cannot afford the rising cost of petrol and whose profit margins have been completely eroded by fuel subsidy removal in the formal sector.
8. Increase in crime
There is the potential for crime to increase. The increase in the price of gasoline following the removal of fuel subsidies might lead to other forms of crime, such as theft of gasoline from refinery warehouses, people’s cars, residential houses, and from people’s electric generators. The crime rate could worsen as more Nigerians struggle to make ends meet.
Conclusion
Fuel subsidy in Nigeria has complex economic, social, and political implications. While its removal can contribute to fiscal sustainability, it must, or rather, should have been done cautiously to avoid disproportionate effects on citizens. Nigeria’s journey as a nation towards a sustainable energy future requires well-balanced policies and a commitment to the well-being of all citizens.
References
Abuchi, J., (2023, June 1). 10 Benefits of petroleum subsidy removal. The Authority News
Itumo, A., & Onyejiuba, E. I. (2019). Oil subsidy and development of local refineries In Nigeria: A Critical Analysis. African Journal of Politics and Administrative Studies, 12, 1.
Naidoo, A. (2023, August 27). The impact of fuel subsidy removal in Nigeria. LinkedIn